[Federal Register Volume 66, Number 91 (Thursday, May 10, 2001)]
[Proposed Rules]
[Pages 23984-24036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11560]



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Part II





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 410, et al.



Medicare Program, Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities--Update; Proposed Rule

Federal Register / Vol. 66, No. 91 / Thursday, May 10, 2001 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 410, 411, 413, 424, 482, and 489

[HCFA-1163-P]
RIN 0938-AK47


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

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2002, as required by statute. Annual updates to 
the PPS rates are required by section 1888(e) of the Social Security 
Act (the Act), as amended by the Medicare, Medicaid, and SCHIP Balanced 
Budget Refinement Act of 1999 (BBRA 1999), and the Medicare, Medicaid, 
and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA 2000), 
relating to Medicare payments and consolidated billing for SNFs. As 
part of this annual update, we are rebasing and revising the routine 
SNF market basket to reflect 1997 total cost data (the latest available 
complete data on the structure of SNF costs), and modifying certain 
variables for some of the cost categories. In addition, we propose to 
implement the transition of swing-bed facilities to the SNF PPS, as 
required by section 1888(e)(7) of the Act.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on July 9, 2001.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1163-P, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    If you prefer, you may deliver your written comments (one original 
and three copies) to one of the following addresses: Hubert H. Humphrey 
Building, Room 443-G, 200 Independence Avenue, SW., Washington, DC 
20201, or Health Care Financing Administration, Room C5-15-03, 7500 
Security Boulevard, Baltimore, MD 21244-8150.
    Comments mailed to those addresses designated for courier delivery 
may be delayed and could be considered late. Because of staffing and 
resource limitations, we cannot accept comments by facsimile (FAX) 
transmission. Please refer to file code HCFA-1163-P on each comment. 
Comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of this document, in Room C5-12-08 of the Health Care 
Financing Administration, 7500 Security Boulevard, Baltimore, Maryland, 
Monday through Friday of each week from 8:30 a.m. to 5 p.m. Please call 
(410) 786-7197 to make an appointment to view comments.

FOR FURTHER INFORMATION CONTACT:

Dana Burley, (410) 786-4547 or Sheila Lambowitz, (410) 786-7605 (for 
information related to the case-mix classification methodology)
John Davis, (410) 786-0008 (for information related to the Wage Index)
Bill Ullman, (410) 786-5667 (for information related to consolidated 
billing)
Susan Burris, (410) 786-6655 (for information related to payment)
Sheila Lambowitz, (410) 786-7605 (for information related to swing-bed 
providers)
Bill Ullman, (410) 786-5667 or Susan Burris, (410) 786-6655 (for 
general information)

SUPPLEMENTARY INFORMATION:
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. The cost for 
each copy is $9. Please specify the date of the issue requested and 
enclose a check or money order payable to the Superintendent of 
Documents, or enclose your Visa or Master Card number and expiration 
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(202) 512-2250. You can also view and photocopy the Federal Register 
document at most libraries designated as Federal Depository Libraries 
and at many other public and academic libraries throughout the country 
that receive the Federal Register.
    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

Table of Contents

I. Background
    A. Current System for Payment of Skilled Nursing Facility 
Services Under Part A of the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 for Updating 
the Prospective Payment System for Skilled Nursing Facilities
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (BBRA 1999)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA 2000)
    E. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rates
    2. Payment Provisions--Transition Period
    F. Skilled Nursing Facility Market Basket Index
II. 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 Adjustment
    C. Wage Index Adjustment to Federal Rates
    D. Updates to the Federal Rates
    E. Relationship of RUG-III Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    F. Three-year Transition Period
    G. Example of Computation of Adjusted PPS Rates and SNF Payment
III. The Skilled Nursing Facility Market Basket Index
    A. Background
    B. Rebasing and Revising the SNF Market Basket
IV. Update Framework
    A. The Need for an Update Framework
    B. Factors Inherent in SNF Payments per Day
    C. Defining Each Factor Inherent in SNF Costs per Day
    1. Input Prices
    2. Productivity
    3. Real Case-Mix per Day
    4. Case-Mix Constant Real Output Intensity per Day
    D. Applying the Factors that Affect SNF Costs per Day in an 
Update Framework
    E. Current HCFA Inpatient Hospital PPS and Illustrative SNF PPS 
Payment Update Frameworks
    F. Additional Conceptual and Data Issues
V. Consolidated Billing
VI. Application of the SNF PPS to SNF Services Furnished by Swing-
Bed Hospitals
    A. Current System for Payment of Swing-Bed Facility Services 
Under Part A of the Medicare Program
    B. Requirement of the Balanced Budget Act of 1997 for Swing-Bed 
Facility Services to be Paid under the Prospective Payment System 
for Skilled Nursing Facilities
    C. Requirements of BBRA 1999 Affecting Swing-Bed Payment and 
Eligibility
    D. Implications of Swing-Bed Facility Conversion to the SNF PPS
    E. SNF PPS Rate Components
    F. Implementation of the SNF PPS for Swing-Bed Facilities
    G. Use of the Resident Assessment Instrument--Minimum Data Set 
(MDS 2.0)

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    H. Required Schedule for Completing the MDS
    I. RUG-III ``Grouper'' Methodology and Software
    J. Applicability of Consolidated Billing to SNF Services 
Furnished in Swing-Bed Facilities
    K. Costs Associated with Automating the MDS: Preliminary 
Estimates
    L. Provider Training
VII. Provisions of the Proposed Rule
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
    A. Background
    B. Impact of the Proposed Rule
X. Federalism
Regulation Text
Appendix--Technical Features of the Proposed 1997-based Skilled 
Nursing Facility Market Basket Index
I. Synopsis of Structural Changes Adopted in the Proposed Revised 
and Rebased 1997 Skilled Nursing Facility Market Basket
II. Methodology for Developing the Cost Category Weights
III. Price Proxies Used to Measure Cost Category Growth
    A. Wages and Salaries
    B. Employee Benefits
    C. All Other Expenses
    D. Capital-Related Expenses

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

ADL  Activity of Daily Living
AHE  Average Hourly Earnings
ARD  Assessment Reference Date
BBA 1997  Balanced Budget Act of 1997, Pub. L. 105-33
BBRA 1999  Medicare, Medicaid and SCHIP Balanced Budget Refinement 
Act of 1999, Pub. L. 106-113
BEA  (U.S.) Bureau of Economic Analysis
BIPA 2000  The Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000, Pub. L. 106-554
BES  (U.S.) Business Expenditures Survey
BLS  (U.S.) Bureau of Labor Statistics
CAH  Critical Access Hospital
CFR  Code of Federal Regulations
CPI  Consumer Price Index
CPI-U  Consumer Price Index-All Urban Consumers
CPT  (Physicians') Current Procedural Terminology
DRG  Diagnosis Related Group
ECI  Employment Cost Index
FI  Fiscal Intermediary
FR  Federal Register
FY  Fiscal Year
GAO  General Accounting Office
HCFA  Health Care Financing Administration
HCPCS  HCFA Common Procedure Coding System
ICD-9-CM  International Classification of Diseases, Ninth Edition, 
Clinical Modification
IFC  Interim Final Rule with Comment Period
MDS  Minimum Data Set
MEDPAR  Medicare Provider Analysis and Review File
MIP  Medicare Integrity Program
MSA  Metropolitan Statistical Area
NECMA  New England County Metropolitan Area
OIG  Office of the Inspector General
OMRA  Other Medicare Required Assessment
PCE  Personal Care Expenditures
PPI  Producer Price Index
PPS  Prospective Payment System
PRM  Provider Reimbursement Manual
RAI  Resident Assessment Instrument
RAP  Resident Assessment Protocol
RAVEN  Resident Assessment Validation Entry
RUG  Resource Utilization Groups
SCHIP  State Children's Health Insurance Program
SNF  Skilled Nursing Facility
STM  Staff Time Measure

I. Background

    On July 31, 2000, we published in the Federal Register (65 FR 
46770), a final rule that set forth updates to the payment rates used 
under the prospective payment system (PPS) for skilled nursing 
facilities (SNFs), for fiscal year (FY) 2001. Annual updates to the PPS 
rates are required by section 1888(e) of the Social Security Act (the 
Act), as amended by the Medicare, Medicaid, and SCHIP Balanced Budget 
Refinement Act of 1999 (BBRA 1999) and the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA 2000), 
relating to Medicare payments and consolidated billing for SNFs.

A. Current System for Payment of Skilled Nursing Facility Services 
Under Part A of the Medicare Program

    Section 4432 of the Balanced Budget Act of 1997 (BBA 1997) 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) 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. We propose to update the per diem payment rates for 
SNFs, for FY 2002. Major elements of the SNF PPS include:
    <bullet> Rates. Per diem Federal rates were established for urban 
and rural areas using allowable costs from FY 1995 cost reports. These 
rates also included an estimate of the cost of services that, before 
July 1, 1998, had been paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay. The rates were 
adjusted annually using a SNF market basket index. Rates were case-mix 
adjusted using a classification system (Resource Utilization Groups, 
version III (RUG-III)) based on beneficiary assessments (using the 
Minimum Data Set (MDS) 2.0). The rates were also adjusted by the 
hospital wage index to account for geographic variation in wages. (In 
section II.C of this preamble, we discuss the wage index adjustment in 
detail, including an examination of the feasibility of developing a 
wage index based on SNF-specific wage data.) At this time, data for the 
FY 2002 hospital wage index are not yet available; therefore, the index 
applied in this proposed rule is the same index used in the July 31, 
2000 final rule. A correction notice was published on January 16, 2001 
(66 FR 3497) that announced corrections to several of the wage factors. 
Additionally, as noted in the July 31, 2000 final rule (65 FR 46770), 
section 101 of BBRA 1999 also affects the payment rate. Finally, 
sections 311, 312, and 314 of BIPA 2000 affect the Part A PPS payment 
rates for SNFs. These new provisions are discussed in detail in section 
I.D. of this proposed rule.
    <bullet> Transition. The SNF PPS includes an initial 3-year, phased 
transition that blended a facility-specific payment rate with the 
Federal case-mix adjusted rate. For each cost reporting period after a 
facility migrated to the new system, the facility-specific portion of 
the blend decreased and the Federal portion increased in 25 percentage 
point increments. For most facilities, the facility-specific rate was 
based on allowable costs from FY 1995; however, since the last year of 
the transition is FY 2001, all facilities will be paid at the full 
Federal rate by the coming fiscal year (FY 2002), for which we are now 
proposing updated rates. Therefore, unlike previous years, this 
proposed rule does not include adjustment factors related to facility-
specific rates for the coming fiscal year.
    <bullet> Coverage. Medicare's fundamental requirements for SNF 
coverage were not changed by BBA 1997; however, because RUG-III 
classification is based, in part, on the beneficiary's need for skilled 
nursing care and therapy, we have attempted, where possible, to 
coordinate claims review procedures with the outputs of beneficiary 
assessment and RUG-III classifying activities.
    <bullet> Consolidated Billing. BBA 1997 included a billing 
provision that required a SNF to submit consolidated Medicare bills for 
its residents for almost all services that are covered under either 
Part A or Part B (the statute excluded a small list of services, 
primarily those of physicians and certain other types of 
practitioners). With the exception of physical therapy, occupational 
therapy, and speech-language therapy, section 313 of BIPA 2000 has now 
limited the scope of this

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provision to apply only to those services that are furnished during the 
course of a resident's covered Part A stay in the SNF, as discussed 
later in this proposed rule.
    <bullet> 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. Part A currently pays for SNF services furnished by 
swing-bed hospitals on a cost-related basis. Section 1888(e)(7) of the 
Act requires the SNF PPS to encompass these services no earlier than 
cost reporting periods beginning on July 1, 1999, and no later than the 
end of the SNF PPS transition period described in section 1888(e)(2)(E) 
of the Act.

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

    Section 1888(e)(4)(H) of the Act requires that we publish in the 
Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the FY.
    2. The case-mix classification system to be applied with respect to 
these services during the FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In the July 30, 1999 final rule (64 FR 41670), we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to modifications in the RUG-III classification 
structure.
    Along with a number of other revisions discussed later in this 
preamble, this proposed rule provides the annual updates to the Federal 
rates as mandated by the Act.

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

    There were several provisions in BBRA 1999 that resulted in 
adjustments to the PPS for SNFs. The provisions were described in the 
final rule that we published on July 31, 2000 (65 FR 46770). In 
particular, section 101 provided for a temporary, 20 percent increase 
in the per diem adjusted payment rates for 15 specified RUG-III groups 
(SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, CB2, CB1, CA2, CA1, RHC, RMC, 
and RMB). Section 101 also included a 4 percent across-the-board 
increase in the adjusted Federal per diem payment rates each year for 
FYs 2001 and 2002, exclusive of the 20 percent increase.
    We included further information on all of the provisions of BBRA 
1999 in Program Memorandums A-99-53 and A-99-61 (December 1999), and 
Program Memorandum AB-00-18 (March 2000).

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

    The following highlights the major provisions in BIPA 2000 that 
result in adjustments to the PPS for SNFs:
    <bullet> Section 203--Exemption of Critical Access Hospital (CAH) 
Swing-beds from SNF PPS. This provision exempts swing-beds in CAHs from 
section 1888(e)(7) of the Act (as enacted by section 4432(a) of BBA 
1997) which applies the SNF PPS to SNF services furnished by swing-bed 
hospitals. Accordingly, this provision enables CAHs to be paid for 
their swing-bed SNF services on a reasonable cost basis. This provision 
is effective with cost reporting periods beginning on or after December 
21, 2000, the date of the enactment of this Act. We include further 
information on this provision in Program Memorandum A-01-09 (January 
16, 2001).
    <bullet> Section 311--Elimination of Reduction in SNF Market Basket 
Update in 2001. This provision eliminates the one percent reduction 
reflected in the update formula for the Federal rates for FY 2001 that 
was required by BBA 1997. In implementing this change, this provision 
modifies the schedule and rates according to which Federal per diem 
payments are updated. For FY 2002 and FY 2003, the updates would be the 
market basket index increase minus 0.5 percentage points. This 
provision also provides a special rule that, for purposes of making 
payments under the SNF PPS for FY 2001, for the first half of FY 2001 
(the period beginning October 1, 2000, and ending March 31, 2001), the 
market basket update remains at market basket minus 1, and for the 
second half of the fiscal year (the period beginning on April 1, 2001, 
and ending on September 30, 2001), the market basket update changes 
from market basket minus 1 to market basket plus 1.
    In addition, this provision requires the General Accounting Office 
(GAO) to submit a report to Congress by July 1, 2002, on the adequacy 
of SNF payment rates. It also requires the Secretary to conduct a study 
of the different systems for categorizing patients in SNFs in a manner 
that accounts for the relative resource utilization of different 
patient types, and to submit a report to Congress not later than 
January 1, 2005.
    <bullet> Section 312--Increase in Nursing Component of PPS Federal 
Rate. This provision requires the Secretary to increase by 16.66 
percent the nursing component of the case-mix adjusted Federal rate 
specified in the July 31, 2000 final rule (65 FR 46770) for services 
furnished on or after April 1, 2001, and before October 1, 2002. This 
provision also requires the GAO to conduct an audit of SNF nursing 
staff ratios, and to submit a report to Congress by August 1, 2002, 
including a recommendation on whether the temporary 16.66 percent 
increase in the nursing component should be continued.
    <bullet> Section 313--Application of SNF Consolidated Billing 
Requirement Limited to Part A Covered Stays. This provision repeals the 
consolidated billing requirement for services (other than physical 
therapy, occupational therapy, and speech-language therapy) furnished 
to those SNF residents who are in non-covered stays, effective January 
1, 2001. It also directs the Secretary to monitor Part B payments for 
such services, in order to guard against duplicate billing and the 
excessive provision of services.
    <bullet> Section 314--Adjustment of Rehabilitation RUGs to Correct 
Anomaly in Payment Rates. For services furnished from April 1, 2001, 
until the date that RUG refinements are implemented, this provision 
requires the Secretary to increase by 6.7 percent the adjusted Federal 
per diem rate for all of the following RUG-III rehabilitation groups: 
RUC, RUB, RUA, RVC, RVB, RVA, RHC, RHB, RHA, RMC, RMB, RMA, RLB, and 
RLA. This provision amends section 101(b) of BBRA 1999 and supersedes 
the 20 percent increase that BBRA 1999 had previously established for 
the RHC, RMC, and RMB rehabilitation groups, and corrects the resulting 
anomaly under which the payment rates for these particular groups were 
actually higher than the rates for some other, more intensive 
rehabilitation RUGs. This provision also requires the Office of 
Inspector General (OIG) to review whether the RUG payment structure in 
effect under BBRA 1999 included incentives for the delivery of 
inadequate care and report to the Congress by October 1, 2001.
    <bullet> Section 315--Establishment of Process for Geographic 
Reclassification. This provision explicitly permits the Secretary to 
establish a geographic reclassification procedure that is specific to 
SNFs, for purposes of payment for covered SNF services under the PPS. 
The Secretary may not implement this procedure until the

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Secretary has collected data necessary to establish a SNF wage index 
that is based on wage data from nursing homes.
    We include further information on several of these provisions in 
Program Memorandum A-01-08 (January 16, 2001).

E. Skilled Nursing Facility Prospective Payment--General Overview

    The Medicare SNF PPS was implemented for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, SNFs are paid 
through prospective, case-mix adjusted per diem payment rates 
applicable to all covered SNF services. These payment rates cover all 
the costs of furnishing covered skilled nursing services (routine, 
ancillary, and capital-related costs) other than costs associated with 
approved educational activities. Covered SNF services include post-
hospital services for which benefits are provided under Part A and all 
items and services that, before July 1, 1998, had been paid under Part 
B (other than physician and certain other services specifically 
excluded under BBA 1997) but furnished to Medicare beneficiaries in a 
SNF during a Part A covered stay. A complete discussion of these 
provisions appears in the May 12, 1998 interim final rule (63 FR 
26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the PPS. We developed the Federal payment rates using allowable costs 
from hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
who were receiving Part A covered services in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of PPS (15-month period beginning July 1, 
1998) using a SNF market basket index, and then standardized for the 
costs of facility differences in case-mix and for geographic variations 
in wages. Providers that received new provider exemptions from the 
routine cost limits were excluded from the database used to compute the 
Federal payment rates, as well as costs related to payments for 
exceptions to the routine cost limits. In accordance with the formula 
prescribed in BBA 1997, we set the Federal rates at a level equal to 
the weighted mean of freestanding costs plus 50 percent of the 
difference between the freestanding mean and weighted mean of all SNF 
costs (hospital-based and freestanding) combined. We computed and 
applied separately the payment rates for facilities located in urban 
and rural areas. In addition, we adjusted the portion of the Federal 
rate attributable to wage-related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix, using a classification system that accounts for the 
relative resource utilization of different patient types. This 
classification system, RUG-III, utilizes beneficiary assessment data 
from the Minimum Data Set (MDS) completed by SNFs to assign 
beneficiaries to one of 44 groups. The May 12, 1998 interim final rule 
(63 FR 26252) included a complete and detailed description of the RUG-
III classification system.
    The Federal rates in this proposed rule reflect an update to the 
rates in the July 31, 2000 update notice (65 FR 46770) equal to the SNF 
market basket index minus 0.5 percent, as well as the elimination of 
the 1 percent reduction reflected in the update formula for the FY 2001 
payment rates under section 311 of BIPA 2000. According to section 311 
of BIPA 2000, for FY 2002, we will update the rate by adjusting the 
current rates by the SNF market basket change minus 0.5 percent.
2. Payment Provisions--Transition Period
    The SNF PPS includes an initial, phased transition from a facility-
specific rate (which reflects the individual facility's historical cost 
experience) to the Federal case-mix adjusted rate. The transition 
extends through the facility's first three cost reporting periods under 
the PPS, up to and including the one that begins in FY 2001. 
Accordingly, starting with cost reporting periods that begin in FY 
2002, we will base payments entirely on the Federal rates.

F. Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5) of the Act requires the Secretary 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 the covered SNF 
services. The SNF market basket index is used to update the Federal 
rates on an annual basis. We are proposing a revised and rebased SNF 
market basket index that consists of the most commonly used cost 
categories for SNF routine services, ancillary services, and capital-
related expenses. A complete discussion concerning the design and 
application of the proposed SNF market basket index is presented in 
Section III.

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

A. Federal Prospective Payment System

    This proposed rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2001. The schedule incorporates per diem Federal rates that 
provide Part A payment for all costs of services furnished to a 
beneficiary in a SNF during a Medicare-covered stay.
1. Costs and Services Covered by the Federal Rates
    The Federal rates apply to all costs (routine, ancillary, and 
capital-related costs) of covered SNF services other than costs 
associated with approved educational activities as defined in 
Sec. 413.85. Under section 1888(e)(2) of the Act, covered SNF services 
include post-hospital SNF services for which benefits are provided 
under Part A (the hospital insurance program), as well as all items and 
services (other than those services excluded by statute) that, before 
July 1, 1998, were paid under Part B (the supplementary medical 
insurance program) but furnished to Medicare beneficiaries in a SNF 
during a Part A covered stay. (These excluded service categories are 
discussed in greater detail in section V.B.2. of the May 12, 1998 
interim final rule (63 FR 26295-97)).
2. Methodology Used for the Calculation of the Federal Rates
    The proposed FY 2002 rates would reflect an update using the latest 
market basket index minus 0.5 percentage point. The FY 2002 market 
basket update factor is 2.9 percent, and subtracting 0.5 percentage 
points yields an update of 2.4 percent. For a complete description of 
the multi-step process, see the May 12, 1998 interim final rule (63 FR 
26252). In accordance with section 101 of BBRA 1999 and section 314 of 
BIPA 2000, we have provided for a temporary increase in the per diem 
adjusted payment rates of 20 percent for certain specified RUGs, and 
6.7 percent for certain others. These temporary increases of 20 percent 
and 6.7 percent for certain specified RUGs will continue until 
implementation of case-mix refinements, as described in section 101 of 
BBRA 1999 and section 314 of BIPA 2000. Also, in accordance with 
section 101 of BBRA 1999, we are providing a 4 percent increase in the 
adjusted Federal rate for FY 2002. These temporary adjustments (that 
is, 20

[[Page 23988]]

percent, 6.7 percent, or 4 percent) are not reflected in the rate 
tables (Tables 1, 2, 3, 4, 5, and 6 of this proposed rule). Rather, in 
accordance with the statute, they are applied only after all other 
adjustments (wage and case-mix) have been made. Further, several 
provisions of BIPA 2000 affect the payment rates for SNFs, as described 
in the previous section.
    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, 2000, and the 
midpoint of the Federal FY beginning October 1, 2001 and ending 
September 30, 2002, to which the payment rates apply. In accordance 
with section 311 of BIPA 2000, the payment rates are updated for FY 
2002 by a factor equal to the annual market basket index percentage 
increase minus 0.5 percentage point. However, we note that section 311 
of BIPA 2000 has also eliminated the one percent reduction in the 
market basket associated with the establishment of the FY 2001 payment 
rates. Therefore, in establishing the payment rates for FY 2002, we 
would update from the FY 2001 payment rates determined using the full 
market basket amount for that year rather than the rates as they 
appeared in the July 31, 2000 final rule (65 FR 46770), that were 
determined using the one percent reduction. As modified in this manner 
to reflect section 311 of BIPA 2000, the FY 2001 rates would be updated 
using the latest market basket minus 0.5 percentage point to determine 
the payment rates for FY 2002. The nursing case-mix component of the 
proposed rates, both urban and rural, includes the 16.66 percent 
increase provided by section 312 of BIPA 2000. The rates are further 
adjusted by a wage index budget neutrality factor, described later in 
this section. Tables 1 and 2 reflect the updated components of the 
unadjusted Federal rates (including both the market basket adjustment 
and the 16.66 percent increase in the nursing case-mix component).

                                Table 1.--Unadjusted Federal Rate Per Diem, Urban
----------------------------------------------------------------------------------------------------------------
                                              Nursing--  case- Therapy--  case- Therapy--  non-
               Rate component                       mix              mix            case-mix       Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................         $137.89           $89.03           $11.73           $60.33
----------------------------------------------------------------------------------------------------------------


                                Table 2.--Unadjusted Federal Rate Per Diem, Rural
----------------------------------------------------------------------------------------------------------------
                                              Nursing--  case- Therapy--  case- Therapy--  non-
               Rate component                       mix              mix            case-mix       Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................         $131.76          $102.67           $12.53           $61.44
----------------------------------------------------------------------------------------------------------------

B. Case-Mix Adjustment

    For FY 2002, we are not proposing to modify the case-mix 
classification system. The payment rates set forth in this proposed 
rule reflect the continued use of the existing 44-group RUG-III 
classification system discussed in the May 12, 1998 interim final rule 
(63 FR 26252). Consequently, we will also maintain the add-ons to the 
Federal rates for specified RUG-III groups, as required by section 101 
of BBRA 1999 and subsequently modified by section 314 of BIPA 2000. The 
case-mix adjusted payment rates are listed separately for urban and 
rural SNFs in Tables 3 and 4, with the corresponding case-mix index 
values. These tables do not reflect the add-ons (that is, 20 percent, 
6.7 percent, or 4 percent) provided for in BBRA 1999 and BIPA 2000, 
which are applied only after all other adjustments (wage and case-mix) 
have been made.

                     Table 3.--Case-Mix Adjusted Federal Rates and Associated Indexes Urban
----------------------------------------------------------------------------------------------------------------
                                                                               Non-case
                                Nursing     Therapy     Nursing     Therapy       mix      Non-case
      RUG III category           index       index     component   component    therapy       mix     Total rate
                                                                                 comp.     component
----------------------------------------------------------------------------------------------------------------
RUC.........................        1.30        2.25      179.26      200.32  ..........       60.33      439.91
RUB.........................        0.95        2.25      131.00      200.32  ..........       60.33      391.65
RUA.........................        0.78        2.25      107.55      200.32  ..........       60.33      368.20
RVC.........................        1.13        1.41      155.82      125.53  ..........       60.33      341.68
RVB.........................        1.04        1.41      143.41      125.53  ..........       60.33      329.27
RVA.........................        0.81        1.41      111.69      125.53  ..........       60.33      297.55
RHC.........................        1.26        0.94      173.74       83.69  ..........       60.33      317.76
RHB.........................        1.06        0.94      146.16       83.69  ..........       60.33      290.18
RHA.........................        0.87        0.94      119.96       83.69  ..........       60.33      263.98
RMC.........................        1.35        0.77      186.15       68.55  ..........       60.33      315.03
RMB.........................        1.09        0.77      150.30       68.55  ..........       60.33      279.18
RMA.........................        0.96        0.77      132.37       68.55  ..........       60.33      261.25
RLB.........................        1.11        0.43      153.06       38.28  ..........       60.33      251.67
RLA.........................        0.80        0.43      110.31       38.28  ..........       60.33      208.92
SE3.........................        1.70  ..........      234.41  ..........       11.73       60.33      306.47
SE2.........................        1.39  ..........      191.67  ..........       11.73       60.33      263.73
SE1.........................        1.17  ..........      161.33  ..........       11.73       60.33      233.39
SSC.........................        1.13  ..........      155.82  ..........       11.73       60.33      227.88
SSB.........................        1.05  ..........      144.78  ..........       11.73       60.33      216.84
SSA.........................        1.01  ..........      139.27  ..........       11.73       60.33      211.33
CC2.........................        1.12  ..........      154.44  ..........       11.73       60.33      226.50

[[Page 23989]]

 
CC1.........................        0.99  ..........      136.51  ..........       11.73       60.33      208.57
CB2.........................        0.91  ..........      125.48  ..........       11.73       60.33      197.54
CB1.........................        0.84  ..........      115.83  ..........       11.73       60.33      187.89
CA2.........................        0.83  ..........      114.45  ..........       11.73       60.33      186.51
CA1.........................        0.75  ..........      103.42  ..........       11.73       60.33      175.48
IB2.........................        0.69  ..........       95.14  ..........       11.73       60.33      167.20
IB1.........................        0.67  ..........       92.39  ..........       11.73       60.33      164.45
IA2.........................        0.57  ..........       78.60  ..........       11.73       60.33      150.66
IA1.........................        0.53  ..........       73.08  ..........       11.73       60.33      145.14
BB2.........................        0.68  ..........       93.77  ..........       11.73       60.33      165.83
BB1.........................        0.65  ..........       89.63  ..........       11.73       60.33      161.69
BA2.........................        0.56  ..........       77.22  ..........       11.73       60.33      149.28
BA1.........................        0.48  ..........       66.19  ..........       11.73       60.33      138.25
PE2.........................        0.79  ..........      108.93  ..........       11.73       60.33      180.99
PE1.........................        0.77  ..........      106.18  ..........       11.73       60.33      178.24
PD2.........................        0.72  ..........       99.28  ..........       11.73       60.33      171.34
PD1.........................        0.70  ..........       96.52  ..........       11.73       60.33      168.58
PC2.........................        0.65  ..........       89.63  ..........       11.73       60.33      161.69
PC1.........................        0.64  ..........       88.25  ..........       11.73       60.33      160.31
PB2.........................        0.51  ..........       70.32  ..........       11.73       60.33      142.38
PB1.........................        0.50  ..........       68.95  ..........       11.73       60.33      141.01
PA2.........................        0.49  ..........       67.57  ..........       11.73       60.33      139.63
PA1.........................        0.46  ..........       63.43  ..........       11.73       60.33      135.49
----------------------------------------------------------------------------------------------------------------


                     Table 4.--Case-Mix Adjusted Federal Rates and Associated Indexes, Rural
----------------------------------------------------------------------------------------------------------------
                                                                               Non-case
                                Nursing     Therapy     Nursing     Therapy       mix      Non-case
      RUG III category           index       index     component   component    therapy       mix     Total rate
                                                                                 comp      component
----------------------------------------------------------------------------------------------------------------
RUC.........................        1.30        2.25      171.29      231.01  ..........       61.44      463.74
RUB.........................        0.95        2.25      125.17      231.01  ..........       61.44      417.62
RUA.........................        0.78        2.25      102.77      231.01  ..........       61.44      395.22
RVC.........................        1.13        1.41      148.89      144.76  ..........       61.44      355.09
RVB.........................        1.04        1.41      137.03      144.76  ..........       61.44      343.23
RVA.........................        0.81        1.41      106.73      144.76  ..........       61.44      312.93
RHC.........................        1.26        0.94      166.02       96.51  ..........       61.44      323.97
RHB.........................        1.06        0.94      139.67       96.51  ..........       61.44      297.62
RHA.........................        0.87        0.94      114.63       96.51  ..........       61.44      272.58
RMC.........................        1.35        0.77      177.88       79.06  ..........       61.44      318.38
RMB.........................        1.09        0.77      143.62       79.06  ..........       61.44      284.12
RMA.........................        0.96        0.77      126.49       79.06  ..........       61.44      266.99
RLB.........................        1.11        0.43      146.25       44.15  ..........       61.44      251.84
RLA.........................        0.80        0.43      105.41       44.15  ..........       61.44      211.00
SE3.........................        1.70  ..........      223.99  ..........       12.53       61.44      297.96
SE2.........................        1.39  ..........      183.15  ..........       12.53       61.44      257.12
SE1.........................        1.17  ..........      154.16  ..........       12.53       61.44      228.13
SSC.........................        1.13  ..........      148.89  ..........       12.53       61.44      222.86
SSB.........................        1.05  ..........      138.35  ..........       12.53       61.44      212.32
SSA.........................        1.01  ..........      133.08  ..........       12.53       61.44      207.05
CC2.........................        1.12  ..........      147.57  ..........       12.53       61.44      221.54
CC1.........................        0.99  ..........      130.44  ..........       12.53       61.44      204.41
CB2.........................        0.91  ..........      119.90  ..........       12.53       61.44      193.87
CB1.........................        0.84  ..........      110.68  ..........       12.53       61.44      184.65
CA2.........................        0.83  ..........      109.36  ..........       12.53       61.44      183.33
CA1.........................        0.75  ..........       98.82  ..........       12.53       61.44      172.79
IB2.........................        0.69  ..........       90.91  ..........       12.53       61.44      164.88
IB1.........................        0.67  ..........       88.28  ..........       12.53       61.44      162.25
IA2.........................        0.57  ..........       75.10  ..........       12.53       61.44      149.07
IA1.........................        0.53  ..........       69.83  ..........       12.53       61.44      143.80
BB2.........................        0.68  ..........       89.60  ..........       12.53       61.44      163.57
BB1.........................        0.65  ..........       85.64  ..........       12.53       61.44      159.61
BA2.........................        0.56  ..........       73.79  ..........       12.53       61.44      147.76
BA1.........................        0.48  ..........       63.24  ..........       12.53       61.44      137.21
PE2.........................        0.79  ..........      104.09  ..........       12.53       61.44      178.06
PE1.........................        0.77  ..........      101.46  ..........       12.53       61.44      175.43
PD2.........................        0.72  ..........       94.87  ..........       12.53       61.44      168.84
PD1.........................        0.70  ..........       92.23  ..........       12.53       61.44      166.20

[[Page 23990]]

 
PC2.........................        0.65  ..........       85.64  ..........       12.53       61.44      159.61
PC1.........................        0.64  ..........       84.33  ..........       12.53       61.44      158.30
PB2.........................        0.51  ..........       67.20  ..........       12.53       61.44      141.17
PB1.........................        0.50  ..........       65.88  ..........       12.53       61.44      139.85
PA2.........................        0.49  ..........       64.56  ..........       12.53       61.44      138.53
PA1.........................        0.46  ..........       60.61  ..........       12.53       61.44      134.58
----------------------------------------------------------------------------------------------------------------

    We remain committed to efforts to monitor the RUG-III 
classification system and to pursue refinements in SNF payment. In the 
proposed rule associated with the FY 2001 SNF PPS update published 
April 10, 2000 (65 FR 19188), we had discussed options for refinements 
to the RUG-III classification system to account more accurately for the 
services provided to medically complex patients. The refinement 
approaches discussed had a particular focus on ancillary services other 
than rehabilitation (physical, occupational, and speech-language 
therapy), such as prescription drugs and respiratory therapy. We 
described our ongoing research and analyses in this area and shared the 
initial results that we proposed be incorporated into the Medicare SNF 
PPS system effective October 1, 2000. In that proposed rule, we 
cautioned that the proposed RUG-III refinements were based on limited 
data from seven states from periods prior to the implementation of the 
SNF PPS (1996 and 1997). Consequently, we indicated our plan to 
validate the findings using more current data from a broad national 
sample before issuing a final rule.
    As discussed in the final rule published on July 31, 2000 (65 FR 
46770), we conducted the validation analyses to determine the 
predictive power of the proposed case-mix models in identifying 
variations in non-therapy ancillary costs, using national data from a 
current period (that is, after the implementation of the SNF PPS). 
Based on these analyses, we determined that the refinement models 
developed using the pre-PPS sample were not effective in predicting 
resource use in the post-PPS environment. We identified several 
important variations in the post-PPS volume and distribution of 
beneficiaries and ancillary services costs using the 1999 national 
data, which appear to have affected the performance of the case-mix 
refinement models described in the proposed rule. We noted our belief 
that the introduction of the PPS and consolidated billing provisions 
for covered Part A SNF stays may have caused changes in facility 
practice patterns and billing. These changes, as well as the use of the 
broader national data sample, likely diminished the effectiveness of 
the models. Accordingly, in the final rule, we indicated our decision 
not to proceed with the implementation of case-mix refinements for FY 
2001.
    However, this decision did not in any way reflect a lack of 
commitment to pursuing appropriate case-mix refinements, and we remain 
dedicated to achieving this objective as quickly as possible. While the 
language in section 101 of BBRA 1999 does not directly mandate that we 
make case-mix refinements, we believe it nonetheless reflects a clear 
expectation that refinements will occur, by establishing payment 
adjustments that will expire upon the implementation of case-mix 
refinements, and by characterizing those adjustments as temporary. 
Accordingly, we are continuing our active efforts in this area, with 
the expectation that we will, over the next 12 months, develop case-mix 
refinements.
    The inability of the specific case-mix refinement models based on a 
pre-PPS study sample (as described in the FY 2001 proposed rule) to 
explain behavior adequately in the post-PPS data does not warrant the 
conclusion that further efforts to improve the payment system's ability 
to allocate payments based on expected ancillary use would be 
unproductive. In fact, we believe there may well be the potential to 
establish meaningful refinements in the short term based on the results 
of a deliberate, comprehensive analysis using the extensive MDS 2.0, 
claims, and other administrative data now available. Moreover, this 
research will also provide an important foundation for a longer term 
analysis which seeks to identify alternative classification approaches 
in the SNF setting. The analysis we propose to conduct will be included 
in the report to Congress mandated by section 311 of BIPA 2000. This 
section requires us to submit the report no later than January 1, 2005. 
This work may also support a longer term goal, supported by HCFA and 
MedPAC, of developing more integrated approaches for the payment and 
delivery system for Medicare post acute services generally.
    Therefore, we are currently proceeding with efforts to develop 
refinements to the RUG-III system, and are in the process of initiating 
a research contract in this area. We plan to look broadly for 
alternative refinement approaches that will improve the payment 
system's ability to account for the variation in resources associated 
with SNF patients generally, as well as medically complex patients and 
non-therapy ancillary services more specifically. This may include 
further analysis to develop a non-therapy ancillary index, similar to 
that proposed in the FY 2001 proposed rule, as well as exploration of 
other potential refinement approaches that could utilize information 
related to service use, function, diagnosis, and co-morbidities. In 
exploring possible refinement approaches, it is necessary to consider 
the potential effect of the refinements on aggregate SNF payments, as 
well as on access to and quality of care. In addition, we recognize the 
utility of using administrative data (such as claims) in the 
construction of the case-mix indexes and may, as MedPAC has recommended 
in the past, examine the potential for using this data to accomplish 
the tasks we are undertaking. Such an approach would facilitate annual 
updates to the case-mix indexes similar to the inpatient hospital PPS. 
In continuing this research, we will carefully consider the comments we 
received pursuant to the FY 2001 proposed rule. In addition, we 
specifically solicit comments in this proposed rule regarding possible 
approaches to refining the case-mix system.
    While we recognize the need to seek improvements in the payment 
system, we are not aware of any substantive findings that demonstrate, 
as has been

[[Page 23991]]

suggested at recent MedPAC meetings, that the RUG-III system has proven 
to be unworkable. In fact, several recent reports indicate that quality 
and access do not appear to be impaired. This may be more a function of 
overall revenues available to SNFs under the PPS, especially 
considering recent increases in funding under BBRA 1999 and BIPA 2000. 
Even though they do not affect the current case-mix classification 
structure, a number of these recent payment increases are nonetheless 
intended to ensure that facilities continue to be paid appropriately 
until RUG refinements can be made. We also note that it may be 
premature to make assumptions regarding the effect of case-mix on 
provider behavior based on currently available data (which, at this 
point, still reflect only payments made during the transition period 
when SNFs received a blend of the Federal rate and facility-specific 
rate), since provider behavior may change significantly once payment is 
made under the fully case-mix adjusted Federal rates.
    Further, it is worth noting that in research conducted to support 
the implementation of the SNF PPS, the RUG-III case-mix system was 
shown to predict approximately 55 percent of the overall variation in 
nursing and therapy staff time costs across total facility population 
(that includes both Medicare and Medicaid, as well as other patients). 
The level of variance explanation is somewhat less across the Medicare 
population due to its greater homogeneity. While we have not measured 
this directly, an examination of the 1997 staff time data focusing on 
patients in Medicare certified units that specialize in medically 
complex care or intensive rehabilitation found that RUG-III predicted 
41 percent of nursing and rehabilitation staff time costs across total 
facility population (which includes Medicare, Medicaid, and private pay 
patients). We believe that it continues to be highly effective in this 
area. While we have found that pharmacy costs are correlated somewhat 
with the nursing case-mix indexes in RUG-III, it is important to note 
that such costs are, by and large, difficult to account for in case-mix 
systems because drug costs do not necessarily follow physical 
condition, resource use, or functional and clinical pathways.
    We look forward to addressing this important issue through the 
study of alternative case-mix systems required under BIPA 2000, which 
provides an opportunity for a deliberate analytical approach to the 
question of how best to refine the current classification system or to 
redirect Medicare's payment system to produce more equitable payments 
for providers and best support access and quality of care for Medicare 
beneficiaries. Similarly, we look forward to the study required under 
section 545 of BIPA 2000 (required to be completed by January 1, 2005), 
which requires us to submit a report on the development of standard 
instruments for the assessment of the health and functional status of 
patients. We also invite comments on possible approaches to refining 
the current case-mix classification system, as well as on identifying 
and studying alternatives to the current system. With regard to the MDS 
2.0, we continue to believe that the MDS is an accurate and effective 
assessment tool, which meets program objectives related to its major 
purposes of supporting quality of care and providing patient status and 
treatment information needed to support payment. We are currently 
engaged in a number of activities that support accurate completion of 
the MDS. These include expanded provider training, clearer definitions 
of certain MDS elements and coding instructions, and funding of program 
safeguard contractor activities to undertake auditing and verification 
of the MDS. We also note our concern that the OIG's recent reports 
related to the accuracy of the MDS contained a number of methodological 
limitations (as acknowledged in the reports) that limit their utility 
for drawing conclusions about the MDS.
    However, we recognize the increased financial incentives that BIPA 
creates for the rehabilitation categories and the potential for 
upcoding under the SNF PPS to gain higher payments. In fact, the 
potential for inappropriate upcoding exists in any prospective payment 
system that uses coding of clinical information as the basis for 
determining payment amounts due to providers, and the SNF PPS (which 
bases payment amounts on the clinical information entered on the MDS) 
is no exception. In this context, we note that fiscal intermediaries 
(FIs) will continue reviewing SNF PPS bills. As with current practice, 
the FIs will focus on identifying instances in which inappropriate 
services were provided or where the beneficiary did not meet the 
requirements for Medicare Part A coverage in an SNF. As part of this 
review, the MDS and the medical record is assessed to verify that the 
reported information supports the RUG category billed.
    We believe that the practice of FIs using a data driven approach to 
focus medical review efforts will help address the incentive for 
upcoding. Once bills have been targeted for review, the FIs will 
identify instances in which inappropriate services were provided or 
where the beneficiary did not meet the requirements for Medicare Part A 
coverage in a SNF. As part of this review, the medical record (which 
includes the MDS) is assessed to verify that the reported information 
supports the RUG category billed.
    To lend further support to program safeguard efforts, we are in the 
process of awarding a contract to a Medicare Integrity Program (MIP) 
contractor to provide an ongoing centralized data surveillance process 
to assess the accuracy and reliability of MDS data particular to the 
health care furnished by SNFs, and payment for these services. This 
includes ensuring appropriate payment and payment denial decisions. The 
findings will produce evidence for further actions at national, 
regional, and State levels in addressing concerns in the areas of 
program integrity, beneficiary health and safety, and quality 
improvement. The contractor is also expected to perform monitoring and 
data analyses to determine if there are variations over time in the 
case-mix intensity, and whether those differences represent changes in 
actual or real case status of beneficiaries rather than changes that 
reflect improper provider behavior. Through the MIP contractor and the 
FIs, we will address instances of improper billing through recoupment 
of improper payments, intensified reviews, and provider education.
    Further, in the context of our ongoing efforts to ensure accurate 
payment for appropriate care, we note a situation regarding 
rehabilitation therapy that is being provided in SNFs in a manner that 
conflicts with Medicare coverage guidelines. This issue involves 
providers that refuse to employ therapists who are unwilling to 
perform, on a routine basis, concurrent therapy. Concurrent therapy is 
the practice of one professional therapist treating more than one 
Medicare beneficiary at a time--in some cases, many more than one 
individual at a time.
    Concurrent therapy is distinguished from group therapy, because all 
participants in group therapy are working on some common skill 
development and the ratio of participants to therapist may be no higher 
than 4 to 1. In addition, in the July 30, 1999 SNF PPS final rule (64 
FR 41662), we specified that the minutes of group therapy received by 
the beneficiary may account for no more than 25 percent of the therapy 
(per discipline) received in a 7 day period. By contrast, a beneficiary 
who is receiving concurrent therapy with one or more other 
beneficiaries likely is not

[[Page 23992]]

receiving services that relate to those needed by any of the other 
participants. Although each beneficiary may be receiving care that is 
prescribed in his individual plan of treatment, it is not being 
delivered according to Medicare coverage guidelines; that is, the 
therapy is not being provided individually, and it is unlikely that the 
services being delivered are at the complex skill level required for 
coverage by Medicare.
    The Medicare SNF benefit provides coverage of therapy services only 
when the services are of such a level of complexity and sophistication 
(or the beneficiary's condition is such) that the services can be 
safely and effectively performed only by or under the supervision of a 
qualified professional therapist. Therapy services that are 
concurrently being delivered by one treating therapist to many 
beneficiaries would not appear to meet these criteria. If the therapist 
or therapy assistant can provide distinct services to several 
beneficiaries at once, then it is unlikely that the services are 
sufficiently complex and sophisticated to qualify for coverage under 
the Medicare guidelines.
    We note that there have always been isolated instances in which a 
professional therapist has been allowed to have some overlap in the 
time of concluding treatment to one individual and the time of 
commencing the treatment of another, even to the point of briefly 
providing therapy concurrently in certain cases. However, the key 
principle here is that Medicare relies on the professional judgment of 
the therapist to determine when, based on the complexity of the 
services to be delivered and the condition of the beneficiary, it is 
appropriate to deliver care to more than one beneficiary at the same 
time. Our concern now is that in some areas of the country, concurrent 
therapy is becoming a standard practice rather than the exception, and 
is being dictated by facility management personnel rather than 
according to the professional judgment of the therapists involved.
    We believe that it is important to heighten the SNF and therapy 
industries' awareness of the applicable Medicare policy in this regard. 
Medicare policy has not, until now, specifically addressed coverage of 
skilled rehabilitation therapy in situations in which a single 
professional therapist (or therapy assistant under the supervision of 
the professional therapist) simultaneously provides different 
treatments to multiple beneficiaries. As noted above, we have relied on 
the professional therapist's judgment as to when it is appropriate for 
an individual therapist to provide services to more than one 
beneficiary. We now wish to advise the providers of care of our concern 
about the potentially adverse effect of this practice on the quality of 
the therapy provided to beneficiaries in Part A SNF stays, as well as 
our concern about the implications of making payments in such 
situations. We solicit public comments regarding the scope and 
magnitude of this problem, and possible approaches for addressing this 
issue.

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 an 
appropriate wage index, as determined by the Secretary. Section 315 of 
BIPA 2000 authorizes the Secretary to establish a reclassification 
system for SNFs, similar to the hospital methodology. This 
reclassification system cannot be implemented until the Secretary has 
collected data necessary to establish an area wage index for SNFs based 
on wage data from such facilities. Pursuant to section 106(a) of the 
Social Security Act Amendments of 1994 (P.L. 103-432), the Secretary 
was directed to begin to collect data on employee compensation and paid 
hours of employment in SNFs for the purpose of constructing a SNF wage 
index. Since the inception of a PPS for SNFs, we have utilized hospital 
wage data in developing a wage index to be applied to SNFs.
    The computation of the proposed wage index is similar to past years 
because we incorporate the latest data and methodology used to 
construct the hospital wage index (see the discussion in the May 12, 
1998 interim final rule (63 FR 26274)). The wage index adjustment is 
applied to the proposed labor-related portion of the Federal rate, 
which is 75.374 percent of the total rate. This percentage reflects the 
labor-related relative importance for FY 2002. The labor-related 
relative importance is calculated from the SNF market basket, and 
approximates the labor-related portion of the total costs after taking 
into account historical and projected price changes between the base 
year and FY 2002. 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 2002 than the base year weights from the SNF market 
basket.
    We calculate the labor-related relative importance for FY 2002 in 
four steps. First, we compute the FY 2002 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 
2002 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2002 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we sum the FY 2002 relative importance 
for each of the labor-related cost categories (that is, wages and 
salaries; employee benefits; nonmedical professional fees; labor-
intensive services; and, capital-related) to produce the FY 2002 labor-
related relative importance. Tables 5 and 6 show the Federal rates by 
labor-related and non-labor-related components.

  Table 5.--Case-Mix Adjusted Federal Rates for Urban SNFs by Labor and
                           Non-Labor Component
------------------------------------------------------------------------
                                                                  Non-
             RUG III  category                Total     Labor     labor
                                              rate     portion   portion
------------------------------------------------------------------------
RUC.......................................    439.91    331.58    108.33
RUB.......................................    391.65    295.20     96.45
RUA.......................................    368.20    277.53     90.67
RVC.......................................    341.68    257.54     84.14
RVB.......................................    329.27    248.18     81.09
RVA.......................................    297.55    224.28     73.27
RHC.......................................    317.76    239.51     78.25
RHB.......................................    290.18    218.72     71.46
RHA.......................................    263.98    198.97     65.01
RMC.......................................    315.03    237.45     77.58
RMB.......................................    279.18    210.43     68.75
RMA.......................................    261.25    196.91     64.34
RLB.......................................    251.67    189.69     61.98
RLA.......................................    208.92    157.47     51.45
SE3.......................................    306.47    231.00     75.47
SE2.......................................    263.73    198.78     64.95
SE1.......................................    233.39    175.92     57.47
SSC.......................................    227.88    171.76     56.12
SSB.......................................    216.84    163.44     53.40
SSA.......................................    211.33    159.29     52.04
CC2.......................................    226.50    170.72     55.78
CC1.......................................    208.57    157.21     51.36
CB2.......................................    197.54    148.89     48.65
CB1.......................................    187.89    141.62     46.27
CA2.......................................    186.51    140.58     45.93
CA1.......................................    175.48    132.27     43.21
IB2.......................................    167.20    126.03     41.17
IB1.......................................    164.45    123.95     40.50
IA2.......................................    150.66    113.56     37.10
IA1.......................................    145.14    109.40     35.74
BB2.......................................    165.83    124.99     40.84
BB1.......................................    161.69    121.87     39.82
BA2.......................................    149.28    112.52     36.76
BA1.......................................    138.25    704.20     34.05
PE2.......................................    780.99    136.42     44.57
PE1.......................................    178.24    134.35     43.89
PD2.......................................    171.34    129.15     42.19
PD1.......................................    168.58    127.07     41.51
PC2.......................................    161.69    121.87     39.82
PC1.......................................    160.31    120.83     39.48
PB2.......................................    142.38    107.32     35.06
PB1.......................................    141.01    106.28     34.73

[[Page 23993]]

 
PA2.......................................    139.63    105.24     34.39
PA1.......................................    135.49    102.12     33.37
------------------------------------------------------------------------


  Table 6.--Case-Mix Adjusted Federal Rates for Rural SNFs by Labor and
                           Non-Labor Component
------------------------------------------------------------------------
                                                                  Non-
             RUG III  category                Total     Labor     labor
                                              rate     portion   portion
------------------------------------------------------------------------
RUC.......................................    463.74    349.54    114.20
RUB.......................................    417.62    314.78    102.84
RUA.......................................    395.22    297.89     97.33
RVC.......................................    355.09    267.65     87.44
RVB.......................................    343.23    258.71     84.52
RVA.......................................    312.93    235.87     77.06
RHC.......................................    323.97    244.19     79.78
RHB.......................................    297.62    224.33     73.29
RHA.......................................    272.58    205.45     67.13
RMC.......................................    318.38    239.98     78.40
RMB.......................................    284.12    214.15     69.97
RMA.......................................    266.99    201.24     65.75
RLB.......................................    251.84    189.82     62.02
RLA.......................................    211.00    159.04     51.96
SE3.......................................    297.96    224.58     73.38
SE2.......................................    257.12    193.80     63.32
SE1.......................................    228.13    171.95     56.18
SSC.......................................    222.86    167.98     54.88
SSB.......................................    212.32    160.03     52.29
SSA.......................................    207.05    156.06     50.99
CC2.......................................    221.54    166.98     54.56
CC1.......................................    204.41    154.07     50.34
CB2.......................................    193.87    146.13     47.74
CB1.......................................    184.65    139.18     45.47
CA2.......................................    183.33    138.18     45.15
CA1.......................................    172.79    130.24     42.55
IB2.......................................    164.88    124.28     40.60
IB1.......................................    162.25    122.29     39.96
IA2.......................................    149.07    112.36     36.71
IA1.......................................    143.80    108.39     35.41
BB2.......................................    163.57    123.29     40.28
BB1.......................................    159.61    120.30     39.31
BA2.......................................    147.76    111.37     36.39
BA1.......................................    137.21    103.42     33.79
PE2.......................................    178.06    134.21     43.85
PE1.......................................    175.43    132.23     43.20
PD2.......................................    168.84    127.26     41.58
PD1.......................................    166.20    125.27     40.93
PC2.......................................    159.61    120.30     39.31
PC1.......................................    158.30    119.32     38.98
PB2.......................................    141.17    106.41     34.76
PB1.......................................    139.85    105.41     34.44
PA2.......................................    138.53    104.42     34.11
PA1.......................................    134.58    101.44     33.14
------------------------------------------------------------------------

    Section 1888(e)(4)(G)(ii) of the Act also requires that the 
application of this wage index be made in a manner that does not result 
in aggregate payments that are greater or lesser than would otherwise 
be made in the absence of the wage adjustment. In this fourth PPS year 
(Federal rates effective October 1, 2001), we are updating the wage 
index applicable to SNF payments using the most recent hospital wage 
data and applying an adjustment to fulfill the budget neutrality 
requirement. This requirement will be met by multiplying each of the 
components of the unadjusted Federal rates by a factor equal to the 
ratio of the volume weighted mean wage adjustment factor (using the 
wage index from the previous year) to the volume weighted mean wage 
adjustment factor, using the wage index for the FY beginning October 1, 
2001. The same volume weights are used in both the numerator and 
denominator and will be derived from 1997 Medicare Provider Analysis 
and Review File (MEDPAR) data. The wage adjustment factor used in this 
calculation is defined as the labor share of the rate component 
multiplied by the wage index plus the non-labor share. The proposed 
budget neutrality factor for FY 2002 is .99939.
    Over the past few years, we have received many comments asking that 
we evaluate a SNF-specific wage index, which would be based solely on 
wage and hourly data from SNFs. To develop this analysis, a schedule 
was added to the cost report to gather wage and hourly data from each 
SNF. In this proposed rule we are publishing a wage index prototype 
based on SNF data, along with the wage index based on the hospital wage 
data that was used in the FY 2001 final rule published July 31, 2000 in 
the Federal Register (65 FR 46770).
    The wage index computations for the SNF prototype were done in the 
same manner as the current wage index based on hospital data, except 
that SNFs use one of three cost reports to report their data: 
Freestanding SNFs use the HCFA-2540, Worksheet S-3; hospital-based SNFs 
use the HCFA-2552, Worksheet S-3; and low-volume SNF providers use the 
HCFA-2540-S, Worksheet S-3.
    The SNF-specific wage indexes illustrated in Table 7 include the 
following categories of data associated with costs paid under the SNF 
PPS:
    <bullet> Salaries and hours from freestanding and hospital-based 
SNFs.
    <bullet> Home office costs and hours.
    <bullet> Certain contract labor costs and hours.
    <bullet> Wage-related costs.
    Consistent with the wage index methodology used in the development 
of the hospital wage index, the wage indexes published here would also 
continue to exclude the direct and overhead costs of salaries and hours 
for services not paid through the SNF PPS, such as home health 
services, and other sub-provider components that are not subject to the 
PPS. In addition, as is done in computing the hospital wage index, we 
would phase out costs associated with graduate medical education (GME) 
(teaching physicians and residents). For purposes of illustrating the 
wage indexes shown in Table 7, the SNF wage index is based on a blend 
of 60 percent of an average hourly wage including the GME costs, and 40 
percent of an average hourly wage excluding these costs.
    Table 7 shows a side by side comparison of the wage index. Column A 
shows the Metropolitan Statistical Area (MSA); Column B shows the wage 
index, utilizing data derived from SNFs with cost reporting periods 
ending during FY 1998; Column C shows the wage index developed using 
SNF data from cost reporting periods ending during FY 1999; and Column 
D shows the wage index from the FY 2001 final rule, as revised by the 
correction notice published on January 16, 2001 (66 FR 3497).

                  Table 7.--Wage Index For Urban Areas
------------------------------------------------------------------------
    Urban Area (Constituent                    Wage Index
      Counties or County       -----------------------------------------
         Equivalents)               SNF98         SNF99         HOSP
------------------------------------------------------------------------
Col. A                                Col. B        Col. C        Col. D
------------------------------------------------------------------------
0040  Abilene, TX.............        0.7354        0.8162        0.8240
    Taylor, TX
0060  Aguadilla, PR...........        0.0000        0.0000        0.4391
    Aguada, PR

[[Page 23994]]

 
    Aguadilla, PR
    Moca, PR
0080  Akron, OH...............        0.9636        1.0553        0.9736
    Portage, OH
    Summit, OH
0120  Albany, GA..............        0.6203        0.7460        0.9933
    Dougherty, GA
    Lee, GA
0160  Albany-Schenectady-Troy,        1.0860        1.0809        0.8549
 NY...........................
    Albany, NY
    Montgomery, NY
    Rensselaer, NY
    Saratoga, NY
    Schenectady, NY
    Schoharie, NY
0200  Albuquerque, NM.........        0.7892        0.7980        0.9136
    Bernalillo, NM
    Sandoval, NM
    Valencia, NM
0220  Alexandria, LA..........        0.7849        0.6318        0.8123
    Rapides, LA
0240  Allentown-Bethlehem-            1.1553        1.0749        0.9925
 Easton, PA...................
    Carbon, PA
    Lehigh, PA
    Northampton, PA
0280  Altoona, PA.............        0.9559        0.9712        0.9346
    Blair, PA
0320  Amarillo, TX............        0.8377        0.8338        0.8715
    Potter, TX
    Randall, TX
0380  Anchorage, AK...........        1.5003        1.4716        1.2793
    Anchorage, AK
0440  Ann Arbor, MI...........        1.0845        1.1059        1.1254
    Lenawee, MI
    Livingston, MI
    Washtenaw, MI
0450  Anniston, AL............        0.7619        0.9226        0.8284
    Calhoun, AL
0460  Appleton-Oshkosh-Neenah,        1.0962        1.0662        0.9052
 WI...........................
    Calumet, WI
    Outagamie, WI
    Winnebago, WI
0470  Arecibo, PR.............        0.0000        0.0000        0.4525
    Arecibo, PR
    Camuy, PR
    Hatillo, PR
0480  Asheville, NC...........        0.9090        0.9482        0.9516
    Buncombe, NC
    Madison, NC
0500  Athens, GA..............        0.9653        0.9264        0.9739
    Clarke, GA
    Madison, GA
    Oconee, GA
0520  Atlanta, GA.............        0.9733        0.9474        1.0096
    Barrow, GA
    Bartow, GA
    Carroll, GA
    Cherokee, GA
    Clayton, GA
    Cobb, GA
    Coweta, GA
    De Kalb, GA
    Douglas, GA
    Fayette, GA
    Forsyth, GA
    Fulton, GA
    Gwinnett, GA
    Henry, GA
    Newton, GA
    Paulding, GA
    Pickens, GA
    Rockdale, GA
    Spalding, GA
    Walton, GA
0560  Atlantic City-Cape May,         1.1443        1.1406        1.1182
 NJ...........................
    Atlantic City, NJ
    Cape May, NJ

[[Page 23995]]

 
0580  Auburn-Opelika, AL......        0.9892        0.8857        0.8106
    Lee, AL
0600  Augusta-Aiken, GA-SC....        0.7831        0.7898        0.9160
    Columbia, GA
    McDuffie, GA
    Richmond, GA
    Aiken, SC
    Edgefield, SC
0640  Austin-San Marcos, TX...        0.8694        0.8826        0.9577
    Bastrop, TX
    Caldwell, TX
    Hays, TX
    Travis, TX
    Williamson, TX
0680  Bakersfield, CA.........        1.0005        1.0059        0.9678
    Kern, CA
0720  Baltimore, MD...........        1.0144        0.9797        0.9365
    Anne Arundel, MD
    Baltimore, MD
    Baltimore City, MD
    Carroll, MD
    Harford, MD
    Howard, MD
    Queen Annes, MD
0733  Bangor, ME..............        1.0358        0.8851        0.9561
    Penobscot, ME
0743  Barnstable-Yarmouth, MA.        1.2663        1.2722        1.3839
    Barnstable, MA
0760  Baton Rouge, LA.........        0.7459        0.7803        0.8842
    Ascension, LA
    East Baton Rouge, LA
    Livingston, LA
    West Baton Rouge, LA
0840  Beaumont-Port Arthur, TX        0.8049        0.7895        0.8744
    Hardin, TX
    Jefferson, TX
    Orange, TX
0860  Bellingham, WA..........        0.9121        0.8984        1.1439
    Whatcom, WA
0870  Benton Harbor, MI.......        0.8766        0.9098        0.8671
    Berrien, MI
0875  Bergen-Passaic, NJ......        1.3811        1.2739        1.1848
    Bergen, NJ
    Passaic, NJ
0880  Billings, MT............        0.9429        0.9017        0.9585
    Yellowstone, MT
0920  Biloxi-Gulfport-                0.8023        0.9676        0.8236
 Pascagoula, MS...............
    Hancock, MS
    Harrison, MS
    Jackson, MS
0960  Binghamton, NY..........        0.9400        0.9231        0.8690
    Broome, NY
    Tioga, NY
1000  Birmingham, AL..........        0.8846        0.9155        0.8452
    Blount, AL
    Jefferson, AL
    St. Clair, AL
    Shelby, AL
1010  Bismarck, ND............        0.8939        0.8745        0.7705
    Burleigh, ND
    Morton, ND
1020  Bloomington, IN.........        0.8272        0.9108        0.8733
    Monroe, IN
1040  Bloomington-Normal, IL..        0.8547        0.9268        0.9095
    McLean, IL
1080  Boise City, ID..........        1.0779        0.9592        0.9006
    Ada, ID
    Canyon, ID
1123  Boston-Worcester-               1.2273        1.1947        1.1160
 Lawrence-Lowell-Brockton, MA-
 NH...........................
    Bristol, MA
    Essex, MA
    Middlesex, MA
    Norfolk, MA
    Plymouth, MA
    Suffolk, MA
    Worcester, MA
    Hillsborough, NH

[[Page 23996]]

 
    Merrimack, NH
    Rockingham, NH
    Strafford, NH
1125  Boulder-Longmont, CO....        1.1414        0.9062        0.9731
    Boulder, CO
1145  Brazoria, TX............        0.7869        0.7187        0.8658
    Brazoria, TX
1150  Bremerton, WA...........        0.9945        0.9732        1.0975
    Kitsap, WA
1240  Brownsville-Harlingen-          0.8226        0.7991        0.8722
 San Benito, TX...............
    Cameron, TX
1260  Bryan-College Station,          0.8326        0.6742        0.8237
 TX...........................
    Brazos, TX
1280  Buffalo-Niagara Falls,          1.0114        0.9494        0.9580
 NY...........................
    Erie, NY
    Niagara, NY
1303  Burlington, VT..........        1.0690        1.0145        1.0735
    Chittenden, VT
    Franklin, VT
    Grand Isle, VT
1310  Caguas, PR..............        0.0000        0.0000        0.4562
    Caguas, PR
    Cayey, PR
    Cidra, PR
    Gurabo, PR
    San Lorenzo, PR
1320  Canton-Massillon, OH....        0.9343        0.8839        0.8584
    Carroll, OH
    Stark, OH
1350  Casper, WY..............        0.7798        0.8405        0.8724
    Natrona, WY
1360  Cedar Rapids, IA........        0.8652        0.9390        0.8736
    Linn, IA
1400  Champaign-Urbana, IL....        0.9478        1.0588        0.9198
    Champaign, IL
1440  Charleston-North                0.7764        0.7695        0.9038
 Charleston, SC...............
    Berkeley, SC
    Charleston, SC
    Dorchester, SC
1480  Charleston, WV..........        0.9525        0.9975        0.9240
    Kanawha, WV
    Putnam, WV
1520  Charlotte-Gastonia-Rock         1.0230        0.9661        0.9407
 Hill, NC-SC..................
    Cabarrus, NC
    Gaston, NC
    Lincoln, NC
    Mecklenburg, NC
    Rowan, NC
    Stanly, NC
    Union, NC
    York, SC
1540  Charlottesville, VA.....        0.9619        0.9943        1.0789
    Albemarle, VA
    Charlottesville City, VA
 
    Fluvanna, VA
    Greene, VA
1560  Chattanooga, TN-GA......        0.9186        0.8876        0.9833
    Catoosa, GA
    Dade, GA
    Walker, GA
    Hamilton, TN
    Marion, TN
1580  Cheyenne, WY............        1.0743        0.9800        0.8308
    Laramie, WY
1600  Chicago, IL.............        0.9358        0.9860        1.1146
    Cook, IL
    De Kalb, IL
    Du Page, IL
    Grundy, IL
    Kane, IL
    Kendall, IL
    Lake, IL
    McHenry, IL
    Will, IL
1620  Chico-Paradise, CA......        0.9238        0.9565        0.9918
    Butte, CA

[[Page 23997]]

 
1640   Cincinnati, OH-KY-IN...        0.9579        0.9615        0.9415
    Dearborn, IN
    Ohio, IN
    Boone, KY
    Campbell, KY
    Gallatin, KY
    Grant, KY
    Kenton, KY
    Pendleton, KY
    Brown, OH
    Clermont, OH
    Hamilton, OH
    Warren, OH
1660  Clarksville-                    0.7928        0.7668        0.8204
 Hopkinsville, TN-KY..........
    Christian, KY
    Montgomery, TN
1680  Cleveland-Lorain-Elyria,        1.0330        1.0271        0.9597
 OH...........................
    Ashtabula, OH
    Geauga, OH
    Cuyahoga, OH
    Lake, OH
    Lorain, OH
    Medina, OH
1720  Colorado Springs, CO....        0.8972        0.9387        0.9697
    El Paso, CO
1740  Columbia, MO............        0.9174        0.8050        0.8961
    Boone, MO
1760  Columbia, SC............        0.9423        0.9195        0.9554
    Lexington, SC
    Richland, SC
1800  Columbus, GA-AL.........        0.7897        0.8062        0.8568
    Russell, AL
    Chattanoochee, GA
    Harris, GA
    Muscogee, GA
1840  Columbus, OH............        1.0294        1.0288        0.9619
    Delaware, OH
    Fairfield, OH
    Franklin, OH
    Licking, OH
    Madison, OH
    Pickaway, OH
1880  Corpus Christi, TX......        0.8333        0.8573        0.8726
    Nueces, TX
    San Patricio, TX
1890  Corvallis, OR...........        0.7759        0.8492        1.1326
    Benton, OR
1900  Cumberland, MD-WV.......        0.8879        0.9957        0.8369
    Allegany, MD
    Mineral, WV
1920  Dallas, TX..............        0.8943        0.9558        0.9913
    Collin, TX
    Dallas, TX
    Denton, TX
    Ellis, TX
    Henderson, TX
    Hunt, TX
    Kaufman, TX
    Rockwall, TX
1950  Danville, VA............        0.7390        0.7589        0.8589
    Danville City, VA
    Pittsylvania, VA
1960  Davenport-Moline-Rock           0.8633        0.8694        0.8898
 Island, IA-IL................
    Scott, IA
    Henry, IL
    Rock Island, IL
2000  Dayton-Springfield, OH..        0.9102        0.9455        0.9442
    Clark, OH
    Greene, OH
    Miami, OH
    Montgomery, OH
2020  Daytona Beach, FL.......        0.8922        0.9231        0.9200
    Flagler, FL
    Volusia, FL
2030  Decatur, AL.............        0.9186        0.8669        0.8534
    Lawrence, AL
    Morgan, AL

[[Page 23998]]

 
2040  Decatur, IL.............        0.8804        0.8322        0.8125
    Macon, IL
2080  Denver, CO..............        1.0833        1.0643        1.0181
    Adams, CO
    Arapahoe, CO
    Denver, CO
    Douglas, CO
    Jefferson, CO
2120  Des Moines, IA..........        0.9003        0.9712        0.9118
    Dallas, IA
    Polk, IA
    Warren, IA
2160  Detroit, MI.............        0.9798        0.9957        1.0510
    Lapeer, MI
    Macomb, MI
    Monroe, MI
    Oakland, MI
    St. Clair, MI
    Wayne, MI
2180  Dothan, AL..............        0.7485        0.8621        0.7943
    Dale, AL
    Houston, AL
2190  Dover, DE...............        1.1346        1.0334        1.0078
    Kent, DE
2200  Dubuque, IA.............        0.9533        1.0244        0.8746
    Dubuque, IA
2240  Duluth-Superior, MN-WI..        0.9492        1.0842        1.0032
    St. Louis, MN
    Douglas, WI
2281  Dutchess County, NY.....        1.0745        1.1267        1.0249
    Dutchess, NY
2290  Eau Claire, WI..........        0.9402        0.9868        0.8790
    Chippewa, WI
    Eau Claire, WI
2320  El Paso, TX.............        0.7912        0.8687        0.9346
    El Paso, TX
    2330  Elkhart-Goshen, IN          1.0718        0.9752        0.9145
    Elkhart, IN
2335  Elmira, NY..............        1.0063        1.0535        0.8546
    Chemung, NY
2340  Enid, OK................        0.7874        0.7879        0.8610
    Garfield, OK
2360  Erie, PA................        1.0605        1.0583        0.8985
    Erie, PA
2400  Eugene-Springfield, OR..        0.8713        0.8417        1.0965
    Lane, OR
2440  Evansville-Henderson, IN-       0.9297        0.9342        0.8173
 KY...........................
    Posey, IN
    Vanderburgh, IN
    Warrick, IN
    Henderson, KY
2520  Fargo-Moorhead, ND-MN...        0.9621        1.0643        0.8749
    Clay, MN
    Cass, ND
2560  Fayetteville, NC........        0.8495        0.8584        0.8655
    Cumberland, NC
2580  Fayetteville-Springdale-        0.8193        0.8512        0.7910
 Rogers, AR...................
    Benton, AR
    Washington, AR
2620  Flagstaff, AZ-UT........        1.2591        1.0997        1.0686
    Coconino, AZ
    Kane, UT
2640  Flint, MI...............        0.9788        0.9726        1.1205
    Genesee, MI
2650  Florence, AL............        0.9251        0.9031        0.7616
    Colbert, AL
    Lauderdale, AL
2655  Florence, SC............        0.7684        0.7799        0.8777
    Florence, SC
2670  Fort Collins-Loveland,          0.9010        0.9680        1.0647
 CO...........................
    Larimer, CO
2680 Ft. Lauderdale, FL.......        0.9681        0.9625        1.0121
    Broward, FL
2700  Fort Myers-Cape Coral,          0.9444        0.8951        0.9247
 FL...........................
    Lee, FL
2710  Fort Pierce-Port St.            1.0172        0.9880        0.9538
 Lucie, FL....................
    Martin, FL

[[Page 23999]]

 
    St. Lucie, FL
2720  Fort Smith, AR-OK.......        0.7268        0.7499        0.8052
    Crawford, AR
    Sebastian, AR
    Sequoyah, OK
2750  Fort Walton Beach, FL...        0.9440        0.9582        0.9607
    Okaloosa, FL
2760  Fort Wayne, IN .........        0.9082        0.9763        0.8665
    Adams, IN
    Allen, IN
    De Kalb, IN
    Huntington, IN
    Wells, IN
    Whitley, IN
2800  Forth Worth-Arlington,          0.8821        0.9047        0.9527
 TX...........................
    Hood, TX
    Johnson, TX
    Parker, TX
    Tarrant, TX
2840  Fresno, CA..............        0.8738        0.9823        1.0104
    Fresno, CA
    Madera, CA
2880  Gadsden, AL.............        0.9108        0.6287        0.8423
    Etowah, AL
2900  Gainesville, FL.........        0.9325        1.0300        1.0074
    Alachua, FL
2920  Galveston-Texas City, TX        0.7678        0.6821        0.9918
    Galveston, TX
2960  Gary, IN................        0.9827        0.9807        0.9454
    Lake, IN
    Porter, IN
2975  Glens Falls, NY.........        0.9560        0.9772        0.8361
    Warren, NY
    Washington, NY
2980  Goldsboro, NC...........        0.9370        0.8740        0.8423
    Wayne, NC
2985  Grand Forks, ND-MN......        0.8816        0.9022        0.8816
    Polk, MN
    Grand Forks, ND
2995  Grand Junction, CO......        0.9539        0.9156        0.9109
    Mesa, CO.
3000  Grand Rapids-Muskegon-          0.9715        0.9978        1.0248
 Holland, MI..................
    Allegan, MI
    Kent, MI
    Muskegon, MI
    Ottawa, MI
3040  Great Falls, MT.........        0.9712        1.0019        0.9065
    Cascade, MT
3060  Greeley, CO.............        0.9253        0.8880        0.9814
    Weld, CO
3080  Green Bay, WI...........        0.9441        1.0262        0.9225
    Brown, WI
3120  Greensboro-Winston-Salem-       1.0166        0.9782        0.9131
 High Point, NC...............
    Alamance, NC
    Davidson, NC
    Davie, NC
    Forsyth, NC
    Guilford, NC
    Randolph, NC
    Stokes, NC
    Yadkin, NC
3150  Greenville, NC..........        0.8844        0.9400        0.9384
    Pitt, NC
3160  Greenville-Spartanburg-         0.8362        0.9622        0.9003
 Anderson, SC.................
    Anderson, SC
    Cherokee, SC
    Greenville, SC
    Pickens, SC
    Spartanburg, SC
3180  Hagerstown, MD..........        0.9318        0.9153        0.9409
    Washington, MD
3200  Hamilton-Middletown, OH.        0.9739        0.9532        0.9061
    Butler, OH
3240  Harrisburg-Lebanon-             1.1052        1.0753        0.9386
 Carlisle, PA.................
    Cumberland, PA
    Dauphin, PA
    Lebanon, PA

[[Page 24000]]

 
    Perry, PA
3283  Hartford, CT............        1.2733        1.1675        1.1373
    Hartford, CT
    Litchfield, CT
    Middlesex, CT
    Tolland, CT
3285  Hattiesburg, MS.........        0.8421        0.7540        0.7490
    Forrest, MS
    Lamar, MS
3290  Hickory-Morganton-              0.9086        0.9027        0.9008
 Lenoir, NC...................
    Alexander, NC
    Burke, NC
    Caldwell, NC
    Catawba, NC
3320  Honolulu, HI............        1.2242        1.2838        1.1863
    Honolulu, HI
3350  Houma, LA...............        0.6694       0..6749        0.8086
    Lafourche, LA
    Terrebonne, LA
3360  Houston, TX.............        0.8506        0.8634        0.9732
    Chambers, TX
    Fort Bend, TX
    Harris, TX
    Liberty, TX
    Montgomery, TX
    Waller, TX
3400  Huntington-Ashland, WV-         0.7948        0.8957        0.9876
 KY-OH........................
    Boyd, KY
    Carter, KY
    Greenup, KY
    Lawrence, OH
    Cabell, WV
    Wayne, WV
3440  Huntsville, AL..........        0.9774        0.7569        0.8932
    Limestone, AL
    Madison, AL
3480  Indianapolis, IN........        0.9932        1.0128        0.9787
    Boone, IN
    Hamilton, IN
    Hancock, IN
    Hendricks, IN
    Johnson, IN
    Madison, IN
    Marion, IN
    Morgan, IN
    Shelby, IN
3500  Iowa City, IA...........        0.9092        0.8611        0.9657
    Johnson, IA
3520  Jackson, MI.............        0.9393        1.0367        0.9134
    Jackson, MI
3560  Jackson, MS.............        0.8731        0.9642        0.8812
    Hinds, MS
    Madison, MS
    Rankin, MS
3580  Jackson, TN.............        0.9437        0.8032        0.8796
    Chester, TN
    Madison, TN
3600  Jacksonville, FL........        0.9566        0.9309        0.9208
    Clay, FL
    Duval, FL
    Nassau, FL
    St. Johns, FL
3605  Jacksonville, NC........        0.6554        0.8257        0.7777
    Onslow, NC
3610  Jamestown, NY...........        0.9276        0.8990        0.7818
    Chautaqua, NY
3620  Janesville-Beloit, WI...        0.8899        0.9652        0.9585
    Rock, WI
3640  Jersey City, NJ.........        1.2879        0.8535        1.1502
    Hudson, NJ
3660  Johnson City-Kingsport-         0.8853        0.8303        0.8272
 Bristol, TN-VA...............
    Carter, TN
    Hawkins, TN
    Sullivan, TN
    Unicoi, TN
    Washington, TN
    Bristol City, VA

[[Page 24001]]

 
    Scott, VA
    Washington, VA
3680  Johnstown, PA...........        0.9877        0.9914        0.8846
    Cambria, PA
    Somerset, PA
3700  Jonesboro, AR...........        0.6568        0.8322        0.7832
    Craighead, AR
  3710 Joplin, MO.............        0.8112        0.8128        0.8148
    Jasper, MO
    Newton, MO
3720  Kalamazoo-Battle Creek,         0.9773        0.9982        1.0453
 MI...........................
    Calhoun, MI
    Kalamazoo, MI
    Van Buren, MI
3740  Kankakee, IL............        0.8635        0.8886        0.9902
    Kankakee, IL
3760  Kansas City, KS-MO......        0.9439        0.9726        0.9527
    Johnson, KS
    Leavenworth, KS
    Miami, KS
    Wyandotte, KS
    Cass, MO
    Clay, MO
    Clinton, MO
    Jackson, MO
    Lafayette, MO
    Platte, MO
    Ray, MO
3800  Kenosha, WI.............        1.1006        1.0354        0.9611
    Kenosha, WI
3810  Killeen-Temple, TX......        0.7996        0.8280        1.0119
    Bell, TX
    Coryell, TX
3840  Knoxville, TN...........        0.9046        0.8712        0.8340
    Anderson, TN
    Blount, TN
    Knox, TN
    Loudon, TN
    Sevier, TN
    Union, TN
3850  Kokomo, IN..............        1.0415        0.8785        0.9518
    Howard, IN
    Tipton, IN
3870  La Crosse, WI-MN........        0.9343        0.9838        0.9211
    Houston, MN
    La Crosse, WI
3880  Lafayette, LA...........        0.7373        0.7000        0.8490
    Acadia, LA
    Lafayette, LA
    St. Landry, LA
    St. Martin, LA
3920  Lafayette, IN...........        1.0308        0.9298        0.8834
    Clinton, IN
    Tippecanoe, IN
3960  Lake Charles, LA........        0.7437        0.7102        0.7399
    Calcasieu, LA
3980  Lakeland-Winter Haven,          1.0545        1.0235        0.9239
 FL...........................
    Polk, FL
4000  Lancaster, PA...........        1.0528        1.0114        0.9259
    Lancaster, PA
4040  Lansing-East Lansing, MI        0.9933        1.0271        0.9934
    Clinton, MI
    Eaton, MI
    Ingham, MI
4080  Laredo, TX..............        0.7832        0.8348        0.8168
    Webb, TX
4100  Las Cruces, NM..........        0.6816        0.7263        0.8658
    Dona Ana, NM
4120  Las Vegas, NV-AZ........        1.0189        1.0278        1.0796
    Mohave, AZ
    Clark, NV
    Nye, NV
4150  Lawrence, KS............        0.9625        0.9352        0.8190
    Douglas, KS
4200  Lawton, OK..............        0.6546        0.7951        0.8996
    Comanche, OK
4243  Lewiston-Auburn, ME.....        0.8717        0.9202        0.9036

[[Page 24002]]

 
    Androscoggin, ME
4280  Lexington, KY...........        0.9208        0.7549        0.8866
    Bourbon, KY
    Clark, KY
    Fayette, KY
    Jessamine, KY
    Madison, KY
    Scott, KY
    Woodford, KY
4320  Lima, OH................        0.8609        0.9397        0.9320
    Allen, OH
    Auglaize, OH
4360  Lincoln, NE.............        1.0497        1.0192        0.9626
    Lancaster, NE
4400  Little Rock-North Little        0.9213        0.9210        0.8906
 Rock, AR.....................
    Faulkner, AR
    Lonoke, AR
    Pulaski, AR
    Saline, AR
4420  Longview-Marshall, TX...        0.7978        0.9291        0.8922
    Gregg, TX
    Harrison, TX
    Upshur, TX
4480  Los Angeles-Long Beach,         1.0083        1.0129        1.1996
 CA...........................
    Los Angeles, CA
4520  Louisville, KY-IN.......        0.9433        0.9206        0.9350
    Clark, IN
    Floyd, IN
    Harrison, IN
    Scott, IN
    Bullitt, KY
    Jefferson, KY
    Oldham, KY
4600  Lubbock, TX.............        0.7676        0.7802        0.8838
    Lubbock, TX
4640  Lynchburg, VA...........        0.8673        0.8209        0.8867
    Amherst, VA
    Bedford City, VA
    Bedford, VA
    Campbell, VA
    Lynchburg City, VA
4680  Macon, GA...............        0.8420        0.7877        0.8974
    Bibb, GA
    Houston, GA
    Jones, GA
    Peach, GA
    Twiggs, GA
4720  Madison, WI.............        0.9982        1.0705        1.0271
    Dane, WI
4800  Mansfield, OH...........        0.8294        0.9051        0.8690
    Crawford, OH
    Richland, OH
4840  Mayaguez, PR............        0.0000        0.0000        0.4589
    Anasco, PR
    Cabo Rojo, PR
    Hormigueros, PR
    Mayaguez, PR
    Sabana Grande, PR
    San German, PR
4880  McAllen-Edinburg-               0.8136        0.7935        0.8566
 Mission, TX..................
    Hidalgo, TX
4890  Medford-Ashland, OR.....        0.9732        0.9528        1.0344
    Jackson, OR
4900  Melbourne-Titusville-           1.0452        1.0178        0.9688
 Palm Bay, FL.................
    Brevard, Fl
4920  Memphis, TN-AR-MS.......        0.9554        0.9919        0.8723
    Crittenden, AR
    De Soto, MS
    Fayette, TN
    Shelby, TN
    Tipton, TN
4940  Merced, CA..............        0.7959        0.9022        0.9646
    Merced, CA
5000  Miami, FL...............        0.9359        0.9577        1.0059
    Dade, FL
5015  Middlesex-Somerset-             1.1283        1.2052        1.1075
 Hunterdon, NJ................
    Hunterdon, NJ

[[Page 24003]]

 
    Middlesex, NJ
    Somerset, NJ
5080  Milwaukee-Waukesha, WI..        1.0373        1.0397        0.9767
    Milwaukee, WI
    Ozaukee, WI
    Washington, WI
    Waukesha, WI
5120  Minneapolis-St Paul, MN-        1.2186        1.2375        1.1017
 WI...........................
    Anoka, MN
    Carver, MN
    Chisago, MN
    Dakota, MN
    Hennepin, MN
    Isanti, MN
    Ramsey, MN
    Scott, MN
    Sherburne, MN
    Washington, MN
    Wright, MN
    Pierce, WI
    St. Croix, WI
5140  Missoula,  MT...........        0.9197        0.8724        0.9274
    Missoula, MT
5160  Mobile, AL..............        0.8273        0.9284        0.8163
    Baldwin, AL
    Mobile, AL
5170  Modesto, CA.............        0.8732        0.9675        1.0396
    Stanislaus, CA
5190  Monmouth-Ocean, NJ......        1.1251        1.0979        1.1278
    Monmouth, NJ
    Ocean, NJ
5200  Monroe, LA..............        0.7793        0.8161        0.8396
    Ouachita, LA
5240  Montgomery, AL..........        0.7738        0.8229        0.7653
    Autauga, AL
    Elmore, AL
    Montgomery, AL
5280  Muncie, IN..............        0.9597        0.9550        1.0969
    Delaware, IN
5330  Myrtle Beach, SC........        0.9077        0.7922        0.8440
    Horry, SC
5345  Naples, FL..............        0.9628        1.0437        0.9661
    Collier, FL
5360  Nashville, TN...........        0.9408        0.9345        0.9490
    Cheatham, TN
    Davidson, TN
    Dickson, TN
    Robertson, TN
    Rutherford, TN
    Sumner, TN
    Williamson, TN
    Wilson, TN
5380  Nassau-Suffolk, NY......        1.5592        1.5034        1.3932
    Nassau, NY
    Suffolk, NY
5483  New Haven-Bridgeport-           1.2799        1.3446        1.2297
 Stamford-Waterbury-Danbury,
 CT...........................
    Fairfield, CT
    New Haven, CT
5523  New London-Norwich, CT..        1.2035        1.2438        1.2063
    New London, CT
5560  New Orleans, LA.........        0.8077        0.8436        0.9295
    Jefferson, LA
    Orleans, LA
    Plaquemines, LA
    St. Bernard, LA
    St. Charles, LA
    St. James, LA
    St. John The Baptist, LA
    St. Tammany, LA
5600  New York, NY............        1.5638        1.4983        1.4651
    Bronx, NY
    Kings, NY
    New York, NY
    Putnam, NY
    Queens, NY
    Richmond, NY
    Rockland, NY

[[Page 24004]]

 
    Westchester, NY
5640  Newark, NJ..............        1.2344        1.1704        1.1837
    Essex, NJ
    Morris, NJ
    Sussex, NJ
    Union, NJ
    Warren, NJ
5660  Newburgh, NY-PA.........        1.2791        1.2347        1.0847
    Orange, NY
    Pike, PA
5720  Norfolk-Virginia Beach-         0.8084        0.7828        0.8412
 Newport News, VA-NC..........
    Currituck, NC
    Chesapeake City, VA
    Gloucester, VA
    Hampton City, VA
    Isle of Wight, VA
    James City, VA
    Mathews, VA
    Newport News City, VA
    Norfolk City, VA
    Poquoson City, VA
    Portsmouth City, VA
    Suffolk City, VA
    Virginia Beach City, VA
    Williamsburg City, VA
    York, VA
5775  Oakland, CA.............        1.0815        1.0616        1.4983
    Alameda, CA
    Contra Costa, CA
5790  Ocala, FL...............        0.9967        0.7345        0.9243
    Marion, FL
5800  Odessa-Midland, TX......        0.7857        0.8858        0.9205
    Ector, TX
    Midland, TX
5880  Oklahoma City, OK.......        0.7911        0.7955        0.8822
    Canadian, OK
    Cleveland, OK
    Logan, OK
    McClain, OK
    Oklahoma, OK
    Pottawatomie, OK
5910  Olympia, WA.............        0.9888        0.9548        1.0677
    Thurston, WA
5920  Omaha, NE-IA............        1.0212        1.0731        0.9572
    Pottawattamie, IA
    Cass, NE
    Douglas, NE
    Sarpy, NE
    Washington, NE
5945  Orange County, CA.......        1.0747        1.0649        1.1467
    Orange, CA
5960  Orlando, FL.............        0.9445        0.9566        0.9610
    Lake, FL
    Orange, FL
    Osceola, FL
    Seminole, FL
5990  Owensboro, KY...........        1.0374        0.8987        0.8159
    Daviess, KY
6015  Panama City, FL.........        0.9224        0.9344        0.9010
    Bay, FL
6020  Parkersburg-Marietta, WV-       0.9779        0.9064        0.8274
 OH...........................
    Washington, OH
    Wood, WV
6080  Pensacola, FL...........        0.7929        0.8519        0.8176
    Escambia, FL
    Santa Rosa, FL
6120  Peoria-Pekin, IL........        0.8375        0.9017        0.8645
    Peoria, IL
    Tazewell, IL
    Woodford, IL
6160  Philadelphia, PA-NJ.....        1.1553        1.1460        1.0937
    Burlington, NJ
    Camden, NJ
    Gloucester, NJ
    Salem, NJ
    Bucks, PA
    Chester, PA

[[Page 24005]]

 
    Delaware, PA
    Montgomery, PA
    Philadelphia, PA
6200  Phoenix-Mesa, AZ........        1.0176        1.0219        0.9669
    Maricopa, AZ
    Pinal, AZ
6240  Pine Bluff, AR..........        0.6727        0.7983        0.7791
    Jefferson, AR
6280  Pittsburgh, PA..........        1.0937        1.0574        0.9741
    Allegheny, PA
    Beaver, PA
    Butler, PA
    Fayette, PA
    Washington, PA
    Westmoreland, PA
6323  Pittsfield, MA..........        1.1357        1.0739        1.0288
    Berkshire, MA
6340  Pocatello, ID...........        0.7864        0.7717        0.9076
    Bannock, ID
6360  Ponce, PR...............        0.7238        0.6854        0.5006
    Guayanilla, PR
    Juana Diaz, PR
    Penuelas, PR
    Ponce, PR
    Villalba, PR
    Yauco, PR
6403  Portland, ME............        1.0594        1.0378        0.9748
    Cumberland, ME
    Sagadahoc, ME
    York, ME
6440  Portland-Vancouver, OR-         1.0495        1.0048        1.0910
 WA...........................
    Clackamas, OR
    Columbia, OR
    Multnomah, OR
    Washington, OR
    Yamhill, OR
    Clark, WA
6483  Providence-Warwick-             1.0486        1.0120        1.0864
 Pawtucket, RI................
    Bristol, RI
    Kent, RI
    Newport, RI
    Providence, RI
    Washington, RI
6520  Provo-Orem, UT..........        0.7640        0.9453        1.0029
    Utah, UT
6560  Pueblo, CO..............        0.8689        0.9305        0.8815
    Pueblo, CO
6580  Punta Gorda, FL.........        0.9549        0.9761        0.9613
    Charlotte, FL
6600  Racine, WI..............        1.1701        1.1432        0.9246
    Racine, WI
6640  Raleigh-Durham-Chapel           1.0767        1.0122        0.9646
 Hill, NC.....................
    Chatham, NC
    Durham, NC
    Franklin, NC
    Johnston, NC
    Orange, NC
    Wake, NC
6660  Rapid City, SD..........        0.7728        0.9584        0.8865
    Pennington, SD
6680  Reading, PA.............        1.0531        1.1283        0.9152
    Berks, PA
6690  Redding, CA.............        1.1269        1.0330        1.1664
    Shasta, CA
6720  Reno, NV................        1.0926        1.2112        1.0550
    Washoe, NV
6740  Richland-Kennewick-             1.0241        1.0334        1.1460
 Pasco, WA....................
    Benton, WA
    Franklin, WA
6760  Richmond-Petersburg, VA.        0.7927        0.8517        0.9617
    Charles City County, VA
    Chesterfield, VA
    Colonial Heights City, VA
    Dinwiddie, VA
    Goochland, VA
    Hanover, VA
    Henrico, VA

[[Page 24006]]

 
    Hopewell City, VA
    New Kent, VA
    Petersburg City, VA
    Powhatan, VA
    Prince George, VA
    Richmond City, VA
6780  Riverside-San                   1.0127        1.0086        1.1239
 Bernardino, CA...............
    Riverside, CA
    San Bernardino, CA
6800  Roanoke, VA.............        0.7443        0.8052        0.8750
    Botetourt, VA
    Roanoke, VA
    Roanoke City, VA
    Salem City, VA
6820  Rochester, MN...........        1.1764        1.1235        1.1315
    Olmsted, MN
6840  Rochester, NY...........        1.0708        1.0488        0.9182
    Genesee, NY
    Livingston, NY
    Monroe, NY
    Ontario, NY
    Orleans, NY
    Wayne, NY
6880  Rockford, IL............        0.8844        0.9617        0.8819
    Boone, IL
    Ogle, IL
    Winnebago, IL
6895  Rocky Mount, NC.........        0.9221        0.8247        0.8849
    Edgecombe, NC
    Nash, NC
6920  Sacramento, CA..........        1.0230        1.0580        1.1950
    El Dorado, CA
    Placer, CA
    Sacramento, CA
A6960  Saginaw-Bay City-              0.8510        0.9002        0.9575
 Midland, MI..................
    Bay, MI
    Midland, MI
    Saginaw, MI
6980  St. Cloud, MN...........        0.8480        0.9556        1.0016
    Benton, MN
    Stearns, MN
7000  St. Joseph, MO..........        1.1074        1.0774        0.9071
    Andrews, MO
    Buchanan, MO
7040  St. Louis, MO-IL........        0.8900        0.9056        0.9049
    Clinton, IL
    Jersey, IL
    Madison, IL
    Monroe, IL
    St. Clair, IL
    Franklin, MO
    Jefferson, MO
    Lincoln, MO
    St. Charles, MO
    St. Louis, MO
    St. Louis City, MO
    Warren, MO
    Sullivan City, MO
7080  Salem, OR...............        0.9308        0.8379        1.0189
    Marion, OR
    Polk, OR
7120  Salinas, CA.............        1.0856        1.1224        1.4502
    Monterey, CA
7160  Salt Lake City-Ogden, UT        0.9984        0.9405        0.9807
    Davis, UT
    Salt Lake, UT
    Weber, UT
7200  San Angelo, TX..........        0.8222        0.7841        0.8083
    Tom Green, TX
7240  San Antonio, TX.........        0.8252        0.8159        0.8580
    Bexar, TX
    Comal, TX
    Guadalupe, TX
    Wilson, TX
7320  San Diego, CA...........        1.0177        1.0038        1.1784
    San Diego, CA
7360  San Francisco, CA.......        1.1958        1.1930        1.4156

[[Page 24007]]

 
    Marin, CA
    San Francisco, CA
    San Mateo, CA
7400  San Jose, CA............        1.0787        1.1736        1.3652
    Santa Clara, CA
 7440  San Juan-Bayamon, PR...        0.5454        0.5070        0.4690
    Aguas Buenas, PR
    Barceloneta, PR
    Bayamon, PR
    Canovanas, PR
    Carolina, PR
    Catano, PR
    Ceiba, PR
    Comerio, PR
    Corozal, PR
    Dorado, PR
    Fajardo, PR
    Florida, PR
    Guaynabo, PR
    Humacao, PR
    Juncos, PR
    Los Piedras, PR
    Loiza, PR
    Luguillo, PR
    Manati, PR
    Morovis, PR
    Naguabo, PR
    Naranjito, PR
    Rio Grande, PR
    San Juan, PR
    Toa Alta, PR
    Toa Baja, PR
    Trujillo Alto, PR
    Vega Alta, PR
    Vega Baja, PR
    Yabucoa, PR
7460  San Luis Obispo-                1.0873        0.9472        1.0673
 Atascadero-Paso Robles, CA...
    San Luis Obispo, CA
7480  Santa Barbara-Santa             0.9547        1.0338        1.0597
 Maria-Lompoc, CA.............
    Santa Barbara, CA
7485  Santa Cruz-Watsonville,         1.1349        0.9398        1.4040
 CA...........................
    Santa Cruz, CA
7490 Santa Fe, NM.............        0.8636        1.3115        1.0537
    Los Alamos, NM
    Santa Fe, NM
7500  Santa Rosa, CA..........        1.0368        1.1709        1.2646
    Sonoma, CA
7510  Sarasota-Bradenton, FL..        1.0006        1.0294        0.9809
    Manatee, FL
    Sarasota, FL
7520  Savannah, GA............        0.8804        0.7861        0.9697
    Bryan, GA
    Chatham, GA
    Effingham, GA
7560  Scranton-Wilkes-Barre-          1.0313        1.0346        0.8421
 Hazleton, PA.................
    Columbia, PA
    Lackawanna, PA
    Luzerne, PA
    Wyoming, PA
7600  Seattle-Bellevue-               1.1078        1.0440        1.0996
 Everett, WA..................
    Island, WA
    King, WA
    Snohomish, WA
7610  Sharon, PA..............        1.0333        0.9605        0.7928
    Mercer, PA
7620  Sheboygan, WI...........        1.1775        1.2892        0.8379
    Sheboygan, WI
7640  Sherman-Denison, TX.....        0.8663        0.8372        0.8694
    Grayson, TX
7680  Shreveport-Bossier City,        0.7241        0.6735        0.8750
 LA...........................
    Bossier, LA
    Caddo, LA
    Webster, LA
7720   Sioux City, IA-NE......        0.9021        0.9063        0.8473
    Woodbury, IA
    Dakota, NE
7760  Sioux Falls, SD.........        0.8511        0.9286        0.8790

[[Page 24008]]

 
    Lincoln, SD
    Minnehaha, SD
7800  South Bend, IN..........        1.0075        1.0621        1.0000
    St. Joseph, IN
7840  Spokane, WA.............        0.9486        0.9854        1.0513
    Spokane, WA
7880  Springfield, IL.........        0.8276        0.9314        0.8685
    Menard, IL
    Sangamon, IL
7920  Springfield, MO.........        0.9289        0.9309        0.8488
    Christian, MO
    Greene, MO
    Webster, MO
    8003  Springfield, MA.....        1.2171        1.1537        1.0637
    Hampden, MA
    Hampshire, MA
8050  State College, PA.......        1.0164        0.9558        0.9038
    Centre, PA
8080  Steubenville-Weirton, OH-       0.9182        0.9057        0.8548
 WV...........................
    Jefferson, OH
    Brooke, WV
    Hancock, WV
8120  Stockton-Lodi, CA.......        0.9860        1.0313        1.0629
    San Joaquin, CA
8140  Sumter, SC..............        0.7762        0.8687        0.8271
    Sumter, SC
8160  Syracuse, NY............        1.0121        1.0499        0.9549
    Cayuga, NY
    Madison, NY
    Onondaga, NY
    Oswego, NY
8200  Tacoma, WA..............        0.9407        0.9441        1.1564
    Pierce, WA
8240  Tallahassee, FL.........        0.9658        0.9761        0.8545
    Gadsden, FL
    Leon, FL
8280  Tampa-St. Petersburg-           1.0177        1.0025        0.8982
 Clearwater, FL...............
    Hernando, FL
    Hillsborough, FL
    Pasco, FL
    Pinellas, FL
8320  Terre Haute, IN.........        0.8222        0.8286        0.8304
    Clay, IN
    Vermillion, IN
    Vigo, IN
8360  Texarkana, AR-Texarkana,        0.8290        0.8049        0.8363
 TX...........................
    Miller, AR
    Bowie, TX
8400  Toledo, OH..............        0.9963        0.9904        0.9832
    Fulton, OH
    Lucas, OH
    Wood, OH
8440  Topeka, KS..............        0.7969        0.8241        0.9117
    Shawnee, KS
8480  Trenton, NJ.............        1.1897        1.1835        1.0137
    Mercer, NJ
8520  Tucson, AZ..............        0.9488        0.9534        0.8794
    Pima, AZ
8560  Tulsa, OK...............        0.8445        0.8104        0.8454
    Creek, OK
    Osage, OK
    Rogers, OK
    Tulsa, OK
    Wagoner, OK
8600  Tuscaloosa, AL..........        0.8490        0.8208        0.8064
    Tuscaloosa, AL
8640  Tyler, TX...............        0.8607        0.8562        0.9404
    Smith, TX
8680  Utica-Rome, NY..........        0.9634        0.9279        0.8560
    Herkimer, NY
    Oneida, NY
8720  Vallejo-Fairfield-Napa,         1.1949        1.1287        1.2847
 CA...........................
    Napa, CA
    Solano, CA
8735  Ventura, CA.............        1.0838        1.0338        1.1030
    Ventura, CA
8750  Victoria, TX............        0.7002        0.7270        0.8154

[[Page 24009]]

 
    Victoria, TX
8760  Vineland-Millville-             1.1806        1.1019        1.0501
 Bridgeton, NJ................
    Cumberland, NJ
8780  Visalia-Tulare-                 0.9010        0.9027        0.9551
 Porterville, CA..............
    Tulare, CA
8800  Waco, TX................        0.8453        0.8291        0.8314
    McLennan, TX
8840  Washington, DC-MD-VA-WV.        1.0430        1.0368        1.0755
    District of Columbia, DC
    Calvert, MD
    Charles, MD
    Frederick, MD
    Montgomery, MD
    Prince Georges, MD
    Alexandria City, VA
    Arlington, VA
    Clarke, VA
    Culpepper, VA
    Fairfax, VA
    Fairfax City, VA
    Falls Church City, VA
    Fauquier, VA
    Fredericksburg City, VA
    King George, VA
    Loudoun, VA
    Manassas City, VA
    Manassas Park City, VA
    Prince William, VA
    Spotsylvania, VA
    Stafford, VA
    Warren, VA
    Berkeley, WV
    Jefferson, WV
8920  Waterloo-Cedar Falls, IA        0.8201        0.8820        0.8404
    Black Hawk, IA
8940  Wausau, WI..............        1.1470        1.2648        0.9418
    Marathon, WI
8960  West Palm Beach-Boca            1.0131        0.9912        0.9682
 Raton, FL....................
    Palm Beach, FL
9000  Wheeling, OH-WV.........        0.9131        0.9078        0.7733
    Belmont, OH
    Marshall, WV
    Ohio, WV
9040  Wichita, KS.............        0.9211        0.9050        0.9544
    Butler, KS
    Harvey, KS
    Sedgwick, KS
9080  Wichita Falls, TX.......        0.7375        0.7385        0.7668
    Archer, TX
    Wichita, TX
9140  Williamsport, PA........        0.9543        1.0264        0.8392
    Lycoming, PA
9160  Wilmington-Newark, DE-MD        1.0931        1.0284        1.1191
    New Castle, DE
    Cecil, MD
9200  Wilmington, NC..........        0.9507        0.8675        0.9402
    New Hanover, NC
    Brunswick, NC
9260  Yakima, WA..............        0.9038        0.8770        0.9907
    Yakima, WA
9270  Yolo, CA................        1.0452        1.0260        1.0199
    Yolo, CA
9280  York, PA................        1.0718        1.0923        0.9264
    York, PA
9320  Youngstown-Warren, OH...        0.8731        0.8594        0.9543
    Columbiana, OH
    Mahoning, OH
    Trumbull, OH
9340  Yuba City, CA...........        1.0615        1.0246        1.0706
    Sutter, CA
    Yuba, CA
9360  Yuma, AZ................        0.9209        0.9020        0.9529
    Yuma, AZ
------------------------------------------------------------------------


[[Page 24010]]


                  Table 8.--Wage Index for Rural Areas
------------------------------------------------------------------------
                                               Wage index
          Rural area           -----------------------------------------
                                    SNF98         SNF99         HOSP
------------------------------------------------------------------------
Col. A                                Col. B        Col. C        Col. D
------------------------------------------------------------------------
Alabama.......................        0.7724        0.8020        0.7489
Alaska........................        1.4132        1.3582        1.2392
Arizona.......................        1.0111        0.9175        0.8317
Arkansas......................        0.6972        0.7278        0.7445
California....................        0.9685        0.9712        0.9861
Colorado......................        0.8710        0.9147        0.8968
Connecticut...................        1.2870        1.0540        1.1715
Delaware......................        1.0854        0.9338        0.9074
Florida.......................        0.8331        0.8921        0.8919
Georgia.......................        0.7850        0.7985        0.8329
Guam..........................        0.0000        0.0000        0.9611
Hawaii........................        1.1915        1.2995        1.1059
Idaho.........................        0.8892        0.8320        0.8678
Illinois......................        0.8296        0.8274        0.8160
Indiana.......................        0.8875        0.9008        0.8602
Iowa..........................        0.7706        0.7834        0.8030
Kansas........................        0.7562        0.7941        0.7605
Kentucky......................        0.8237        0.7905        0.7931
Louisiana.....................        0.6699        0.7014        0.7681
Maine.........................        0.8766        0.8908        0.8766
Maryland......................        0.9015        0.8780        0.8651
Massachusetts.................        1.1740        1.2039        1.1204
Michigan......................        0.9505        0.9655        0.8987
Minnesota.....................        1.1396        1.0221        0.8881
Mississippi...................        0.7412        0.7885        0.7491
Missouri......................        0.7904        0.7898        0.7698
Montana.......................        0.8996        0.8606        0.8688
Nebraska......................        0.7977        0.8182        0.8109
Nevada........................        0.8621        0.9222        0.9232
New Hampshire.................        1.1065        1.1171        0.9845
New Jersey <SUP>1</SUP>..................  ............  ............  ............
New Mexico....................        0.6834        0.8052        0.8497
New York......................        1.0081        0.9981        0.8499
North Carolina................        0.9255        0.9028        0.8445
North Dakota..................        0.7649        0.7779        0.7716
Ohio..........................        0.8895        0.8948        0.8670
Oklahoma......................        0.7481        0.7275        0.7491
Oregon........................        0.8616        0.8455        1.0132
Pennsylvania..................        0.9870        0.9443        0.8578
Puerto Rico...................        0.3897        0.3866        0.4264
Rhode Island <SUP>1</SUP>................  ............  ............  ............
South Carolina................        0.7941        0.8367        0.8370
South Dakota..................        0.7946        0.8373        0.7570
Tennessee.....................        0.8656        0.8415        0.7838
Texas.........................        0.7512        0.7528        0.7502
Utah..........................        0.9492        0.8196        0.9037
Vermont.......................        0.9914        1.0299        0.9274
Virginia......................        0.8157        0.8601        0.8189
Virgin Islands................        0.0000        0.0000        0.6306
Washington....................        0.9539        0.9475        1.0434
West Virginia.................        0.8260        0.8668        0.8231
Wisconsin.....................        0.9516        0.9893        0.8880
Wyoming.......................        0.9081        0.8314       0.8817
------------------------------------------------------------------------
<SUP>1</SUP> All counties within the State are classified urban.

    We have drawn the following conclusions from these tables and our 
analysis of the wage data:
    A comparison of the wage index based on hospital data with one 
based on SNF-specific wage data has created many significant variances, 
not only between the SNF wage index and the hospital wage index, but 
also between the two SNF wage indexes illustrated in Tables 7 and 8. 
While we would expect some changes from year to year, and between a 
wage index based on SNF data and one based on hospital data, we believe 
that the large quantity of significant variations raises questions as 
to the reliability of the SNF-specific wage data.
    The following illustrates the impact of using the various wage 
indexes contained in Tables 7 and 8:
    <bullet> When comparing the FY 1998 SNF-specific wage index to the 
hospital wage index, we found the number of areas that:

Increased more than 20%--15 (the highest was 44.59%)
Increased between 10-20%--53

[[Page 24011]]

Increased between 5-10%--49
Increased between 0-5%--64
Decreased between 0-5%--69
Decreased between 5-10%--56
Decreased between 10-20%--51
Decreased greater than 20%--12 (the largest was 37.55%)

    <bullet> When comparing the FY 1999 SNF-specific wage index to the 
hospital wage index, we found the number of areas that:

Increased more than 20%--12 (the largest was 53.86%)
Increased between 10-20%--47
Increased between 5-10%--67
Increased between 0-5%--70
Decreased between 0-5%--56
Decreased between 5-10%--60
Decreased between 10-20%--44
Decreased greater than 20%--13 (the largest was 33.06%)

    <bullet> When comparing the FY 1998 SNF-specific wage index to the 
FY 1999 SNF-specific wage index, we found the number of areas that:

Increased more than 20%--9 (the largest was 51.86%)
Increased between 10-20%--25
Increased between 5-10%--52
Increased between 0-5%--102
Decreased between 0-5%--110
Decreased between 5-10%--44
Decreased between 10-20%--22
Decreased greater than 20%--5 (the largest was 33.73%)

    The FY 1998 and FY 1999 SNF wage index had 6 areas with no values.
    For FY 1998, from a total of 13,587 freestanding providers, we 
eliminated 2,674 providers because they had a zero value for wages or 
hours. For hospital-based SNFs, of the 2,185 providers, we eliminated 
160 providers for the same reason. For FY 1999, of the 12,491 
freestanding providers, we eliminated 2,461 providers because they had 
a zero value for wages or hours. For hospital-based SNFs, of the 2,034 
providers, we eliminated 132 providers for the same reason. In 
addition, for FY 1998, we eliminated 231 providers that had average 
hourly wages either below $5.00, or above the 99th percentile ($24.15). 
For FY 1999, we eliminated 206 providers with average hourly wages 
either below $5.00, or above the 99th percentile ($24.79).
    There are far fewer significant changes between MSAs in the annual 
hospital wage index. The latest comparison of the year-to-year 
differences in the hospital wage index (pre-classified, pre-floor) 
shows only 7 areas with increases of 10 percent or more and 4 with 
decreases greater than 10 percent. A comparison of the FY 1998 and 1999 
SNF-specific wage indexes shows 34 areas that experienced an increase 
of 10 percent or more and 27 areas with decreases of 10 percent or 
more.
    We believe that any changes to the wage index adjustment under the 
SNF PPS should support greater precision in Medicare payments; however, 
as a result of the variations in the SNF-specific wage data and the 
large number of SNFs that are unable to provide adequate wage and 
hourly data, we are concerned about the reliability of the data used in 
establishing a SNF wage index at this time.
    We continue to believe that a wage index based on hospital wage 
data is the best and most appropriate to use in adjusting payments to 
SNFs, since both hospitals and SNFs compete in the same labor markets. 
We invite public comment on the SNF-specific wage data; however, for 
the reasons discussed above we currently plan to use the updated 
hospital wage data when we publish the final rule. In addition, in 
accordance with section 315(b) of BIPA 2000, since we currently do not 
have reliable SNF-specific wage data, we are not proposing at this time 
to develop or incorporate any type of geographic reclassification 
system for SNFs.

D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act and section 311 
of BIPA 2000, the proposed payment rates listed here reflect an update 
equal to the SNF market basket minus 0.5 percentage point, which equals 
2.4 percent. For each succeeding FY, we will publish the rates in the 
Federal Register before August 1 of the year preceding the affected 
Federal FY.

E. Relationship of RUG-III Classification System to Existing Skilled 
Nursing Facility Level-of-Care Criteria

    As discussed in Sec. 413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec. 409.30. This 
designation reflects an administrative presumption that beneficiaries 
who are correctly assigned to one of the upper 26 RUG-III groups in the 
initial 5-day, Medicare-required assessment are automatically 
classified as meeting the SNF level of care definition up to that 
point.
    Those beneficiaries assigned to any of the lower 18 groups are not 
automatically classified as either meeting or not meeting the 
definition, but instead receive 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 26 groups during the immediate post-
hospital period require a covered level of care, which would be 
significantly less likely for those beneficiaries assigned to one of 
the lower 18 groups.
    We propose to continue the existing designation of the upper 26 
RUG-III groups for purposes of this administrative presumption, 
consisting of the following RUG-III classifications: all groups within 
the Ultra High Rehabilitation category; all groups within the Very High 
Rehabilitation category; all groups within the High Rehabilitation 
category; all groups within the Medium Rehabilitation category; all 
groups within the Low Rehabilitation category; all groups within the 
Extensive Services category; all groups within the Special Care 
category; and, all groups within the Clinically Complex category.

F. Three-Year Transition Period

    As noted previously, the rates that we now propose are for the 
fourth year of the SNF PPS. As a result, the PPS is no longer operating 
under the initial three-year transition period from facility-specific 
to Federal rates and, therefore, now equals 100 percent of the adjusted 
Federal per diem rate.

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

    Using the XYZ SNF described in Table 9A, the following shows the 
adjustments made to the Federal per diem rate to compute the provider's 
actual per diem PPS payment. XYZ's 12-month cost reporting period 
begins October 1, 2001. Table 9B displays the 44 RUG-III categories and 
their respective add-ons, as provided in BBRA 1999 and BIPA 2000.

[[Page 24012]]



                               Table 9.A.--SNF XYZ From Above Is Located in State College, PA With a Wage Index of 0.9038
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Labor                    Adjusted     Nonlabor     Adjusted     Percent      Medicare
                 RUG group                    portion    Wage  index     labor       portion        rate      adjustment      days          Payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVC.......................................      $257.54       0.9038      $232.76       $84.14      $316.90      $350.81           50            $17,541
SSC.......................................       171.76       0.9038       155.24        56.12       211.36   \3\ 262.09           25              6,552
IA2.......................................       113.56       0.9038       102.64        37.10       139.74   \4\ 145.33           25              3,633
                                           -------------------------------------------------------------------------------------------------------------
      Total...............................  ...........  ...........  ...........  ...........  ...........  ...........          100            27,726
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ From Table 5.
\2\ Reflects a 10.7 percent adjustment (the 4 percent adjustment from section 101(d) of BBRA 1999 and the 6.7 percent adjustment from section 314 of
  BIPA 2000).
\3\ Reflects a 24 percent adjustment (the 4 percent and 20 percent adjustments from sections 101(a) and (d) of BBRA 1999).
\4\ Reflects the 4 percent adjustment from section 101(d) of BBRA 1999.


     Table 9.B.--BBRA 1999 & BIPA 2000 Add-Ons, by RUG-III Category
------------------------------------------------------------------------
             RUG-III  category               4% \1\     10.7%    24% \3\
---------------------------------------------------------\2\------------
RUC.......................................                  X
RUB.......................................                  X
RUA.......................................                  X
RVC.......................................                  X
RVB.......................................                  X
RVA.......................................                  X
RHC.......................................                  X
RHB.......................................                  X
RHA.......................................                  X
RMC.......................................                  X
RMB.......................................                  X
RMA.......................................                  X
RLB.......................................                  X
RLA.......................................                  X
SE3.......................................                            X
SE2.......................................                            X
SE1.......................................                            X
SSC.......................................                            X
SSB.......................................                            X
SSA.......................................                            X
CC2.......................................                            X
CC1.......................................                            X
CB2.......................................                            X
CB1.......................................                            X
CA2.......................................                            X
CA1.......................................                            X
IB2.......................................        X
IB1.......................................        X
IA2.......................................        X
IA1.......................................        X
BB2.......................................        X
BB1.......................................        X
BA2.......................................        X
BA1.......................................        X
PE2.......................................        X
PE1.......................................        X
PD2.......................................        X
PD1.......................................        X
PC2.......................................        X
PC1.......................................        X
PB2.......................................        X
PB1.......................................        X
PA2.......................................        X
PA1.......................................        X
------------------------------------------------------------------------
\1\ From BBRA 1999.
\2\ Includes the 4% increase from BBRA 1999 and the 6.7% increase from
  BIPA 2000.
\3\ Includes the 4% and 20% increases from BBRA 1999.

    For rates addressed in this proposed rule, we are using wage index 
values that are based on hospital wage data from cost reporting periods 
beginning in FY 1996, the same wage data as used to compute the FY 2001 
wage index values for the SNF PPS. We will incorporate updated wage 
data in the final rule for the FY 2002 SNF PPS update. XYZ's total PPS 
payment will equal $27,726.

III. The Skilled Nursing Facility Market Basket Index

A. Background

    Section 1888(e)(5)(A) of the Act requires the Secretary to 
establish a market basket index that reflects changes over time in the 
prices of an appropriate mix of goods and services included in the SNF 
PPS. Effective for cost reporting periods beginning on or after July 1, 
1998, we revised and rebased our 1977 routine costs input price index 
and adopted a total expenses SNF input price index using data from 1992 
as the base year.
    The term ``market basket'' technically describes the mix of goods 
and services needed to produce SNF care, and is also commonly used to 
denote the input price index that includes both weights (mix of goods 
and services) and price factors. The term ``market basket'' used in 
this proposed rule refers to the SNF input price index.
    The 1992-based SNF market basket represents routine costs, costs of 
ancillary services and capital-related costs. The percentage change in 
the market basket reflects the average change in the price of a fixed 
set of goods and services purchased by SNFs to furnish all services. 
For further background information, see the May 12, 1998 Federal 
Register (63 FR 26289).
    For purposes of SNF PPS, the SNF market basket is a fixed-weight 
(Laspeyres type) price index. (A Laspeyres type index compares the cost 
of purchasing a specified group of commodities at current prices to the 
cost of purchasing that same group in a selected base period.) The SNF 
market basket is constructed in three steps. First, a base period is 
selected and total base period expenditure shares are estimated for 
mutually exclusive and exhaustive spending categories. Total costs for 
routine services, ancillary services, and capital are used. These 
proportions are called ``cost'' or ``expenditure weights''. The second 
step is to match each expenditure category to a price/wage variable, 
called a price proxy. These price proxy variables are drawn from 
publicly available statistical series published on a consistent 
schedule, preferably at least quarterly. In the final step, the price 
level for each spending category is multiplied by the expenditure 
weight for that category. The sum of these products (that is, weights 
multiplied by proxy index levels) for all cost categories yields the 
composite index level in the market basket for a given quarter or year. 
Repeating the third step for other quarters and years produces a time 
series of market basket index levels, from which rates of growth can be 
calculated.
    The market basket is described as a fixed-weight index because it 
answers the question of how much more or less it would cost, at a later 
time, to purchase the same mix of goods and services that was purchased 
in the base period. The effects on total expenditures resulting from 
changes in the quantity or mix of goods and services purchased 
subsequent or prior to the base period are, by design, not considered.
    As discussed in the May 12, 1998 Federal Register (63 FR 26252), to 
implement section 1888(e)(5)(A) of the Act, we have revised and rebased 
the market basket so the cost weights and price proxies reflected the 
mix of goods and services that SNFs purchase for all costs (routine, 
ancillary, and capital-related) encompassed by SNF PPS in fiscal year 
1992.

B. Rebasing and Revising the Skilled Nursing Facility Market Basket

    The terms ``rebasing'' and ``revising'', while often used 
interchangeably, actually denote different activities. Rebasing means 
shifting the base year for the structure of costs of the input

[[Page 24013]]

price index (for example, for this proposed rule, we would shift the 
base year cost structure from fiscal year 1992 to fiscal year 1997). 
Revising means changing data sources, cost categories, and/or price 
proxies used in the input price index.
    We are proposing to rebase and revise the SNF market basket to 
reflect 1997 total cost data (routine, ancillary, and capital-related). 
Fiscal year 1997 was selected as the new base year because 1997 is the 
most recent year for which relatively complete data are available. 
These data include settled 1997 Medicare Cost Reports as well as 1997 
data from two U.S. Department of Commerce surveys: the Bureau of the 
Census' Business Expenditures Survey, and the Bureau of Economic 
Analysis' Annual Input-Output tables. Preliminary analysis of 1998 data 
from Medicare Cost Reports showed little change in cost shares from 
those in the 1997 Medicare Cost Reports.
    In developing the proposed market basket, we reviewed SNF 
expenditure data from Medicare Cost Reports for FY 1997 for each 
freestanding SNF that had Medicare expenses. FY 1997 Cost Reports are 
those with cost reporting periods beginning after September 30, 1996 
and before October 1, 1997. We maintained our policy of using data from 
freestanding SNFs because they reflect the actual cost structure faced 
by the SNF itself. By contrast, expense data for a hospital-based SNF 
is influenced by the allocation of overhead over the entire 
institution.
    Data on SNF expenditures for six major expense categories (wages 
and salaries, employee benefits, contract labor, pharmaceuticals, 
capital-related, and a residual ``all other'') were edited and 
tabulated. Using these data, we then determined the proportion of total 
costs that each category represented. The six major categories for the 
revised and rebased cost categories and weights derived from SNF 
Medicare Cost Reports are summarized in Table 10.A.

 Table 10.A.--1992 and Proposed 1997 Skilled Nursing Facility Major Cost
            Categories and Weights From Medicare Cost Reports
------------------------------------------------------------------------
                                            1992-based    Proposed 1997-
                                              skilled      based skilled
                                              nursing         nursing
             Cost categories                 facility        facility
                                              weights         weights
                                             (percent)       (percent)
------------------------------------------------------------------------
Wages and Salaries......................          47.805          46.889
Employee Benefits.......................          10.023           9.631
Contract Labor..........................          12.852           6.478
Pharmaceuticals.........................           2.531           3.006
Capital-related Costs...................           9.778           9.877
All Other Costs.........................          17.012          24.119
                                         -------------------------------
      Total Costs.......................         100.000         100.000
------------------------------------------------------------------------

    We fully discuss the methodology for developing these weights in 
the Appendix. The main methodological difference between the 1992-based 
SNF market basket and the proposed 1997-based market basket is in the 
calculation of the contract labor weight. For the 1992-based market 
basket, we estimated this share using non-salary costs for therapy cost 
centers. For the proposed 1997-based index, we used the contract labor 
amounts for a subset of edited reports from Worksheet S-3 in the 
Medicare Cost Reports. We believe this new methodology provides a more 
accurate reflection of the share of total costs that are attributable 
to contract labor. The data from this worksheet were not available in 
the 1992 Medicare Cost Reports.
    Relative weights within the six major categories were derived using 
relative cost shares from the Bureau of the Census' 1997 Business 
Expenditures Survey (BES), 1997 Medicare Cost Reports, and the Bureau 
of Economic Analysis' (BEA) 1997 Annual Input-Output tables. They were 
used to disaggregate and allocate costs within the six major categories 
determined from the 1997 SNF Medicare Cost Reports. The BEA Input-
Output database is benchmarked at 5-year intervals and updated annually 
between benchmarks. We are using the annual update for 1997. The BES is 
updated every five years.
    The capital-related portion of the proposed rebased and revised SNF 
PPS market basket employs the same overall methodology used to develop 
the capital-related portion of the 1992-based SNF market basket, 
described in the May 12, 1998 Federal Register (63 FR 26289). It is 
also the same methodology used for the inpatient hospital PPS capital 
input price index described in the Federal Register May 31, 1996 (61 FR 
27466) and August 30, 1996 (61 FR 46196). The strength of this 
methodology is that it reflects the vintage nature of capital, which 
represents the acquisition and use of capital over time.
    Our work resulted in 21 separate categories for the proposed 
rebased and revised SNF market basket. The 1992-based total cost SNF 
market basket also had 21 separate cost categories. Detailed 
descriptions of each cost category and respective price proxy in the 
proposed 1997-based SNF market basket are provided in the Appendix to 
this proposed rule.
    As in the 1992-based SNF market basket, the proposed 1997-based SNF 
market basket does not include a separate cost category for 
professional liability insurance. Our analysis of the BEA 1997 Annual 
Input-Output survey indicated that the general category for insurance 
carriers (which includes professional liability insurance as a subset) 
was, at just 0.2 percent, a small share of the total costs in 1997. It 
has been our policy in the past not to provide detailed breakouts of 
cost categories unless they represent a significant portion of the 
providers' costs. We also reviewed data available on professional 
liability insurance from Worksheet S-2 of the SNF Medicare Cost 
Reports, but found that nearly all SNFs did not report data for 
malpractice premiums, paid losses, or self-insurance in 1997.
    Professional liability insurance is included with other insurance 
paid to carriers in the all other labor-intensive services cost 
category. We are soliciting comments on possible data sources for 
professional liability insurance costs for SNFs. Recent indications are 
that professional liability insurance costs for SNFs are rising 
quickly. We are looking both for information that would be

[[Page 24014]]

available for a cost weight as well as for a time-series of 
professional liability premiums for a constant level of coverage, 
similar to the data we currently collect for hospitals and physicians 
from a small sample of insurance carriers.
    After the 21 cost weights for the proposed revised and rebased SNF 
market basket were developed, we selected the most appropriate wage and 
price proxies currently available to monitor the rate of change for 
each expenditure category. With three exceptions (all for the capital-
related expenses cost category), the wage and price proxies are based 
on Bureau of Labor Statistics (BLS) data and are grouped into one of 
the following BLS categories:
    <bullet> Employment Cost Indexes. Employment Cost Indexes (ECIs) 
measure the rate of change in employment wage rates and employer costs 
for employee benefits per hour worked. These indexes are fixed-weight 
indexes and strictly measure the change in wage rates and employee 
benefits per hour. They are not affected by shifts in occupation or 
industry mix. ECIs are superior to Average Hourly Earnings (AHEs) as 
price proxies for input price indexes for two reasons: (1) They measure 
pure price change, and (2) they are available by both occupational 
group and by industry.
    <bullet> Producer Price Indexes. Producer Price Indexes (PPIs) 
measure price changes for goods sold in other than retail markets. PPIs 
were used when the purchases of goods or services were made at the 
wholesale level.
    <bullet> Consumer Price Indexes. Consumer Price Indexes (CPIs) 
measure change in the prices of final goods and services bought by 
consumers. CPIs were only used when the purchases were similar to those 
of retail consumers rather than purchases at the wholesale level, or if 
no appropriate PPI was available.
    The contract labor weight of 6.478 was reallocated to (1) wages and 
salaries, and (2) employee benefits, so that the same price proxies 
that we propose to use for direct labor costs are applied to contract 
costs. While we understand that the level of unit labor costs for 
contract labor can differ from the unit labor costs of a SNF employee, 
we feel that the rate at which these labor costs change should be 
similar. That is, unit contract labor costs should not grow any more or 
less rapidly than SNF employee labor costs. The rebased and revised 
cost categories, weights, and price proxies for the proposed 1997-based 
SNF market basket are listed in Table 10.B.

   Table 10.B.--Proposed 1997-Based SNF Market Basket Cost Categories,
                       Weights, and Price Proxies
------------------------------------------------------------------------
                                   1997-based
                                     skilled
                                     nursing
         Cost category              facility           Price proxy
                                  market basket
                                     weight
------------------------------------------------------------------------
Operating Expenses.............          90.123
Compensation...................          62.998
    Wages and Salaries.........          52.263  ECI for Wages and
                                                  Salaries for Private
                                                  Nursing Homes.
    Employee benefits..........          10.734  ECI for Benefits for
                                                  Private Nursing Homes.
Nonmedical professional fees...           2.634  ECI for Compensation
                                                  for Private
                                                  Professional,
                                                  Technical and
                                                  Specialty workers.
Utilities......................           2.368
    Electricity................           1.420  PPI for Commercial
                                                  Electric Power.
    Fuels, nonhighway..........           0.426  PPI for Commercial
                                                  Natural Gas.
    Water and sewerage.........           0.522  CPI-U for Water and
                                                  Sewarge.
Other Expenses.................          22.123
Other Products.................          13.522
    Pharmaceuticals............           3.006  PPI for Prescription
                                                  Drugs.
    Food.......................           4.136
        Food, wholesale                   3.198  PPI for Processed
         purchase.                                Foods.
        Food, retail purchase..           0.937  CPI-U for Food Away
                                                  From Home.
    Chemicals..................           0.891  PPI for Industrial
                                                  Chemicals.
    Rubber and plastics........           1.611  PPI for Rubber and
                                                  Plastic Products.
    Paper products.............           1.289  PPI for Converted Paper
                                                  and Paperboard.
    Miscellaneous products.....           2.589  PPI for Finished Goods
                                                  less Food and Energy.
Other Services.................           8.602
    Telephone Services.........           0.448  CPI-U for Telephone
                                                  Services.
    Labor-intensive Services...           4.094  ECI for Compensation
                                                  for Private Service
                                                  Occupations.
    Non labor-intensive                   4.059  CPI-U for All Items.
     services.
Capital-related Expenses.......           9.877
Total Depreciation.............           5.266
    Building & Fixed Equipment.           3.609  Boeckh Institutional
                                                  Construction Index
                                                  (vintage-weighted over
                                                  23 years).
    Movable Equipment..........           1.657  PPI for Machinery &
                                                  Equipment (vintage-
                                                  weighted over 10
                                                  years).
Total Interest.................           3.852
    Government & Nonprofit SNFs           1.890  Average Yield Municipal
                                                  Bonds (Bond Buyer
                                                  Index-20 bonds)
                                                  (vintage-weighted over
                                                  22 years).
    For-Profit SNFs............           1.962  Average Yield Moody's
                                                  AAA Bonds (vintage-
                                                  weighted over 22
                                                  years).
Other Capital-related Expenses.           0.760  CPI-U for Residential
                                                  Rent.
                                ----------------
      0Total...................      * 100.000
------------------------------------------------------------------------
* Total may not equal 100 due to rounding


[[Page 24015]]

    In the proposed 1997-based SNF market basket, the labor-related 
share for FY 1997 is 73.588 percent, while the non-labor-related share 
is 26.412 percent. The labor-related share reflects the proportion of 
the average SNF's costs that vary with local area wages. This share 
includes wages and salaries, employee benefits, professional fees, 
labor-intensive services, and a 39.1 percent share of capital-related 
expenses, as shown in Table 10.C. By comparison, the labor-related 
share of the 1992-based SNF market basket was 75.888 percent. The 
labor-related share of the market basket is the sum of the weights for 
those cost categories that are influenced by the local labor market. 
The labor-related share is calculated from the base year, which for the 
proposed SNF market basket is FY 1997.
    The labor-related share for capital-related expenses was estimated 
using a statistical analysis of individual SNF Medicare Cost Reports 
for 1997, similar to the analysis done on the 1992 SNF Medicare Cost 
Reports and explained in the May 12, 1998 Federal Register (63 FR 
26289). The statistical analysis was necessary because the proportion 
of capital-related expenses related to local area wage costs cannot be 
directly determined from the SNF capital-related portion of the market 
basket. We used regression analysis with total costs per day in SNFs as 
the dependent variable and relevant explanatory variables for size, 
complexity, efficiency, age of capital, and local wage variation. To 
account for these factors, we used number of beds, case-mix indexes, 
occupancy rate, ownership, age of assets, length of stay, FTEs per bed, 
and wage index values based on the hospital wage index (wages and 
employee benefits) as independent variables. Our regression analysis 
indicated that the coefficient on the area wage index was 73.588, which 
represents the proportion of total costs that vary with local labor 
markets, holding constant other factors. From the operating portion of 
the market basket, we can specifically identify cost categories that 
reflect local labor markets and include them in the labor-related 
share. These cost categories equal 69.727, and reflect approximately 77 
percent of operating costs. Thus, the labor-related share for capital-
related costs is 3.861 (73.588 minus 69.727), and reflects 
approximately 39 percent of capital-related costs.
    Capital-related expenses are determined in some proportion by local 
area labor costs (such as construction worker wages and building 
materials costs) that are reflected in the price of the capital asset. 
However, many other inputs that determine capital costs are not related 
to local area wage costs, such as equipment prices and interest rates. 
Thus, it is appropriate that capital-related expenses would vary less 
with local wages than would operating expenses for SNFs. Therefore, we 
are proposing to use this analysis in determining the labor-related 
share for SNF PPS.
    All price proxies for the proposed revised and rebased SNF market 
basket are listed in Table 10.B and summarized in the Appendix to this 
proposed rule. A comparison of the yearly historical percent changes 
from FY 1995 through FY 2000 for the current 1992-based market basket 
and the proposed 1997-based market basket is shown in Table 10.D.

      Table 10.C.--1992 and Proposed 1997-Based Labor-Related Share
------------------------------------------------------------------------
                                            1992-based    Proposed 1997-
                                              skilled      based skilled
                                              nursing         nursing
              Cost category                  facility        facility
                                           market basket   market basket
                                              weight          weight
------------------------------------------------------------------------
Wages and Salaries......................          54.262          52.263
Employee Benefits.......................          12.797          10.734
Nonmedical Professional Fees............           1.916           2.634
Labor-intensive Services................           3.686           4.094
Capital-related.........................           3.227           3.861
      Total.............................          75.888          73.588
                                         -------------------------------
------------------------------------------------------------------------


   Table 10.D.--Comparison of the 1992-Based Skilled Nursing Facility
   Market Basket and the Proposed 1997-Based Skilled Nursing Facility
                Market Basket, Percent Changes, 1995-2000
------------------------------------------------------------------------
                                            1992-based    Proposed 1997-
                                              skilled      based skilled
    Fiscal years beginning October 1          nursing         nursing
                                             facitlity       facility
                                           market basket   market basket
------------------------------------------------------------------------
Historical:
    October 1994, FY 1995...............             2.9             3.0
    October 1995, FY 1996...............             2.7             2.7
    October 1996, FY 1997...............             2.4             2.4
    October 1997, FY 1998...............             2.8             2.8
    October 1998, FY 1999...............             3.1             3.0
    October 1999, FY 2000...............             4.1             4.0
Historical average 1995-2000:...........             3.0            3.0
------------------------------------------------------------------------
Released by HCFA, OACT, National Health Statistics Group.

    The historical average rate of growth for 1995 through 2000 for the 
proposed SNF 1997-based market basket is similar to that of the 1992-
based market basket. The proposed 1997-based SNF market basket provides 
a more current measure of the annual price increases for total care 
than the 1992-based SNF market basket because the cost weights reflect 
the structure of costs for the most recent year for which there are 
relatively complete data. The forecasted rates of

[[Page 24016]]

growth for FY 2002 for the proposed 1997-based and current 1992-based 
SNF market basket are shown in Table 10.E.

 Table 10.E.--Comparison of Forecasted Change for the 1992-Based Skilled
   Nursing Facility Market Basket, and the Proposed 1997-Based Skilled
        Nursing Facility Market Basket Percent Change for FY 2002
------------------------------------------------------------------------
                                           1992-based       1997-based
                                        skilled nursing  skilled nursing
    Fiscal Year beginning October 1     facility market  facility market
                                             basket           basket
------------------------------------------------------------------------
October 2001, FY 2002.................             3.0             2.9
------------------------------------------------------------------------
Source: Standard & Poor's DRI HCC, 1st QTR, 2001; @ USMARCRO/
  MODTREND@CISSIM/TRENDLONG0201.
Released by HCFA, OACT, National Health Statistics Group.

IV. Update Framework

A. The Need for an Update Framework

    Medicare payments to SNFs are based on a predetermined national 
payment amount per day. Annual updates to these payments are required 
by section 1888(e) of the Act. These updates are usually based on the 
increase in the SNF market basket. For FY 2002, the update is set at 
market basket minus 0.5 percent. Our goal is to develop a method for 
analyzing and comparing expected trends in the underlying cost per day 
to use in establishing these updates.
    The SNF market basket, or input price index, developed by HCFA's 
Office of the Actuary (OACT) is just one component in the SNF cost per 
day amount. It captures only the pure price change of inputs (labor, 
materials, and capital) used by the SNF to produce a constant quantity 
and quality of care. Other factors also contribute to the change in 
costs per day, which include changes in case-mix, intensity, and 
productivity.
    Under the inpatient hospital PPS, HCFA and MedPAC use an update 
framework to account for these other factors and to make annual 
recommendations to the Congress concerning the magnitude of the update. 
We are currently examining these factors and exploring ways that they 
could be incorporated into an update framework for the SNF PPS. We are 
also examining some additional conceptual and data issues that must be 
considered when the framework is constructed and applied.
    We are not proposing to apply an update framework in a 
recommendation to the Congress at this time. We are actively pursing 
development efforts aimed at producing an analytical framework which, 
by informing policy makers concerning the magnitude of annual updates, 
would support the continued appropriateness and relevance of the 
payment rates for services provided to beneficiaries in SNFs. To this 
end, we are requesting comments concerning the conceptual approach we 
have outlined in this proposed rule, including the utility and 
feasibility of this approach for SNFs. We are specifically interested 
in comments concerning whether certain factors should be accounted for 
in the framework, and suggestions concerning potential data sources and 
analysis to support the model. As with the existing methodology, the 
features of a SNF-specific update framework would need to be based on a 
sound policy and methodology.

B. Factors Inherent in SNF Payments per Day

    In order to understand the factors that determine SNF costs per 
day, it is first necessary to understand the factors that determine SNF 
payments per day. Payments per day under SNF PPS are based on the cost 
and an implicit normal profit margin to the SNF in providing an 
efficient level of care. We have developed a methodology to identify a 
mutually exclusive and exhaustive set of factors included in SNF 
payments per day. The discussion here details a set of equations to 
identify these factors.
    In its simplest form, the average payment per day to a SNF can be 
separated into a cost term and a profit term as shown in equation (1):
[GRAPHIC] [TIFF OMITTED] TP10MY01.000

    This equation can be made multiplicative by converting profit per 
day into a profit rate as shown in equation (2):
[GRAPHIC] [TIFF OMITTED] TP10MY01.001

    An output price term can be introduced into the equation by 
multiplying and dividing through by input prices and productivity. As 
shown in equation (3), the term inside the brackets represents the 
output price, since an output price reflects the input price and profit 
margin adjusted for productivity:
[GRAPHIC] [TIFF OMITTED] TP10MY01.002

    The cost per day term can be further separated by accounting for 
real case-mix. Under SNF PPS, Resource Utilization Groups (RUGs) are 
used to classify patients. Based on accurate RUG classification data, 
average real case-mix per day can be incorporated, as shown in equation 
(4):
[GRAPHIC] [TIFF OMITTED] TP10MY01.003


[[Page 24017]]


    The term ``real'' is imperative here because only true case-mix 
should be measured, not case-mix caused by improper coding behavior. By 
rearranging the terms in equation (4), a set of mutually exclusive and 
exhaustive factors such as those shown in equation (5) can be 
identified:
[GRAPHIC] [TIFF OMITTED] TP10MY01.004

    The term of the equation in brackets can be analyzed in two steps. 
First, excluding the productivity term from the equation results in 
case-mix adjusted real cost per day, which is input intensity per day. 
Second, multiplying input intensity by productivity results in case-mix 
adjusted real payment per day, or output intensity per day. The 
rationale behind this step is explained in detail in the next section.
    The result of this exercise is that SNF payment per day can be 
determined from the following factors:
[GRAPHIC] [TIFF OMITTED] TP10MY01.005

    Thus, it holds that the change in SNF payment per day is a function 
of the change in these factors. In order to determine an annual update 
that most accurately reflects the underlying cost to the SNF of 
efficiently providing care, the four factors related to cost must be 
accounted for when an update framework is developed. A brief discussion 
of each factor, including specific conceptual and data issues, is 
provided in the next section.

C. Defining Each Factor Inherent in SNF Costs per Day

    Each cost factor from equation (6) above is discussed here in 
detail. Because this is a basic conceptual discussion, it is likely 
that more detailed issues may be relevant that are not explored here.
1. Input Prices
    Input prices are the pure prices of inputs used by the SNF in 
providing services. When we refer to inputs we are referring to costs, 
which have both a price and a quantity component. The price is an input 
price, and the quantity component reflects real inputs, or real costs. 
Similarly, when we refer to outputs, we are referring to payments, 
which also have both a price and a quantity component. The price 
component is the transaction output price, and the quantity component 
is the real output, or real payment. The real inputs include labor, 
capital, and materials, such as drugs. By definition, an input price 
reflects prices that SNFs encounter in purchasing these inputs, whereas 
an output price reflects the prices that buyers encounter in purchasing 
SNF services. We currently can measure input prices using the SNF 
market basket.
2. Productivity
    Productivity measures the efficiency of the SNF in producing 
outputs. It is the amount of real outputs, or real payments, that can 
be produced from a given amount of real inputs, or real costs. For 
SNFs, these inputs are in the form of both labor and capital; thus, 
they represent multi-factor productivity, as not just labor 
productivity is reflected. The following set of equations shows how 
multi-factor productivity can be measured in terms of available data, 
such as payments, costs, and input prices:
[GRAPHIC] [TIFF OMITTED] TP10MY01.006

    Rearranging the terms, this multi-factor productivity equation was 
used as the basis for incorporating an output price term in equation 
(3) above. This equation is the basis for understanding the 
relationship between input prices, output prices, profit margins, and 
productivity.
    Equation (6) shows that productivity is divided through the 
equation, offsetting other factors. The theory behind this offset is 
that if an efficient SNF in a competitive market can produce more 
output with the same amount of inputs, the full increase in input costs 
does not have to be passed on by the provider to maintain a normal 
profit margin.
3. Real Case-Mix per Day
    Real case-mix per day is the average overall mix of care provided 
by the SNF, as measured using the RUG classification system. Over time, 
a measure of real case-mix will change as care is given in more or less 
complex RUGs. Changes in the level of care within a RUG classification 
group would not be reflected in a case-mix measure based on RUGs, but 
instead should be captured in the intensity factor of equation (6).
    The important distinction here is the difference between real and 
nominal case-mix. SNFs submit claims using the RUG classification 
system. The case-mix reflected by the claims is considered ``nominal''. 
However, the reported classification can reflect the true level of care 
provided or improper coding behavior. An example of improper coding 
behavior would be the upcoding, or case-mix ``creep,'' that took place 
when the hospital PPS was implemented. Any change in case-mix that is 
not associated with the actual level of care or a true change in the 
level of care provided must be excluded in order to determine real 
case-mix. Section 1888(e)(4)(F) of the Act provides us with the 
statutory authority to make adjustments to the unadjusted Federal per 
diem rates for changes caused by case-mix creep.

[[Page 24018]]

4. Case-Mix-Constant Real Output Intensity per Day
    Intensity is the true underlying nature of the product or service 
and can take the form of output and/or input intensity. In the case of 
SNFs, output intensity per day is associated with real payment per day, 
while input intensity per day is associated with real cost per day. For 
example, input intensity would be associated with a therapist's hours 
when providing treatment, whereas output intensity would be associated 
with the amount of treatments a therapist provides. The underlying 
nature of SNF services is determined by such factors as technological 
capabilities, increased utilization of inputs (such as labor or drugs), 
site of care, and practice patterns. Because these factors can be 
difficult to measure, intensity per day is usually calculated as a 
residual after the other factors from equation (6) have been accounted 
for.
    Accounting for output intensity associated with an efficient SNF 
can be more accurately analyzed using a SNF's costs rather than its 
payments. This analysis would also provide an alternative to developing 
or using a transaction output price index, which has been difficult for 
the Bureau of Labor Statistics (BLS) to measure for SNFs. The following 
series of equations shows how to use the definition of an output price 
as defined earlier to convert the equation for output intensity per day 
to reflect costs instead of payments, as used in equation (6):
[GRAPHIC] [TIFF OMITTED] TP10MY01.007

    The last equation is identical to the term in brackets in equation 
(5), case-mix-constant real input intensity per day multiplied by 
productivity. Thus, output intensity per day can be defined in such a 
way that cost data from the SNF are utilized. This equation can be 
broken down even further to account for different types of input 
intensity per day. We discuss this matter more fully in the next 
section.

D. Applying the Factors That Affect SNF Costs per Day in an Update 
Framework

    As discussed earlier, payments per day under SNF PPS must be 
updated each year. Currently, the updates are specified by legislation 
as the percent change in the SNF market basket for FY 2001, the percent 
change in the SNF market basket minus 0.5 percentage points for FY 2002 
and FY 2003, and the percent change in the SNF market basket 
thereafter. However, it is important to understand the underlying 
trends in SNF costs per day for an efficient provider, especially 
should the change in these costs deviate from the legislated updates. 
The development of an update framework with a sound conceptual basis 
will provide this capability.
    Earlier, factors inherent in SNF costs per day were identified. 
Changes in these factors determine the change in SNF costs per day. 
Fitting these factors into a framework would allow us to recommend 
updates each year that appropriately reflect changes in underlying 
costs for efficient SNFs. Accounting for each of these factors from 
equation (6) under SNF PPS is discussed below:
    <bullet> Change in case-mix constant real output intensity per day 
would be accounted for in the update framework, reflecting the factors 
that affect not only case-mix constant real input intensity per day, 
but also productivity, which is determined separately. Factors that can 
cause changes in case-mix constant real input intensity per day 
include, but are not limited to, changes in site of service, changes in 
within-RUG case-mix, changes in practice patterns, changes in the use 
of inputs, and changes in technology available.
    <bullet> As discussed earlier, changes in nominal case-mix are 
automatically included in the payment to the SNF. However, the law 
gives us the authority to make adjustments for case-mix change due to 
improper coding behavior. Therefore, the update framework should 
include an adjustment to convert changes in nominal case-mix per day to 
changes in real case-mix per day.
    <bullet> Change in multi-factor productivity would be accounted for 
in the update framework. The availability of historical data on input 
prices, payments, and costs are useful in the analysis of this factor. 
MedPAC sets this factor as a target under hospital PPS.
    <bullet> Changes in input prices for labor, material, and capital 
would be accounted for in the update framework. Our Office of the 
Actuary currently has an input price index, or market basket, for SNF 
services. This is the market basket referred to in the legislated 
updates. In an update framework, a

[[Page 24019]]

forecast error adjustment has typically been included, to reflect that 
the updates are set prospectively and some degree of forecast error is 
inevitable. In the case of the inpatient hospital PPS, this adjustment 
is made on a two-year lag and only if the error exceeds a defined 
threshold (0.25 percentage points).

E. Current HCFA Inpatient Hospital PPS and Illustrative SNF PPS Payment 
Update Frameworks

    Table 11 shows the payment update framework for the current 
inpatient hospital PPS and an illustrative update framework for the SNF 
PPS. Some of the factors in the inpatient hospital PPS framework are 
computed using the Medicare Cost Report data, while others are 
determined based on policy considerations. The details of calculating 
each factor for the inpatient hospital PPS framework can be found in 
the August 1, 2000 Federal Register (65 FR 47054) final rule that set 
forth updates to the payment rates used under the inpatient PPS. This 
design for a SNF update framework is for illustrative purposes only, as 
much more work needs to be done to determine the appropriate level of 
detail for each factor and the manner in which the factors would be 
developed through policy. The numbers provided for the hospital update 
are only intended to serve as examples of prior updates recommended for 
the hospital PPS.
    MedPAC supports the use of this type of framework for updating 
payments and applies a similar framework when it proposes updates to 
hospital payments in its annual recommendation to Congress. The 
appropriateness of this framework for updating inpatient hospital 
payments was discussed in the Health Care Financing Review, Winter 
1992, in an article entitled, ``Are PPS Payments Adequate? Issues for 
Updating and Assessing Rates.'' A similar framework would be useful for 
analyzing updates to SNF payments.

  Table 11.--Current HCFA Hospital PPS and Illustrative SNF PPS Payment
                            Update Frameworks
------------------------------------------------------------------------
                               FY 2001 calculated
  HCFA hospital PPS update       hospital update    Illustrative SNF PPS
                                 percent change            update
------------------------------------------------------------------------
Percent Change in:
    HCFA PPS Hospital Market  3.4.................  HCFA SNF Market
     Basket.                                         Basket.
    Forecast Error..........  0.0.................  Forecast Error.
    Productivity............  -0.5 to -0.4........  Productivity.
Output Intensity............  0.0 to -0.6.........  Output Intensity:
    Science and Technology..  ....................    Science and
                                                     Technology
    Practice Patterns.......
    Real within-DRG Change..  ....................    Real within-RUG
                                                     Change.
    Site of Service.........  ....................    Utilization of
                                                     Inputs.
                                                      Site of Service.
Case-mix Adjustment Factors:  ....................    Case-mix
                                                     Adjustment Factors:
    Projected Case-mix......  -0.5................    Nominal across-RUG
                                                     Case-mix.
    Real across-DRG Change..  0.5.................    Real across-RUG
                                                     Change.
Total Cost per Admission....  -0.5 to -1.0........    Total per Diem
                                                     Cost.
Other Policy Factors:         ....................    Other Policy
                                                     Factors:
    Reclassification and      0.0.................    None.
     Recalibration.
Total Calculated Update       2.4 to 2.9..........  Total Calculated
                                                     Update.
------------------------------------------------------------------------
Table data derived from the August 1, 2000 Federal Register, Medicare
  Program; Changes to the Hospital Inpatient Prospective Payment System
  and Fiscal Year 2001 Rates; Final Rule.

F. Additional Conceptual and Data Issues

    Three conceptual issues specific to the SNF PPS are the relevance 
of a site-of-service substitution adjustment, the necessity of an 
adjustment for RUG reclassification, and the handling of one-time 
factors.
    Under the inpatient hospital PPS, a site-of-service substitution 
factor (captured as part of intensity) was necessary because of the 
incentive to shift care from hospital inpatient to such other settings 
as hospital outpatient, SNFs, or home health agencies (HHAs). For SNF 
PPS, it must be determined whether incentives to shift care to these 
other settings will continue or whether the SNF PPS will reduce these 
incentives and/or create alternative incentives to shift care out of 
SNFs. It is not clear without additional research in this area whether 
changes in behavior created by the different Medicare payment systems 
should be reflected in a SNF update framework.
    A reclassification and recalibration adjustment under the inpatient 
hospital PPS is necessary to account for additional changes in the 
case-mix factor resulting from reclassifying and recalibrating the DRG 
classification software. This factor is applied to the current fiscal 
year update, but reflects the effect of revisions in the fiscal year 
two years prior. MedPAC does not account for this adjustment in its 
update framework. Whether a RUG reclassification adjustment would be 
necessary in the update framework would depend on the data availability 
and the likelihood of revisions to RUG classifications on a periodic 
basis.
    There is also a question about how to handle one-time factors, such 
as the increased costs of converting computer systems to Year 2000 
(Y2K) compliance. An update framework is the appropriate mechanism to 
account for these items, but because of uncertainty surrounding their 
impact on costs, determining an appropriate adjustment amount may be 
difficult. MedPAC has discussed this issue in prior sessions, but was 
unable to agree on the exact methodology for these types of factors.
    The purpose of this conceptual discussion is not to determine how 
the identified factors of the update framework would be measured. We do 
recognize, however, that it would be important to use the Medicare Cost 
Report (MCR) and other relevant data from SNFs to analyze the factors 
that would account for growth in costs per day. As was the case for the 
inpatient hospital PPS, we will be required to make optimal use of the 
MCR data as we proceed in the development of an update framework 
methodology.
    The lack of historical case-mix data is another important issue. 
These data are

[[Page 24020]]

currently being collected under contract but will not be available for 
most historical years. This factor may prove difficult to account for 
in a historical analysis. In addition, there is no information 
currently available to make the distinction between real and nominal 
case-mix change. There are also concerns about the BLS output price 
measures for SNFs, especially during the first years of publication in 
1996 and 1997. Output prices are relevant for measuring productivity in 
a historical context. Most of these concerns were also encountered and 
addressed in the inpatient hospital PPS update framework.
    The discussion here provides the conceptual basis for developing an 
update framework for SNF PPS that reflects changes in the underlying 
costs of efficiently providing SNF services. It is important to note 
that the framework does not handle distribution issues such as 
geographic wage variations.
    Due to some variations in technical methodologies for measuring the 
factors of an update framework, and because of some of the data 
concerns mentioned earlier, implementing an update framework for SNF 
PPS would involve making significant policy decisions on issues similar 
to those for the inpatient hospital PPS update framework. We invite 
comments on the type of data sources to use, what other factors (if 
any) we should consider in an update framework, and any additional 
comments concerning the issues discussed in this proposed rule.

V. Consolidated Billing

    The consolidated billing requirement established by section 4432(b) 
of BBA 1997 places the Medicare billing responsibility with the SNF for 
virtually all of the services that the SNF's residents receive, except 
for a small number of services that the law specifically identifies as 
being excluded from this provision. For services that are subject to 
this provision, the original legislation made no distinction as to 
whether the services were furnished during the course of a covered Part 
A SNF stay.
    We have implemented consolidated billing only for services that are 
furnished during the course of a covered Part A SNF stay. We have not 
implemented consolidated billing for those services furnished to SNF 
residents who are not in a covered Part A stay (for example, residents 
who have exhausted their available days of coverage under the Part A 
SNF benefit, or who do not meet that benefit's post-hospital or level 
of care requirements). As explained in the final rule of July 30, 1999 
(64 FR 41671), implementing the Part B aspect of the provision would 
entail making significant systems modifications, which have been 
delayed by systems constraints that arose in connection with achieving 
Y2K compliance.
    In addition, recently enacted provisions in BIPA 2000 have also 
affected this aspect of consolidated billing. For services furnished on 
or after January 1, 2001, section 313(a) of BIPA 2000 amends section 
1862(a)(18) of the Act by eliminating consolidated billing for most 
services furnished to SNF residents during noncovered stays. This 
amendment limits the application of consolidated billing to those 
services that are furnished during the course of a covered Part A stay, 
with one exception: for SNF residents in noncovered stays, the only 
services for which the SNF retains the Medicare billing responsibility 
are physical, occupational, and speech-language therapy. (The related 
requirements for fee schedule payment and appropriate HCFA Common 
Procedure Coding System (HCPCS) coding for Part B SNF services have not 
been repealed, and remain the law.) We propose to revise the 
regulations at Sec. 411.15(p) to reflect this change.
    We regard the provision of therapy services as an inherent and 
integral function of this type of facility, and we believe that the 
statutory requirement for SNFs to retain the Part B billing 
responsibility for these particular services reflects a number of 
policy considerations. First, these are services for which the SNF 
already has the billing responsibility under the separate Part B 
therapy cap provision enacted by section 4541 of BBA 1997. In addition, 
unlike some types of services (such as ambulance and laboratory) with 
which SNFs historically have had only limited billing experience, most 
SNFs are familiar with the procedures involved in furnishing and 
billing for therapy and other skilled rehabilitation services. In fact, 
section 1819(a)(1) of the Act describes such a facility in terms of 
being primarily engaged in furnishing skilled nursing or rehabilitation 
services to its residents. The SNF level of care definition in section 
1814(a)(2)(B) of the Act defines a beneficiary's access to SNF coverage 
under Part A as involving the need for and receipt of ``skilled nursing 
care * * * or other skilled rehabilitation services * * *''.
    Finally, since the inception of the Medicare program, section 
1861(h)(3) of the Act has provided for coverage of physical, 
occupational, and speech-language therapy services under the Part A 
extended care benefit when furnished either directly by the facility, 
or by others under arrangements with the facility. Thus, physical, 
occupational, and speech-language therapy are unique among SNF services 
because the law has always explicitly provided for Part A coverage of 
them when furnished under an arrangement with an outside supplier in 
which the SNF performs the Medicare billing for the services.
    Section 313 of BIPA 2000 also contains a number of technical and 
conforming changes to reflect the amendment of section 1862(a)(18) of 
the Act, as discussed above. Section 313(b)(1) amends section 
1842(b)(6)(E) of the Act (which provides that only the SNF can receive 
Part B payments for services furnished to those of its residents in 
noncovered stays), by limiting payment to SNFs to only those situations 
in which the SNF elects to furnish such Part B services--either 
directly with its own resources, or under an arrangement with an 
outside supplier in which the SNF assumes the billing responsibility. 
We are revising the regulations at Sec. 410.150 to reflect this change. 
This section of the legislation also removes the existing language in 
section 1842(b)(6)(E) of the Act that refers to services furnished to a 
resident of ``* * * a part of a facility that includes a skilled 
nursing facility (as determined under regulations)''. As explained in 
the May 12, 1998, SNF PPS interim final rule (63 FR 26297), BBA 1997 
originally introduced this language in order to apply the consolidated 
billing requirement not only to the portion of a nursing home that is 
actually certified as a Medicare SNF, but also to any noncertified 
remainder:

    This avoids creating a perverse incentive for SNFs to set aside 
a nonparticipating section in which they could otherwise circumvent 
the Consolidated Billing requirement for those residents who are not 
in a covered Part A stay.

    However, since the consolidated billing requirement has now been 
limited to those residents in Part A covered stays, and physical, 
occupational, and speech-language therapy in noncovered stays, the 
language that extended its applicability to the noncertified portion of 
a nursing home is no longer relevant. This is reflected in our proposed 
change to the regulation at Sec. 411.15.
    Section 313(b)(2) of BIPA 2000 amends section 1842(t) of the Act by 
deleting a similar reference to the noncertified portion of a nursing 
home. Section 1842(t) of the Act requires that Part B claims for 
physician services furnished to SNF residents (which are excluded from 
consolidated billing)

[[Page 24021]]

must include the SNF Medicare provider number. Section 313(b)(2) of 
BIPA 2000 also expands this requirement to apply to Part B claims for 
all types of services furnished to SNF residents. For a SNF resident in 
a covered Part A stay, this expanded requirement would apply to claims 
for any type of service that is excluded from consolidated billing 
(and, thus, is separately billable to Part B by an outside source). For 
residents in a noncovered stay, it would encompass claims for all Part 
B services that the resident receives. We are proposing to revise the 
regulations at Sec. 424.32 to reflect this change.
    Section 313(b)(3) of BIPA 2000 amends the existing language in 
section 1866(a)(1)(H)(i)(I) of the Act by requiring compliance with 
section 1862(a)(18), as amended, under the terms of a SNF's Medicare 
provider agreement. We are proposing to revise the regulations at 
Sec. 489.20 to reflect this change. Finally, section 313(d) of BIPA 
2000 directs the Office of Inspector General to monitor payments for 
services furnished to SNF residents during noncovered stays, in order 
to help prevent duplicate payment or the excessive provision of 
services.

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

A. Current System for Payment of Swing-bed Facility Services Under Part 
A of the Medicare Program

    Section 1883 of the Act permits certain small, rural hospitals to 
enter into a swing-bed agreement, under which the hospital can use its 
beds to provide either acute or SNF care, as needed. Currently, Part A 
pays for SNF services furnished in Medicare swing-bed hospitals on a 
cost-related basis, with both calculated rate and retrospective, 
reasonable cost-based components. Under Medicare payment principles set 
forth in section 1883(a)(2)(B) of the Act and regulations at 
Sec. 413.114, swing-bed facilities receive payment for two major 
categories of costs: routine and ancillary.
    Routine costs are the costs of those services included by the 
provider in a daily service charge. Routine service costs include 
regular room, dietary, and nursing services, minor medical supplies, 
medical social services, psychiatric social services, and the use of 
certain facilities and equipment for which a separate charge is not 
made. Ancillary costs are costs for specialized services, such as 
therapy, drugs, and laboratory services, that are directly identifiable 
to individual patients. Capital-related costs, such as the cost of 
land, building, equipment, and the interest incurred in financing the 
acquisition of such items, are not reimbursed separately. Instead, they 
are incorporated into the routine and ancillary cost components of the 
rate.
    Under Medicare rules, the reasonable cost of ancillary services is 
paid in full. For routine operating costs, swing-bed providers are paid 
a predetermined rate equal to the average reasonable routine cost of 
all freestanding SNFs in the census region. This pre-determined rate is 
based on annual cost report data, is adjusted for inflation, and is 
calculated on a calendar year basis. For swing-bed payment purposes, 
there are nine regions.

B. Requirement of the Balanced Budget Act of 1997 for Swing-Bed 
Facility Services To Be Paid Under the Prospective Payment System for 
Skilled Nursing Facilities

    Section 1888(e)(7) of the Act and section 203 of BIPA 2000 confers 
authority on the Secretary to specify when swing-bed hospitals become 
subject to the SNF PPS, subject to the limitation that swing-bed 
hospitals cannot be paid under the SNF PPS for cost reporting periods 
prior to July 1, 1999, and must be paid under the SNF PPS by the end of 
the transition period described in section 1888(e)(2)(E) of the Act. 
The SNF PPS transition period ends June 30, 2002, the day immediately 
following the last day that any SNF could be eligible for the blended 
rate provisions established for the three-year transition period.
    We are proposing to revise the regulations at Sec. 413.114 to 
provide that swing-bed payments be made under the SNF PPS to swing-bed 
hospitals for cost reporting periods beginning on and after October 1, 
2001, to ensure that the conversion is made within the statutory time 
frames. By selecting October 1, 2001 as the effective date, we can 
integrate the swing-bed hospitals into the SNF PPS program using the 
same time lines that are statutorily required for the annual SNF PPS 
updates.
    Under BBA 1997, this conversion to the SNF PPS was intended to 
apply to payments to swing-bed facilities in critical access hospitals 
(CAHs) as well as to those facilities in rural hospitals. However, 
section 203 of BIPA 2000 exempted CAHs with swing-beds from the SNF 
PPS. Therefore, only rural hospitals with swing-beds will be subject to 
the SNF PPS.
    Since the application of the SNF PPS to non-CAH swing-bed providers 
will not occur until the final portion of the SNF PPS phase-in period, 
those swing-bed providers are not eligible for a blended rate. Upon 
their PPS effective dates, all rural hospital swing-bed providers will 
be paid at the per diem Federal payment rate in effect for rural 
providers when services were delivered.
    Section 4407 of BBA 1997 redefined the movement of patients from 
hospitals from PPS hospitals to SNFs as transfers rather then 
discharges. This provision applies to hospital discharges for 10 
specific DRGs (014, 113, 209, 210, 211, 236, 263, 264, 429, and 483), 
and mandates that payment for these post-acute transfers cannot exceed 
the sum of 50 percent of the regular transfer payment and 50 percent of 
the regular DRG payment. This provision applies to all transfers from a 
DRG hospital to a SNF that is currently reimbursed under the SNF PPS.
    Swing-bed discharges from acute to SNF-level care were specifically 
exempted from this provision, and swing-bed hospitals would retain 
their exempt status when they become subject to the SNF PPS. However, 
in connection with the possible reevaluation of the existing swing-bed 
conditions of participation discussed in the following section, and the 
potential for changes associated with a change in payment methodology, 
we plan to monitor swing-bed activity to determine whether any 
additional changes may be necessary. We are also mindful of the unique 
relationship between acute care and SNF-level services in a swing-bed 
facility. For this reason, we are soliciting comments on this issue, 
with particular emphasis on both the need for a swing-bed transfer 
provision and the expected impact it would have on swing-bed hospital 
operations. For a more detailed explanation of the policy regarding PPS 
hospital discharges to post-acute care providers, please see Program 
Memorandum A-98-26 (July, 1998).

C. Requirements of BBRA 1999 Affecting Swing-Bed Payment and 
Eligibility

    Section 408 of BBRA 1999 modified the swing-bed provisions in 
section 1883(b) of the Act as follows:
    <bullet> Hospitals with more than 49 and fewer than 100 beds will 
no longer be required to discharge beneficiaries from swing-beds within 
5 days of a community SNF bed becoming available.
    <bullet> Hospitals will no longer have a cap on the number of days 
of swing-bed services they can provide. The requirement that swing-bed 
days be no more than 15 percent of the total bed days was removed.

[[Page 24022]]

    <bullet> Hospitals will no longer be required to obtain state 
Certificate of Need approval for swing-beds.
    By removing the per discharge restrictions on length of stay and 
the aggregate caps on the facility's ratio of swing-bed to acute days, 
these BBRA 1999 provisions give swing-bed hospitals more flexibility in 
determining how to use their swing-beds. Under BBRA 1999, the 
implementation date of these amendments is to coincide with the 
timeframe for the swing-bed transition to the SNF PPS schedule. We 
propose to revise the regulations at Sec. 413.114 to implement this 
change.
    Since swing-bed services are provided within an acute care facility 
and have historically represented short stay services, swing-bed 
providers have not been subject to the full set of participation 
requirements that apply to SNFs. Instead, they have been subject to the 
hospital conditions of participation, plus an abbreviated set of SNF 
participation requirements specified in Sec. 482.66. It is not our 
intent to change the swing-bed conditions of participation at this 
time; however, we are aware that the BBRA 1999 amendments may encourage 
swing-bed facilities to make greater use of their facilities to serve 
beneficiaries with longer term needs, who otherwise would have been 
transferred to a SNF. We plan to monitor swing-bed utilization and 
practice patterns to determine whether changes are occurring that 
warrant a review of swing-bed conditions of participation. We welcome 
comments on the need for and nature of changes, if any, that would be 
most helpful in ensuring continued high quality services in swing-bed 
facilities.

D. Implications of Swing-Bed Facility Conversion to the SNF PPS

    The SNF PPS is an outgrowth of substantial research efforts 
beginning in the 1970s. It is based on the recognition that differences 
in patient characteristics result in different levels of resource 
utilization. Unlike some older payment methodologies that paid a flat 
per diem amount, a case-mix system measures the intensity of care and 
services required for each patient and then translates that into a 
payment level.
    Under the SNF PPS, payment rates are based on mean SNF costs in a 
base year, updated for inflation. Swing-bed routine cost reimbursement 
is similarly based on a precalculated average cost. However, under the 
current methodology, swing-beds are paid at a rate consisting of the 
average of the freestanding nursing facility costs within the region. 
In contrast, under the SNF PPS, costs are calculated using both 
freestanding and hospital-based SNF data.
    The ability to identify differences in patient service needs is 
crucial to the development of a case-mix system. For the SNF PPS, we 
needed a sophisticated patient classification system that specifically 
captured resource use of individuals receiving SNF-level care. The 
Resource Utilization Group, version 3 (RUG-III) is a 44-group patient 
classification system that was designed specifically to measure SNF-
level services. RUG-III establishes a hierarchy of major patient types, 
organized into seven major categories. Each of these categories is 
further differentiated by patient characteristics and service needs to 
yield the 44 specific patient groups used for payment. Differences in 
service use are shown by assigning a weight or case mix index to each 
RUG-III group. This weight represents the amount of nursing and 
rehabilitation staff time, weighted by salary level, and is 
standardized to reflect the relative value of each group within the 44-
group system.
    Detailed descriptions of the RUG-III classification methodology are 
included in the May 12, 1998 SNF PPS final rule (63 FR 25252). 
Additional information on the RUG-III system is available in the annual 
SNF PPS updates (64 FR 41645, July 30, 1999, and 65 FR 46770, July 31, 
2000). Like the DRG system used in the inpatient hospital PPS, the RUG-
III system has been automated. Program specifications, record layouts 
and RUG-III coding logic may be found on HCFA's web site at 
www.hcfa.gov/medicaid/mds2.0/default.htm.
    All data needed to classify a Medicare beneficiary into one of the 
RUG-III groups is contained in the MDS 2.0. The MDS 2.0 is a resident 
assessment instrument used by SNFs for care planning, quality 
monitoring, and SNF PPS payment. As described in Section G below, we 
plan to use the MDS 2.0 to calculate SNF PPS payments for swing-bed 
services.
    All providers currently subject to the SNF PPS perform periodic MDS 
2.0 assessments for Medicare beneficiaries in Part A stays. Facilities 
then generate electronic MDS 2.0 records, and transmit each 
beneficiary's assessment to a designated state agency. These electronic 
MDS 2.0 records are then transmitted by the state agency to HCFA's data 
repository. For more information on MDS encoding and transmission, see 
HCFA's final rule mandating the transmission of MDS records (62 FR 
67174, December 23, 1997) and the HCFA web site at www.hcfa.gov/medicaid/mds2.0/default.htm.
    Under SNF PPS, providers must transmit their MDS 2.0 assessments to 
the appropriate state agency and receive confirmation that the MDS 2.0 
record has been accepted into the state's MDS 2.0 data base before 
submitting a bill to the Part A FI. Billing instructions have been 
developed for SNFs subject to the SNF PPS. Three Program Memorandums 
were issued shortly after the introduction of the SNF PPS, and provide 
a basic understanding of the current billing requirements (Program 
Memorandums A-98-16 (May 1998), A-98-20 (June 1998), and A-98-26 (July 
1998)). In addition, each Part A FI has developed its own SNF PPS 
training materials and billing instructions. HCFA staff will be working 
with the FIs to review these billing requirements and to identify any 
changes or additions needed to accommodate swing bed providers. We are 
soliciting comments on concerns related to billing or claims processing 
in swing-bed facilities.
    Finally, swing-bed claims are already subject to medical review to 
ensure that the services provided to Medicare beneficiaries are 
reasonable and necessary, and meet Medicare's SNF level of care 
criteria. Under the SNF PPS, these reviews will be modified to verify 
the accuracy of the clinical data used to determine the RUG-III group 
billed. We will work with the appropriate contractors to finalize 
procedures for these swing-bed reviews, and we plan to publish specific 
instructions and guidelines later this year.

E. SNF PPS Rate Components

    The SNF PPS methodology is discussed in detail in the regulations 
at 42 CFR Part 413, subpart J. As this methodology is only now being 
applied to swing-bed hospitals, the major components of the PPS Federal 
rate are summarized below.
    <bullet> The nursing component includes direct nursing care and the 
cost of non-therapy ancillary services required by Medicare 
beneficiaries. This portion of the rate is case-mix adjusted using the 
RUG-III classification system described in detail in the May 12, 1998 
SNF PPS interim final rule (63 FR 26252). Swing-bed facilities will be 
reimbursed under the rural facility rates as shown in Table 6.
    <bullet> The therapy component includes physical, occupational, and 
speech-language therapy services provided to beneficiaries in a Part A 
stay and, like the nursing component, is case-mix adjusted. Payment 
varies based on the actual therapy resource minutes

[[Page 24023]]

received by the beneficiary and reported on the MDS assessment 
instrument.
    <bullet> The non-case-mix therapy component is a standard amount to 
cover the cost of therapy assessments of beneficiaries who were 
determined not to need continued therapy services. This payment is 
added to the rate for all RUG-III groups except those in the 
Rehabilitation category.
    <bullet> The non-case-mix component is also a standard amount added 
to the rate for each RUG-III group to cover administrative and capital-
related costs. The specific costs included in this rate component are 
described in the May 12, 1998 SNF PPS interim final rule (63 FR 26252).
    The RUG-III system utilizes data from the MDS to determine the 
appropriate payment level for nursing and therapy services. Upon 
transition to PPS, swing-bed providers will be required to complete MDS 
assessments according to the same Medicare payment assessment schedule 
designated for SNFs: on the 5th, 14th, 30th, 60th, and 90th days of 
post-hospital extended care (Part A SNF) services.
    In addition, the portion of the Federal rate attributable to wage-
related costs is adjusted by a wage index. For swing-bed facilities, we 
will use the wage index applicable to the county in which the facility 
is located or, in the absence of a county wage index, the rural rate 
for the state in which the facility is located.

F. Implementation of the SNF PPS for Swing-Bed Facilities

    Under section 1888(e)(7) of the Act, swing-bed providers (other 
than CAHs) would be subject to the SNF PPS by the end of the SNF PPS 
transition period described in section 1888(e)(2)(E) of the Act. 
However, swing-bed services are not subject to the consolidated billing 
requirement for services furnished to SNF residents under section 
1862(a)(18) of the Act, but instead are subject to the similar bundling 
requirement for services furnished to hospital inpatients under section 
1862(a)(14) of the Act (see section VI.J below).

G. Use of the Resident Assessment Instrument--Minimum Data Set (MDS 
2.0)

    Swing-bed facilities are not currently subject to the clinical MDS 
requirements, but will be required under the PPS to perform the 
Medicare-required MDS assessments.
    The MDS required for payment purposes includes the MDS face sheet, 
Sections AA-R, and Section T. In addition, swing-bed providers, like 
other nursing facilities, must complete the discharge and reentry 
tracking forms as appropriate to track the beneficiary's movement into 
and out of the post-acute care facility. Swing-bed facilities that also 
participate in the Medicaid program may also be required, at State 
option, to complete Section S.
    When completing the MDS, swing-bed facility staff should use the 
instructions in the Long Term Care RAI User's Manual. A copy of this 
manual is available on the HCFA web site at www.hcfa.gov/medicaid/mds20/man-form.htm and is also available for purchase.
    The types of assessments used to support SNF PPS billing are 
described below.
1. Regularly Scheduled Medicare Assessments
    MDS assessments must be performed in accordance with a 
predetermined schedule based upon the start of a Medicare Part A 
covered stay. The assessments are due on days 5, 14, 30, 60, and 90 of 
the SNF Part A covered stay.
2. Readmission/Return Assessments (MDS Item A8b=5)
    This MDS reason for assessment is used when a beneficiary who is 
receiving Part A SNF care in a swing-bed is hospitalized and then 
returns to the swing-bed. The assessment reference date of the 
Readmission/Return Assessment must be set within 5 days of the 
readmission, as with a regular Medicare 5-day assessment. Like the 5-
day assessment, there are 3 grace days available.
3. Other Medicare-Required Assessments (OMRA)
    Other Medicare-Required Assessments (OMRAs) must be performed when 
a beneficiary in a covered Part A stay stops receiving therapy, but 
continues to receive other skilled services, thus remaining eligible 
for Part A services. This assessment must be performed between 8 and 10 
days after the cessation of all rehabilitation therapy services. It may 
not be used to indicate changes in the amount or frequency of service 
or to show reductions in the number of therapy disciplines provided. 
For example, an OMRA is not required to show that a beneficiary's 
speech-language therapy has been discontinued when the beneficiary is 
still receiving physical therapy. This assessment is not required if 
the beneficiary's Part A stay is discontinued when the therapy is 
stopped.
    Since swing-bed facilities do not perform significant change or 
significant correction assessments, we have no method of recognizing 
changes in the beneficiary's clinical status that occur outside the 
regular SNF PPS assessment schedule. For this reason, we are proposing 
to modify the MDS 2.0 by adding a new reason for an OMRA assessment 
specific to swing-bed facilities. Swing-bed providers would then use 
this additional reason for assessment code when preparing off-cycle 
assessments reflecting changes in patient status that change the RUG-
III group and payment rate.

H. Required Schedule for Completing the MDS

    Swing-bed providers would follow the same MDS completion schedule 
for Medicare PPS assessments as other providers reimbursed under the 
SNF PPS. When performing an MDS assessment, the registered nurse 
coordinating the assessment would first establish the period of time 
that would be used to observe and assess the beneficiary. The last day 
of the observation period is defined as the Assessment Reference Date 
(ARD). The ARD is the date used to determine the timeliness of the 
Medicare-required MDS assessments. The assessment schedule is shown in 
Table 12.
    The Medicare Assessment Window refers to the days on which the MDS 
ARD may be set in order for the assessment to be considered timely. For 
example, the ARD for the 5-day assessment should be set between days 1 
and 5 of the beneficiary's admission to the swing-bed. Since we realize 
that there will be exceptional circumstances in which additional time 
will be needed, we have provided for grace days. MDS assessments with 
ARDs on a grace day would also be considered timely. The timeliness of 
the MDS assessments may be monitored to identify providers that 
routinely perform assessments during the grace period.
    In addition, Medicare PPS assessments are required to be completed 
within 14 days of the ARD. An MDS is considered completed on the date 
the Assessment Coordinator indicates on the MDS in Section R(2)(b). 
Swing-bed providers that fail to perform assessments or that perform 
late assessments (ARD outside of the specified assessment window) are 
paid at the default rate. This default rate is equal to the rate paid 
for the lowest acuity level in the RUG-III system, PA1.

[[Page 24024]]



                     Table 12.--Assessment Schedule
------------------------------------------------------------------------
                                    Assessment                 Payment
        Type of assessment         window days   Grace days  period days
------------------------------------------------------------------------
5 day............................          1-5          6-8           14
14 day...........................        11-14        15-19           14
30 day...........................        21-29        30-34           30
60 day...........................        50-59        60-64           30
90 day...........................        80-89        90-94           10
------------------------------------------------------------------------

    Each assessment would then be used to calculate a RUG-III group for 
payment. As shown in Table 12, the RUG-III group is used to bill 
Medicare for Medicare-covered days of SNF care. The days shown in the 
payment period column are the maximum number of covered days that can 
be billed using the 5, 14, 30, 60, and 90 day assessments. Swing-bed 
care, like care in SNFs, is covered by Medicare when the beneficiary 
meets the Medicare level of care and medical necessity criteria.

I. RUG-III ``Grouper'' Methodology and Software

    RUG-III is a patient classification system that classifies 
beneficiaries receiving SNF care based on the amount of nursing and 
therapy resources needed to provide that level of care. RUG-III 
establishes a seven level hierarchy based on resource use. The seven 
levels are rehabilitative services, extensive care, special care, 
clinically complex, cognitive impairment, behavior, and reduced 
physical function. The classification system is then subdivided into 44 
groups using activities of daily living (ADL) deficits, depression, and 
the provision of restorative nursing services as classification 
criteria. All data necessary to classify a patient into one of the RUG-
III categories is contained on the MDS 2.0.
    Swing-bed bills would be paid in the same manner as for all other 
providers subject to the SNF PPS. Swing-bed facilities would encode and 
transmit their MDS data to the appropriate State agency. The RUG-III 
group on the MDS would be validated by the State upon acceptance of the 
facility's MDS data file. The provider would bill Medicare using the 
validated RUG-III code. Detailed information on the RUG-III system can 
be found in the July 30, 1999 SNF PPS final rule published in the 
Federal Register (64 FR 41684), and on HCFA's PPS web site at 
www.hcfa.gov/medicare/snfpps.htm.
    Detailed information on the RUG-III software can be found at 
www.hcfa.gov/medicaid/mds20/default.htm. These software groupers are 
available from many software vendors, however, we have developed the 
standard software grouper product, RAVEN, which is available to all 
providers at no cost. We also provide ongoing support for the RAVEN 
software, and have a Help Desk to assist providers with data 
transmission and other technical problems. The RAVEN software may be 
downloaded by accessing HCFA's web site at www.hcfa.gov/medicaid/mds20/raven.htm.

J. Applicability of Consolidated Billing to SNF Services Furnished in 
Swing-Bed Facilities

    As enacted by section 4432(b) of BBA 1997, the SNF consolidated 
billing requirement (which places the Medicare billing responsibility 
for almost the entire range of Medicare-covered services with the SNF) 
is based on services that are furnished to SNF residents. However, a 
swing-bed agreement allows for the provision of SNF services to 
inpatients of certain small, rural hospitals. These swing-bed services 
are not subject to the SNF consolidated billing requirement at section 
1862(a)(18) of the Act, since that provision applies to services that 
are furnished to residents of SNFs. Rather, these swing-bed services 
are subject to the hospital bundling requirement at section 1862(a)(14) 
of the Act, which applies to services that are furnished to inpatients 
of hospitals.
    The hospital bundling requirement is a longstanding provision that 
has applied uniformly to all hospitals (including those with swing-bed 
agreements) and does not represent a new requirement or a change in 
existing procedures for these facilities. The hospital bundling 
provision is conceptually similar to the SNF consolidated billing 
requirement (since it places with the hospital the Medicare billing 
responsibility for virtually all services that the patient receives), 
and actually served as the model for the SNF consolidated billing 
legislation. Like SNF consolidated billing, hospital bundling 
specifically excludes the services of several types of practitioners 
(services furnished by physicians, physician assistants, nurse 
practitioners, clinical nurse specialists, certified nurse-midwives, 
clinical psychologists, and certified registered nurse anesthetists). 
However, unlike SNF consolidated billing, the hospital bundling 
provision does not provide for the additional exclusion of certain 
other types of services, such as dialysis or erythropoietin (EPO).
    When the SNF PPS was implemented in July 1998, we received several 
questions concerning the relationship between SNF consolidated billing 
and Medicare's preadmission payment window provision, which requires 
that certain services furnished during the period immediately preceding 
an inpatient hospital admission be included in the payment for the 
hospital admission. The most common question is related to situations 
in which a SNF resident in a covered Part A SNF stay receives 
outpatient services from a hospital, and is subsequently admitted to 
that same hospital as an inpatient within three days. Both hospital and 
SNF providers were unsure whether the hospital outpatient services 
should be included on the hospital inpatient bill or were included in 
the SNF PPS payment. Since this issue is relevant to swing-bed patients 
who may require a readmission to an acute care hospital (either within 
the same facility or to another hospital), we are reiterating our 
previous clarification on this point.
    Section 1886(a)(4) of the Act includes a preadmission payment 
window provision for hospitals. Under this provision, certain Part B 
services furnished by a hospital (or by an entity wholly owned or 
operated by the hospital) within three days before an inpatient 
admission to that hospital are included in the Medicare Part A payment 
for the hospital admission. However, we clarified the application of 
the payment window provisions in a final regulation published in the 
Federal Register on February 11, 1998 (63 FR 6865-66), to explain that 
this provision does not apply to Part A services furnished during the 
preadmission period by home health agencies, SNFs, and hospices. The 
preadmission payment window applies

[[Page 24025]]

only to services that are ``otherwise payable under Medicare Part B.'' 
Therefore, those preadmission services that are covered under the Part 
A SNF benefit would not be within the scope of the preadmission payment 
window provision.
    However, services furnished on the day that a SNF resident is 
admitted to a hospital as an inpatient are not included in the SNF PPS 
payment rate. Thus, the outpatient hospital services furnished on that 
day would be subject to the preadmission payment window provision. In 
addition, services excluded from the SNF PPS under consolidated billing 
are considered Part B services and, when provided within three days of 
admission as a hospital inpatient, are subject to the preadmission 
payment window. Among these SNF PPS-excluded services are certain 
exceptionally intensive services furnished in the hospital setting: 
cardiac catheterization, computerized axial tomography (CT) scans, 
magnetic resonance imaging (MRIs), ambulatory surgery involving the use 
of an operating room, emergency services, radiation therapy, 
angiography, and certain lymphatic and venous procedures.
    For a complete list of services that are reimbursed separately from 
the SNF PPS rate, please refer to Program Memorandums A-98-37 (November 
1998, reissued as A-00-01, January 2000) and AB-00-18 (March 2000).

K. Costs Associated With Automating the MDS: Preliminary Estimates

    In accordance with section 1888(e)(7) of the Act, we propose to 
apply the SNF PPS to swing-bed providers (other than CAHs) effective 
with cost reporting periods beginning on or after October 1, 2001, 
consistent with the statutory mandate to implement this provision by 
the end of the SNF PPS transition period described in section 
1888(e)(2)(E) of the Act. Reimbursement under the SNF PPS is contingent 
upon the periodic completion of an MDS assessment, which is used to 
assign each beneficiary to an acuity level. Payment is then based on 
that acuity level. Therefore, all swing-bed providers must automate the 
MDS data collection and transmission process and be capable of 
transmitting MDS data no later than the effective date of the 
conversion to PPS. We anticipate that swing-bed providers will incur 
some incremental costs associated with automating and transmitting the 
MDS. Most start up costs associated with automating the MDS will be 
related to hardware, software, and staff training. These costs will 
vary with the size of each swing-bed facility, the facility's current 
level of computer technology, and the familiarity of staff with the MDS 
assessment instrument.
    At the current time, a number of swing-bed hospitals also operate 
distinct part SNFs, and have systems in place to prepare, store, and 
transmit MDS assessments. We estimate that approximately 30 percent of 
the nation's 1,240 Medicare swing-bed providers presently have the 
hardware and software capability for automated MDS data collection and 
transmission. Other facilities may be using computers for other 
applications and may need to upgrade their systems to provide access to 
clinical and/or data entry staff within the swing-bed unit. For swing-
bed hospitals that do not currently operate distinct part SNFs, we 
expect that a significant percentage will have either very limited 
capacity or no computer system at all.
    Based on our experience with SNFs, we have developed this 
preliminary estimate of the costs a swing-bed provider can expect to 
incur. Costs are separated into two categories, start-up and 
maintenance.
    <bullet> Hardware: We estimate total hardware costs associated with 
automating the MDS to be approximately $2,000 to $2,500 for a typical 
swing-bed provider. This amount includes the cost of a computer, 
communications components capable of running MDS software and 
transmitting MDS assessments, and a laser printer. This estimate is 
based on the most recent cost data available for a system that meets 
the specifications required by the State system. As noted earlier in 
this proposed rule, we expect that many swing-bed hospitals already 
have some computer capability and will not need to buy an entirely new 
system. Based on information currently available, we have no way to 
quantify the number of providers requiring upgrades to their existing 
computer systems in order to operate the MDS software. However, the 
cost of upgrading existing systems should be substantially less than 
the hardware cost estimates provided here. It is also possible that 
some providers may elect more sophisticated and expensive multi-user 
systems. However, since these systems are not generally appropriate for 
small facilities, are not required for SNF PPS payment purposes, we 
have considered this type of multi-user system to be an optional 
expense, and did not include it in the cost estimates. For this 
analysis, we assumed that all providers would purchase new hardware, 
and that assumption may overstate the cost estimates.
    This cost estimate is based on a computer system suitable for a 
small business, and assumes that the facility will add applications and 
data files over time to support ongoing operations. We anticipate that 
many swing-bed hospitals will choose to purchase this type of system 
even though it will initially provide excess capacity, and believe that 
the selection is appropriate. Facilities may, of course, choose a more 
basic configuration at lower cost. A comparison between a small 
business industry standard configuration and the minimum system capable 
of running the necessary MDS software is shown in Table 13.A. Ongoing 
hardware maintenance costs for nursing homes are expected to average 
about $100 annually. Service contracts are also available for new PC 
purchases.

                 Table 13.A.--PPS Computer Requirements
------------------------------------------------------------------------
                                    Small business         Basic MDS
            Component                  standard           processing
------------------------------------------------------------------------
Processor.......................  Pentium III 933/    Pentium III.
                                   133MH.
Memory..........................  128MB sdram.......  32 MB.
Keyboard........................  Standard with PC..  Standard with PC.
Monitor.........................  17" color monitor.  14" color monitor.
Hard Drive......................  20GB..............  100MB.
Floppy Drive....................  1.44MB 3.5".......  1.44MB 3.5".
Operating System................  Win2000...........  Windows 98, NT.
Data Backup.....................  Iomega 250MB Zip    Optional.
                                   drive.
Mouse...........................  Standard with PC..  Standard with PC.
Modem...........................  v.90 56K voice/     28.8k voice/data/
                                   data/fax.           fax.
Media Options...................  20/48X CD-Rom.....  Optional.
Communications software.........  Netscape or         Netscape or
                                   comparable device.  comparable
                                                       device.

[[Page 24026]]

 
Applications Software...........  Microsoft Small     Optional Anti-
                                   Business Norton     virus software,
                                   AntiVirus.          recommended.
Printer.........................  Laser Printer.....  Laser Printer.
------------------------------------------------------------------------

    <bullet> Software: Swing-bed providers desiring only to meet the 
MDS data submission requirements may use RAVEN, the MDS software 
developed by HCFA, which is available free of charge. RAVEN allows 
facilities to perform the basic encoding and formatting functions, and 
allows users to store and retrieve MDS documents. We already provide 
ongoing support for the RAVEN software, and the RAVEN Help Desk will be 
available to swing-bed providers to resolve software or transmission 
problems. We expect that RAVEN will meet the needs of many small swing-
bed providers.
    Some facilities will choose more sophisticated software programs 
that can be used to meet other clinical or operational needs, such as 
care planning, order entry, quality assurance, or billing. There are 
currently over 100 vendors marketing MDS software products, and the 
cost of MDS software packages varies widely. Depending on the number of 
work stations, the level of customer support, and the scope of 
reporting subsystems, an MDS processing system can cost anywhere from 
approximately $500 to $5,000 or more per year. Generally, the higher-
priced software is designed for large SNFs or multi-facility chains and 
would be inappropriate for a small swing-bed facility. We would expect 
that swing-bed facilities that choose not to use RAVEN could purchase 
proprietary MDS software and support services at a cost ranging from 
$500 to $1,200 per year. While we have considered the possibility, 
absent a survey of swing-bed providers, we have no way to quantify how 
many will elect to purchase more elaborate proprietary MDS processing 
systems. The extra functionality associated with these systems is not 
required for payment under the SNF PPS, and should be considered 
optional costs. However, we have included a cost range in these 
estimates since we do not want to discourage providers from using MDS 
systems for other functions, such as quality assurance.
    All swing-bed providers will need a common data communications 
software package to transmit MDS assessments to the State. This 
communications package must meet our specifications related to 
transmission of MDS data, which represent current technology. The cost 
of the communications software, the anti-virus software and the most 
common small business suite of word processing and spread sheet 
computer applications is included in the cost estimate for a small 
business standard configuration PC system.
    <bullet> Supplies: Supplies necessary for collection and 
transmission of data including diskettes, computer paper, and toner, 
will vary according to the size of the facility in terms of residents 
served and assessments required. For the average facility, supply costs 
should average approximately $200 per year.
    <bullet> Maintenance: There are costs associated with normal 
maintenance of computer equipment, such as the replacement of disk 
drives or memory chips. Typically, such maintenance is provided via 
extended warranty agreements with the original equipment manufacturer, 
system reseller, or a general computer support firm. These maintenance 
costs are estimated to average no more than $100 per year.

L. Provider Training

    We recognize our responsibility to provide initial training, as 
well as ongoing technical support. We are currently evaluating training 
options and solicit comments on training methods, vehicles, and 
timeframes.

VII. Provisions of the Proposed Rule

    The provisions of this proposed rule are as follows:
    <bullet> In Sec. 410.150, we propose to revise paragraph (b)(14) to 
reflect that Part B makes payment to the SNF for its resident's 
services only in those situations where the SNF itself furnishes the 
services, either directly or under an arrangement with an outside 
source.
    <bullet> In Sec. 411.15, we propose to revise paragraph (p)(1) to 
indicate that except for physical, occupational, and speech-language 
therapy, consolidated billing applies only to those services that a SNF 
resident receives during the course of a covered Part A stay. We would 
also make conforming revisions in Secs. 489.20(s) and 489.21(h), in the 
context of the requirements of the SNF provider agreement. We propose 
to revise paragraph (p)(2) to indicate that, for Part B services 
furnished to a SNF resident, the requirement to enter the SNF's 
Medicare provider number on the Part B claim (which previously applied 
only to claims for physician services) would apply to all types of Part 
B claims. We would also make conforming revisions in the requirements 
regarding claims for payment, at Secs. 424.32(a)(2) and (a)(5). We 
would revise the wording of the existing requirement in 
Sec. 424.32(a)(5) for a SNF to include appropriate HCPCS coding and its 
Medicare provider number on the claims that it files for its residents' 
services, by adding that these requirements also apply to these claims 
when they are filed by an outside entity. In addition, we would revise 
Sec. 411.15(p)(3) to exclude from the definition of a SNF resident, for 
consolidated billing purposes, those individuals who reside in the 
noncertified portion of an institution that also contains a 
participating distinct part SNF.
    <bullet> In accordance with section 1888(e)(2)(E) of the Act, we 
propose to revise Sec. 413.114 to reimburse swing-bed services of rural 
hospitals (other than CAHs, which would be paid on a reasonable cost 
basis) under the SNF PPS described in regulations at subpart J of that 
part. This conversion to the SNF PPS would be effective for services 
furnished during cost reporting periods beginning on or after October 
1, 2001. We also propose to revise paragraph (d)(1) of this section to 
reflect the BBRA 1999 modifications to the special requirements for 
swing-bed facilities with more than 49 but fewer than 100 beds (as 
discussed in section VI.C of this preamble), and to make a conforming 
revision in Sec. 424.20(a)(2).

VIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment when a collection of information requirement is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. To fairly evaluate whether an information collection should 
be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comments on the following issues:
    <bullet> Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;

[[Page 24027]]

    <bullet> The accuracy of the agency's estimate of the information 
collection burden;
    <bullet> The quality, utility, and clarity of the information to be 
collected; and
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirements discussed below.
    Sec. 413.114(a)(2)--Implementing the requirement in section 
1888(e)(7) of the Act for the SNF PPS to encompass swing-bed services 
furnished in rural hospitals will require these providers to complete 
MDS assessments, in accordance with the schedule prescribed in 
regulations at 42 CFR 413.343(b). Accordingly, we are including in this 
proposed rule the following discussion of the anticipated burden for 
rural hospitals as a result of implementing this requirement.
    On December 23, 1997, we issued in the Federal Register a final 
regulation requiring Medicare-certified SNFs and Medicaid-certified 
nursing facilities (NFs) to encode and transmit MDS data to HCFA in 
electronic format (42 FR 67174). In that rule, we provided cost 
estimates for training staff and conducting ongoing functions related 
to the preparation, data entry and transmission of MDS data. The 
estimates presented here are based on the analysis presented in the MDS 
automation rule, but are updated to reflect current wage data and 
unique aspects of swing-bed providers. We also used 1999 claims data to 
calculate the number of swing-bed stays and the average length of stay. 
These data were used to estimate ongoing MDS-related costs.
    Using the best available 1999 claims data, we identified 97,576 
swing bed stays. There are currently 1,250 swing-bed facilities. The 
average annual number of admissions is 78 per swing-bed hospital. Using 
the same 1999 claims data, the average length of stay is 8.79 days. 
Accordingly, on average, a typical swing-bed facility would need to 
complete only one MDS per admission, since the PPS 5-day assessment 
governs payment for the first 14 days of the stay.
    <bullet> Data Entry: Based upon our experience with SNFs, we 
estimate that swing-bed facilities will need to train at least one 
staff person to handle the data entry and MDS processing system. State 
agencies currently train SNF staff on these functions, and the training 
is generally completed in a single half-day session. Additional 
training materials and updates to program requirements are generally 
posted on the MDS web sites, and are available to staff at no cost. By 
distributing information electronically, and providing Help Desks for 
software and transmission problems, we minimize the need for staff 
travel, and reduce the ongoing costs associated with encoding and 
transmitting MDS data.
    Facilities may choose among a variety of approaches to encode the 
MDS data in electronic format. In many SNFs, the nurses conducting the 
assessments input their responses directly into the computer, and the 
data entry time is incorporated into the MDS preparation time. In 
others, a data entry operator is used to input the MDS data and 
maintain the MDS processing system. For SNFs, the data entry function 
averages 15 minutes per assessment. We also expect that staff will 
require approximately 2 hours per month to perform system-related 
functions such as processing corrections, retrieving assessment 
information, printing copies, verifying the accuracy of the data 
entered into the system, and reviewing program updates and training 
materials.
    The hourly rate for data entry was estimated at $15, and reflects 
the salary differentials between the two types of staff typically 
performing this function: RNs and data operators.
    <bullet> Electronic Transmission: Swing-bed staff will also need 
training on data transmission procedures. Again, state agencies have 
already developed training programs in this area, and this training 
will be available to swing-bed personnel. Generally, a facility would 
send one person to a half-day training program. This individual would 
be responsible for handling data transmission functions, and would be 
expected to train other facility staff on a time-available basis. We 
will make the MDS transmission system available to swing-bed providers 
prior to the effective date of the transition to the SNF PPS, and allow 
staff to practice transmission procedures. We would expect that each 
swing-bed provider would have successfully transmitted at least one MDS 
data file prior to the updated SNF PPS effective date. Once the 
designated individual has been trained, we estimate that the MDS 
transmission will take approximately one hour per month.
    The hourly rate of data transmission was estimated at $15, and 
reflects the salary differentials between the two types of staff 
typically performing this function: RNs and data operators.
    <bullet> MDS Coding: Training time will vary depending on the 
familiarity of swing-bed staff with MDS coding procedures and the 
presence of a hospital-based SNF that is already subject to the SNF PPS 
requirements. Many swing-bed hospital employees may have prior 
experience in a SNF where they were trained in MDS coding procedures. 
In addition, in 1999, approximately 25 percent of swing-bed hospitals 
also had hospital-based SNF facilities, and have a pool of trained 
staff who can assist swing-bed employees with MDS coding procedures. 
Regardless of the amount of inhouse support available, we believe it is 
advisable for each swing-bed hospital to designate an RN to assume lead 
responsibility, and to ensure that this RN is fully trained. We 
estimate that the initial training in MDS clinical coding and SNF PPS 
assessment scheduling will require two days.
    Based upon the experience SNFs have had in completing the MDS, we 
estimate that it generally takes 45 minutes to complete a comprehensive 
assessment. We considered reducing this estimate for swing-bed 
providers for two reasons. First, the requirements for comprehensive 
assessments which are mandated under the Omnibus Budget Reconciliation 
Act of 1987, Pub.L. 100-203 (OBRA 1987) are somewhat higher than those 
applicable to the SNF PPS assessments. Second, SNF staff generally have 
limited knowledge concerning the care the patient received prior to the 
SNF admission, and limited access to the records from the prior 
hospital stay. As a result, the RN in the SNF conducting a 5-day PPS 
assessment has to build a completely new knowledge base about the 
patient's condition and care needs. By contrast, in a swing-bed 
hospital, the staff caring for the patient have the advantages of 
observing the patient during the acute portion of the stay, and should 
have more information already available when completing the SNF PPS 5-
day assessment. However, rather than reducing the time estimate, we are 
using the higher number to reflect the expected learning curve over the 
first year as staff become more familiar with and proficient in 
completing the MDS.
    As stated above, swing-bed providers averaged 78 stays per year 
with an average swing-bed length of stay of slightly under 9 days. 
Therefore, swing-bed providers would generally complete just one SNF 
PPS assessment for most patients; i.e., the 5-day assessment that 
governs payment for the first 14 days of a stay.
    Although our projections are based on the most recent available 
data, and indicate that swing-bed providers will generally complete 
only one MDS per beneficiary during the course of a swing-bed stay, we 
are aware that this

[[Page 24028]]

utilization pattern could change. We note that the restrictions on 
beneficiary length of stay and the caps on the percentage of bed days 
that could be used for swing-bed service were eliminated by section 408 
of BBRA 1999, effective with cost reporting periods beginning on and 
after October 1, 2002. With this added flexibility, swing-bed providers 
may decide to adjust their admission practices, and may serve more 
patients requiring longer lengths of stay. If this change occurs, 
swing-bed staff may be required to perform additional MDS assessments. 
Therefore, we plan to monitor swing-bed utilization patterns to 
identify any changes in provider practices and evaluate the impact of 
these changes on swing-bed performance under the SNF PPS. However, for 
the current analysis, we have used the best available historical data 
to project future experience.
    To calculate the costs of preparing the MDS, we used 1998 Bureau of 
Labor Statistics nursing wage data including fringe benefits, updated 
to FY 2002 levels using the SNF market basket factor. The average 
hourly rate of $24.70 is used in the calculations shown in Table 13.B. 
The Aggregate Cost-Basic Option column estimates are based on October, 
2000 data showing 1,250 certified swing-bed providers. The aggregate 
calculations assume that all providers chose either the basic or small 
business option. Absent a survey of all providers, we have no way to 
quantify the number of providers requiring upgrades to existing 
computer systems in order to operate the MDS software. We have assumed 
purchase of a new system for all providers, which may result in an 
overstatement of actual anticipated costs. The Basic Option-Cost/
Facility Hardware estimate includes a laser printer, operating 
software, basic applications software, including Word 2000 and Excel 
2000, and a one year service agreement and anti-virus software. The 
Small Business Option-Cost/Facility Hardware estimate includes a laser 
printer, operating software, Microsoft Office Suite applications 
software, anti-virus software, and a one year service agreement. The 
Communications Software estimate reflects the cost of Netscape or other 
communications software. It is assumed that swing-bed providers will 
use the free RAVEN software for MDS processing. This software was 
developed and tested by HCFA, and has been widely used by both 
hospital-based and freestanding SNFs during the past three years. We 
cannot quantify the number of providers who will choose to purchase 
proprietary systems, and therefore have included a cost range. We 
believe that the free RAVEN software, along with the associated Help 
Desk Services will meet the needs of most providers. The use of 
proprietary systems should be considered an optional cost.

                                              Table 13.B.--Swing-Bed Rural Hospital Cost of Completing MDS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                Basic option- cost/    Small business option--     Aggregate cost-- basic       Aggregate cost-- small
                  Category                            facility              cost/facility                  option                  business option
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hardware....................................                $1,400.00                $2,100.00                $1,750,000.00                $2,625,000.00
Comm. Software..............................                   100.00                   100.00                   125,000.00                   125,000.00
MDS Software................................               0-1,200.00               0-1,200.00               0-1,500,000.00               0-1,500,000.00
Staff Training--MDS Coding..................                   494.00                   494.00                   617,500.00                   617,500.00
Staff Training--Entry and Transmission......                   240.00                   240.00                   300,000.00                   300,000.00
Start Up Costs..............................                 2,234.00                 2,934.00                 2,792,500.00                 3,667,500.00
MDS Preparation.............................                 1,445.00                 1,445.00                   216,750.00                   216,750.00
MDS Entry...................................                   292.50                   292.50                   365,625.00                   365,625.00
MDS Transmission............................                   180.00                   180.00                   225,000.00                   225,000.00
Supplies....................................                   200.00                   200.00                   250,000.00                   250,000.00
Maintenance.................................                   100.00                   100.00                   125,000.00                   125,000.00
Operating Cost..............................                 2,217.50                 2,217.50                 1,182,375.00                 1,182,375.00
Estimated First Year Costs..................        4,451.50-5,651.50        5,151.50-6,351.50    3,974,875.00-5,474,875.00    4,849,875.00-6,349,875.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Sec. 424.32(a)(5)--We propose to revise section 424.32(a)(5) to 
reflect the new statutory requirement that all Part B claims for 
services furnished to SNF residents must include the SNF's Medicare 
provider number. Because the burden associated with this additional 
requirement is incidental to the completion of a claim, we are unable 
to estimate the burden associated with this new requirement, and 
explicitly solicit comment. As a result of this new requirement, we 
will be revising the OMB clearance package for the HCFA-1500 (Common 
Claim Form), OMB number 0938-0008, which is currently being reviewed by 
OMB for re-approval.
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements in 
Secs. 413.411(a)(2) and 424.32(a)(5). These requirements are not 
effective until they have been approved by OMB.
    If you have any comments on any of these information collection and 
record keeping requirements, please mail one original and three copies 
within 60 days of the publication date directly to the following:

Health Care Financing Administration, Office of Information Services, 
Information Technology Investment Management Group, Division of HCFA 
Enterprise Standards, Room N2-14-26, 7500 Security Boulevard, 
Baltimore, MD 21244-1850, Attn: John Burke, HCFA-1163-P.
And: Office of Information and Regulatory Affairs, Room 10235, New 
Executive Office Building, Washington, DC 20503, Attn: Allison Herron 
Eydt, HCFA Desk Officer.

IX. Regulatory Impact Analysis

    We have examined the impact of this rule as required by Executive 
Order (EO) 12866, the Unfunded Mandate Reform Act (UMRA, Public Law 
104-4), the Regulatory Flexibility Act (RFA, Public Law 96-354), and 
the Federalism Executive Order (EO) 13132.
    Executive Order 12866 directs agencies to assess costs and benefits 
of available regulatory alternatives and, when regulation is necessary, 
to select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). A regulatory impact analysis (RIA) 
must be prepared for major rules with economically significant effects 
($100 million or more annually). This proposed rule is a major

[[Page 24029]]

rule as defined in Title 5, United States Code, section 804(2), because 
we estimate its impact will be to increase the payments to SNFs by 
approximately $300 million in FY 2002. The update set forth in this 
proposed rule applies to payments in FY 2002. Accordingly, the analysis 
that follows describes the impact of this one year only. In accordance 
with the requirements of the Act, we will publish a notice for each 
subsequent FY that will provide for an update to the payment rates and 
include an associated impact analysis.
    The UMRA also requires (in section 202) that agencies prepare an 
assessment of anticipated costs and benefits before developing any rule 
that may result in an expenditure in any year by State, local, or 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more. This rule will have no consequential effect on State, 
local, or tribal governments. We believe the private sector cost of 
this rule falls below these thresholds as well.
    Executive Order 13132 (effective November 2, 1999) establishes 
certain requirements that an agency must meet when it promulgates 
regulations that impose substantial direct compliance costs on State 
and local governments, preempt State law, or otherwise have Federalism 
implications. As stated above, this rule will have no consequential 
effect on State and local governments.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and governmental agencies. 
Most SNFs and most other providers and suppliers are small entities, 
either by virtue of their nonprofit status or by having revenues of $10 
million or less annually. For purposes of the RFA, all States and 
tribal governments are not considered to be small entities, nor are 
intermediaries or carriers. Individuals and States are not included in 
the definition of a small entity.
    The policies contained in this proposed rule would update the SNF 
PPS rates by increasing the payment rates published in the July 31, 
2000 notice (65 FR 46770). While we do not believe that this will have 
a significant effect upon small entities overall, some individual 
providers may experience significant increases in payments, while 
others (those that are concluding their final year under the transition 
from facility-specific to full Federal rates) may experience 
significant decreases, as discussed later in this section.
    In addition, section 1102(b) of the Act requires us to prepare an 
RIA 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 50 beds. We have examined the impact on the 1,250 swing-bed 
facilities that would start receiving payment under the SNF PPS 
effective with cost reporting periods beginning on or after October 1, 
2001, and find that the payments to these facilities will increase 
overall. Some swing-bed facilities may receive significant increases in 
Medicare related payments, as described later in this section. 
Accordingly, the following analysis includes a specific examination of 
the projected impact of these provisions on small rural hospitals.

A. Background

    Section 1888(e) of the Act establishes the SNF PPS for the payment 
of Medicare SNF services for periods beginning on or after July 1, 
1998. This section specifies that the base year cost data to be used 
for computing the RUG-III payment rates must be from FY 1995 (that is, 
October 1, 1994, through September 30, 1995.) In accordance with the 
statute, we also incorporated a number of elements into the SNF PPS, 
such as case-mix classification methodology, the MDS assessment 
schedule, a market basket index, a wage index, and the urban and rural 
distinction used in the development or adjustment of the Federal rates.
    This proposed rule sets forth updates of the SNF PPS rates 
contained in the July 31, 2000 final rule (65 FR 46770). Table 14 
presents the projected effects of the policy changes in the SNF PPS 
from FY 2001 to FY 2002, as well as statutory changes effective for FY 
2001 and FY 2002. In so doing, we estimate the effects of each policy 
change by estimating payments while holding all other payment variables 
constant. We use the best data available, but we do not attempt to 
predict behavioral responses to our policy changes, and we do not make 
adjustments for future changes in such variables as days or case-mix.
    This analysis incorporates the latest estimates of growth in 
service use and payments under the Medicare SNF benefit based on the 
latest available Medicare claims data and MDS 2.0 assessment data from 
1999. We plan to update this data in the final rule. We note that 
certain events may combine to limit the scope or accuracy of our impact 
analysis, because such an analysis is future-oriented and, thus, very 
susceptible to forecasting errors due to other changes in the 
forecasted impact time period. Some examples of such possible events 
are 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 BBA 
1997, BBRA 1999, BIPA 2000 or new statutory provisions. Although these 
changes may not be specific to SNF PPS, the nature of the Medicare 
program is such that the changes may interact, and the complexity of 
the interaction of these changes could make it difficult to predict 
accurately the full scope of the impact upon SNFs.

B. Impact of the Proposed Rule

    The purpose of this proposed rule is not to initiate significant 
policy changes with regard to the SNF PPS; rather, it is to provide an 
update to the rates for FY 2002. We believe that the revisions and 
clarifications mentioned elsewhere in the preamble (for example, the 
update to the wage index used for adjusting the Federal rates) will 
have, at most, only a negligible overall effect upon the regulatory 
impact estimate specified in the rule. As such, these revisions will 
not represent an additional burden to the industry.
    The aggregate increase in payments associated with this proposed 
rule is estimated to be $300 million. The effect of the 20 percent add-
on from BBRA 1999 is $1.0 billion; however, since this add-on became 
effective in FY 2001, it has already been reflected in the impact 
analysis for last year's final rule (65 FR 46770) and, thus, does not 
represent a new, additional impact for the FY 2002 payment rates. There 
are three areas of change that produce this increase for facilities:
    1. The effect of facilities being paid the full Federal rate.
    2. The implementation of provisions in BIPA 2000, such as the 16.6 
percent increase in the nursing component of each RUG and the 
elimination of the one percent reduction in the SNF market basket for 
FY 2001.
    3. The total change in payments from FY 2001 levels to FY 2002 
levels. This includes all of the previously noted changes in addition 
to the effect of the update to the rates.
    As seen in Table 14, some of these areas are expected to result in 
increased aggregate payments and others are expected to tend to lower 
them. The breakdown of the various categories of data in the table is 
as follows:

[[Page 24030]]

    The first row of figures in the table describes the estimated 
effects of the various policies on all facilities. The next six rows 
show the effects on facilities split by hospital-based, freestanding, 
urban and rural categories. The remainder of the table shows 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 shows the effect of the 
expiration of the transition and movement to the full Federal rates for 
all SNFs. This change has an overall effect of lowering payments by an 
estimated 8.5 percent, affecting hospital-based facilities more than 
freestanding facilities. The main reason for such a large decrease is 
the BBRA 1999 provision that allowed facilities to choose the full 
Federal rate. When given the option to do so, an estimated 43 percent 
of the facilities elected to go to the full Federal rate. This meant 
that the only facilities left to transition to the full Federal rate 
are ones for which the expiration of the transition will cause a 
decrease in reimbursement. In contrast, those facilities receiving the 
full Federal rate will experience an 11.6 percent increase in payments. 
The overall effect, therefore, reduced reimbursement, but the effects 
across regions are quite variable.
    The fourth column shows the projected effect of the 16.66 percent 
add-on to the nursing portion of the Federal rate mandated by BIPA 
2000. As expected, this results in an increase in payments for all 
facilities; however, as seen in the table, the varying effect of the 
SNF PPS transition results in a distributional impact. In addition, 
since this increase only applies to the nursing portion of the payment 
rate, the effect on total expenditures is less than 16.66 percent.
    The fifth column of the table shows the effect of the change in the 
add-on for the rehabilitation RUGs. The total impact of this change is 
zero percent; however, there are distributional effects of this change, 
as seen in the table.
    The sixth column of the table shows the effect of all of the 
changes on the FY 2002 payments. This includes all of the previous 
changes, including the update to this year's payment rates by the 
market basket. Rebasing of the market basket index from 1992 to 1997 
had little impact on the overall changes displayed in this column. It 
is projected that payments will increase by 2.1 percent in total, 
assuming facilities do not change their care delivery and billing 
practices in response. As can be seen from this table, the combined 
effects of all the changes vary widely by specific types of providers 
and by location. For example, freestanding facilities experience 
payment increases, while the effects of the transition cause decreases 
in payments for hospital-based providers.

                          Table 14.--Projected Impact of FY 2002 Update to the SNF PPS
----------------------------------------------------------------------------------------------------------------
                                                               Transition   Add-on to
                                                  Number of    to federal    nursing     Add-on to     Total FY
                                                  facilities     rates        rates      rehab RUGs  2002 change
                                                               (percent)    (percent)    (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
Total..........................................         9037         -8.5          7.9          0.0          2.1
Urban..........................................         6300         -9.0          8.0          0.1          1.7
Rural..........................................         2737         -6.7          7.5         -0.5          3.2
Hospital based urban...........................          683        -14.7          8.5         -0.8         -5.1
Freestanding urban.............................         5617         -8.1          7.9          0.3          2.8
Hospital based rural...........................          533         -9.7          8.2         -2.0         -1.0
Freestanding rural.............................         2204         -6.2          7.4         -0.3          3.9
Urban by region................................
New England....................................          630         -3.9          8.1          0.2          7.6
Middle Atlantic................................          877         -2.9          8.4         -1.7          7.0
South Atlantic.................................          959        -10.5          7.7          0.8          0.5
East North Central.............................         1232         -7.6          7.8          0.9          3.9
East South Central.............................          212         -8.8          7.8          0.4          2.1
West North Central.............................          469        -10.6          7.9          0.1         -0.2
West South Central.............................          519        -19.5          8.1          0.1         -9.9
Mountain.......................................          303        -17.3          7.5          1.5         -6.7
Pacific........................................         1070        -13.9          8.0          0.5         -3.4
Rural by region................................
New England....................................           88         -0.9          7.5         -0.4          9.7
Middle Atlantic................................          144         -4.4          7.7         -1.5          4.9
South Atlantic.................................          373         -5.3          7.5          0.1          5.4
East North Central.............................          561         -5.1          7.4          0.0          5.4
East South Central.............................          255         -5.1          7.9         -2.6          3.1
West North Central.............................          581         -8.2          7.7         -1.4          0.8
West South Central.............................          354        -14.9          7.5          0.2         -5.2
Mountain.......................................          204        -11.6          7.2         -0.1         -2.1
Pacific........................................          151         -7.4          7.2          0.6          3.3
----------------------------------------------------------------------------------------------------------------

    In accordance with section 1888(e)(7) of the Act, we propose to pay 
rural hospitals for SNF-level swing-bed services under the SNF PPS 
effective with cost report periods beginning on and after October 1, 
2001. In making this proposal, we have examined the anticipated impact 
of this payment change on swing-bed facilities.
    We analyzed data from swing-bed claims for calendar years 1996 
through 1998 to determine Medicare payments made under the current 
swing-bed payment system. The claims data reflect the predetermined 
routine cost payments and the interim payment for ancillary services. 
While the interim payment rate for ancillary services is subject to 
final cost settlement, it represents a reasonable proxy for actual 
swing-bed payments.
    We then adjusted the historical data on swing-bed payments to 2002 
levels. For calendar years 1999 through 2001, we projected the average 
payment per day, using the 6.5 percent growth rate calculated from the 
most recent

[[Page 24031]]

available data from calendar years 1997 and 1998. For 2002, we used a 
blended growth rate that reflects a projected increase in payment for 
routine services equal to the market basket of 2.4 percent, but retains 
the historical growth factor of 6.5 percent for ancillary payments. In 
1998, the average payment per day was $205.41. The estimated swing-bed 
payment per day for 2002 under the existing method of reimbursement is 
$258.41.
    We then estimated the amount that would have been paid for the same 
services under the SNF PPS. This estimate reflected both adjustments 
for geographic variation and case-mix. For the geographic adjustment, 
we used the average rural wage index for FY 2001 (that is, 0.8700). For 
case-mix, although Medicare swing-bed claims do not include all of the 
data elements necessary to classify patients in exactly the same way as 
the patients would be classified in the RUG-III system, there is enough 
information to assign Medicare swing-bed patients to RUG-III categories 
at a general level. To generate this classification, we used the MEDPAR 
case-mix analog described in detail in the SNF PPS interim final rule 
published on May 12, 1998 (63 FR 26252). As a result, we were able to 
estimate how the national swing-bed population would classify into RUG-
III categories. We found that 69 percent of the covered days would be 
assigned to just two RUG-III categories (or six groups): medium 
rehabilitation and extensive services.
    We also noted that 9 percent of the covered days were assigned to 
categories that are not typically associated with a Medicare level of 
care (impaired cognition and lower groups). We have not assumed that 
these claims were paid in error. Rather, we are assuming that these 
patients had skilled care needs other than ones that could be captured 
using the MEDPAR case-mix analog, and we have included these stays in 
our analysis.

   Table 15.--RUG-III Frequency Distribution Using Calendar Year 1999
                                 Claims
------------------------------------------------------------------------
                                                 Number of    Percent of
            RUG-III category level               days paid    total days
------------------------------------------------------------------------
Ultra High Rehab..............................       30,618            3
Very High Rehab...............................       33,687            4
High Rehab....................................       76,596            9
Medium Rehab..................................      264,614           30
Low Rehab.....................................       58,016            7
Extensive Services............................      288,131           33
Special Care..................................       11,540            1
Clinically Complex............................       35,304            4
Impaired Cognition............................        4,737            1
Other.........................................       72,293            8
                                               -------------------------
    Totals....................................      875,536          100
------------------------------------------------------------------------

    Our next step was to project the SNF PPS payments for these swing-
bed services. For the purposes of this analysis, we used the calendar 
year frequency distribution and number of covered swing-bed days shown 
in Table 15. Unique nursing case-mix weights have already been 
developed for each level of the MEDPAR case-mix analog. These weights 
were used to adjust the proposed FY 2002 rural SNF PPS rates set forth 
in this proposed rule to determine the SNF PPS rates used in this 
estimate. We adjusted these rates for all BBRA and BIPA add-ons 
applicable for FY 2002.
    Based on our analysis, the FY 2002 SNF PPS payment amount exceeds 
the projected payments under the current swing-bed payment system for 
that year in 5 of the 10 case-mix analog categories that included 79 
percent of the swing bed days. In fact, for the two most common RUG-III 
categories, medium rehabilitation and extensive services, the projected 
increases are substantial: 14 percent for medium rehabilitation and 16 
percent for extensive services. In addition, records in two of the 
categories where the projected SNF PPS rate is lower than the projected 
swing-bed payment amount under the present system (impaired cognition 
and other) group into much higher categories when using the full RUG-
III algorithm.
    In terms of aggregate Medicare expenditures, we estimate that the 
transition to SNF PPS will increase payments for SNF-level swing-bed 
services by 9 percent, or approximately $20 million, while the 
aggregate costs will be approximately $20 million in benefits and 6.32 
million for completion of the MDS assessments.
    Based on these estimates, we believe the financial impact on swing-
bed providers will be positive, with the anticipated 9 percent payment 
increase serving to offset the estimated start-up costs associated with 
MDS completion and transmission (described in section VI.K of this 
proposed rule).
    Finally, in accordance with the provisions of Executive Order 
12866, this notice was reviewed by the Office of Management and Budget.

X. Federalism

    We have reviewed this proposed rule under the threshold criteria of 
Executive Order 13132, Federalism, and we have determined that it does 
not significantly affect the rights, roles, and responsibilities of 
States.

List of Subjects

42 CFR Part 410

    Health facilities, Health professions, Kidney diseases, 
Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 413

    Health Facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and recordkeeping requirements.

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare.

42 CFR Part 482

    Grant programs-health, Hospitals, Medicaid, Medicare, Reporting and 
recordkeeping requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, 42 CFR chapter IV is 
proposed to be amended as follows:

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

    1. The authority citation for part 410 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
* * * * *

Subpart I--Payment of SMI Benefits

    2. In Sec. 410.150, the introductory text of paragraph (b) is 
republished, and paragraph (b)(14) is revised to read as follows:


Sec. 410.150  To whom payment is made.

* * * * *
    (b) Specific rules. Subject to the conditions set forth in 
paragraph (a) of this section, Medicare Part B pays as follows:
* * * * *
    (14) To an SNF for services (other than those described in 
Sec. 411.15(p)(2) of this chapter) that it furnishes to a

[[Page 24032]]

resident (as defined in Sec. 411.15(p)(3) of this chapter) of the SNF 
who is not in a covered Part A stay.
* * * * *

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

    3. The authority citation for part 411 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

Subpart A--General Exclusions and Exclusion of Particular Services

    4. In Sec. 411.15, paragraph (p)(1) is revised, and paragraph 
(p)(2) introductory text, paragraph (p)(2)(i), and paragraph (p)(3) 
introductory text are revised to read as follows:


Sec. 411.15  Particular services excluded from coverage.

* * * * *
    (p) Services furnished to SNF residents. (1) Basic rule. Except as 
provided in paragraph (p)(2) of this section, any service furnished to 
a resident of an SNF during a covered Part A stay by an entity other 
than the SNF, unless the SNF has an arrangement (as defined in 
Sec. 409.3 of this chapter) with that entity to furnish that particular 
service to the SNF's residents. Services subject to exclusion under 
this paragraph include, but are not limited to--
    (i) Any physical, occupational, or speech-language therapy 
services, regardless of whether the services are furnished by (or under 
the supervision of) a physician or other health care professional, and 
regardless of whether the resident who receives the services is in a 
covered Part A stay; and
    (ii) Services furnished as an incident to the professional services 
of a physician or other health care professional specified in paragraph 
(p)(2) of this section.
    (2) Exceptions. The following services are not excluded from 
coverage, provided that the claim for payment includes the SNF's 
Medicare provider number in accordance with Sec. 424.32(a)(5) of this 
chapter:
    (i) Physicians' services that meet the criteria of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
* * * * *
    (3) SNF resident defined. For purposes of this paragraph, a 
beneficiary who is admitted to a Medicare-participating SNF is 
considered to be a resident of the SNF. Whenever the beneficiary leaves 
the facility, the beneficiary's status as an SNF resident for purposes 
of this paragraph (along with the SNF's responsibility to furnish or 
make arrangements for the services described in paragraph (p)(1) of 
this section) ends when one of the following events occurs--
* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT 
RATES FOR SKILLED NURSING FACILITIES

    5. The authority citation for part 413 is amended to read as 
follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1871, 1881, 1883, 1886, and 1888 of the Social Security Act (42 
U.S.C. 1302, 1395d(d), 1395(f)b, 1395g, 1395l(a), (i), and (n), 
1395hh, 1395rr, 1395tt, 1395ww, and 1395yy).

Subpart F--Specific Categories of Costs

    6. In Sec. 413.114:
    a. Paragraph (a) is revised.
    b. In paragraph (c), the heading is revised.
    c. Paragraph (d)(1) introductory text is revised.


Sec. 413.114  Payment for posthospital SNF care furnished by a swing-
bed hospital.

    (a) Purpose and basis. This section implements section 1883 of the 
Act, which provides for payment for posthospital SNF care furnished by 
rural hospitals and CAHs having a swing-bed approval.
    (1) Services furnished in cost reporting periods beginning prior to 
October 1, 2001. Posthospital SNF care furnished in general routine 
inpatient beds in rural hospitals and CAHs is paid in accordance with 
the special rules in paragraph (c) of this section for determining the 
reasonable cost of this care. When furnished by rural and CAH swing-bed 
hospitals approved after March 31, 1988 with more than 49 beds (but 
fewer than 100), these services must also meet the additional payment 
requirements set forth in paragraph (d) of this section.
    (2) Services furnished in cost reporting periods beginning on and 
after October 1, 2001. Posthospital SNF care furnished in general 
routine inpatient beds in rural hospitals (other than CAHs) is paid in 
accordance with the provisions of the prospective payment system for 
SNFs described in subpart J of this part. Posthospital SNF care 
furnished in general routine inpatient beds in CAHs is paid based on 
reasonable cost, in accordance with the provisions of subparts A 
through G of this part (other than paragraphs (c) and (d) of this 
section).
* * * * *
    (c) Special rules for determining the reasonable cost of 
posthospital SNF care furnished in cost reporting periods beginning 
prior to October 1, 2001.
    (d) Additional requirements--(1) General rule. For services 
furnished in cost reporting periods beginning prior to October 1, 2001, 
in order for Medicare payment to be made to a swing-bed hospital with 
more than 49 beds (but fewer than 100), the following payment 
requirements must be met:
* * * * *
    7. In Sec. 413.337, paragraph (e) is added to read as follows:


Sec. 413.337  Methodology for calculating the prospective payment 
rates.

* * * * *
    (e) Pursuant to section 101 of the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA) and revised by section 
314 of the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA), using the best available data, the 
Secretary will issue a new regulation with a newly refined case-mix 
classification system to better account for medically complex patients. 
Upon issuance of the new regulation, the temporary increases in payment 
for certain high cost patients will no longer be applicable.
* * * * *

PART 424--CONDITIONS FOR MEDICARE PAYMENT

    8. The authority citation for part 424 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

    9. In Sec. 424.20(a)(2), the heading is revised to read as follows:


Sec. 424.20  Requirements for posthospital SNF care.

    (a) * * *
    (2) Special requirement for certifications performed prior to 
October 1, 2001: A swing-bed hospital with more than 49 beds (but fewer 
than 100) that does not transfer a swing-bed patient to a SNF within 5 
days of the availability date. * * *
* * * * *

Subpart C--Claims for Payment

    10. In Sec. 424.32, the introductory text of paragraph (a) is 
republished, and paragraphs (a)(2) and (a)(5) are revised.

[[Page 24033]]

Sec. 424.32  Basic requirements for all claims.

    (a) A claim must meet the following requirements:
* * * * *
    (2) A claim for physician services, clinical psychologist services, 
or clinical social worker services must include appropriate diagnostic 
coding for those services using ICD-9-CM.
* * * * *
    (5) All Part B claims for services furnished to SNF residents 
(whether filed by the SNF or by another entity) must include the SNF's 
Medicare provider number and appropriate HCPCS coding.
* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

    11. The authority citation for part 489 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

Subpart B--Essentials of Provider Agreements

    12. In Sec. 489.20, the introductory text is republished, and the 
introductory text of paragraph (s) is revised.


Sec. 489.20  Basic commitments.

    The provider agrees to the following:
* * * * *
    (s) In the case of an SNF, either to furnish directly or make 
arrangements (as defined in Sec. 409.3 of this chapter) for any 
physical, occupational, or speech-language therapy services furnished 
to a resident of the SNF under Sec. 411.15(p) of this chapter 
(regardless of whether the resident is in a covered Part A stay), and 
also either to furnish directly or make arrangements for all other 
Medicare-covered services furnished to a resident during a covered Part 
A stay, except the following:
* * * * *
    13. In Sec. 489.21, the introductory text is republished, and 
paragraph (h) is revised to read as follows:


Sec. 489.21  Specific limitations on charges.

    Except as specified in subpart C of this part, the provider agrees 
not to charge a beneficiary for any of the following:
* * * * *
    (h) Items and services (other than those described in 
Sec. 489.20(s)(1) through (15)) required to be furnished under 
Sec. 489.20(s) to a resident of an SNF (defined in Sec. 411.15(p) of 
this chapter), for which Medicare payment would be made if furnished by 
the SNF or by other providers or suppliers under arrangements made with 
them by the SNF. For this purpose, a charge by another provider or 
supplier for such an item or service is treated as a charge by the SNF 
for the item or service, and is also prohibited.

    Note: This appendix will not appear in the Code of Federal 
Regulations.

Appendix--Technical Features of the Proposed 1997 Skilled Nursing 
Facility Market Basket Index

    As discussed in the preamble of this proposed rule, we propose 
to revise and rebase the SNF market basket. This appendix describes 
the technical aspects of the 1997-based index that we are proposing 
in this rule. We present this description of the market basket in 
three steps:
    <bullet> A synopsis of the structural differences between the 
1992-and the 1997-based market baskets.
    <bullet> A description of the methodology used to develop the 
cost category weights in the proposed 1997-based market basket.
    <bullet> A description of the data sources used to measure price 
change for each component of the proposed 1997-based market basket, 
making note of the differences, if any, from the price proxies used 
in the 1992-based market basket.

I. Synopsis of Structural Changes Adopted in the Proposed Revised and 
Rebased 1997 Skilled Nursing Facility Market Basket

    We are proposing just one major structural change between the 
current 1992-based and the proposed 1997-based SNF market baskets, 
which is that more recent SNF cost data would be used in the 
proposed revised and rebased SNF market basket.
    The proposed 1997-based market basket contains cost shares for 
six major cost categories that were derived from an edited set of FY 
1997 Medicare Cost Reports for freestanding SNFs that had Medicare 
expenses. FY 1997 cost reports have cost reporting periods beginning 
after September 30, 1996 and before October 1, 1997. The 1992-based 
market basket used data from the PPS-9 Medicare Cost Reports for 
freestanding SNFs with Medicare expenses greater than 1 percent of 
total expenses. PPS-9 cost reports have cost reporting periods 
beginning after September 30, 1991 and before October 1, 1992. Cost 
allocations for the proposed 1997-based SNF market basket within the 
six major cost categories use Medicare Cost Reports and two 
Department of Commerce data sources: the 1997 Business Expenditures 
Survey, Bureau of the Census, Economics and Statistics 
Administration, and the 1997 Bureau of Economic Analysis' Annual 
Input-Output tables.

II. Methodology for Developing the Cost Category Weights

    Cost category weights for the proposed 1997-based market basket 
were developed in two stages. First, base weights for six main 
categories (wages and salaries, employee benefits, contract labor, 
pharmaceuticals, capital-related expenses, and a residual ``all 
other'') were derived from the SNF Medicare Cost Reports described 
above. The residual ``all other'' cost category was divided into 
subcategories, using U.S. Department of Commerce data sources for 
the nursing home industry. Relationships from the 1997 Business 
Expenditures Survey and data from the 1997 Annual Input-Output 
tables were used to allocate the all other cost category.
    Below we describe the source of the main category weights and 
their subcategories in the proposed 1997-based market basket.
    <bullet> Wages and Salaries: The wages and salaries cost 
category is derived using 1997 SNF Medicare Cost Reports. The share 
was determined using wages and salaries from Worksheet S-3, part II 
and total expenses from Worksheet B. This share represents the wage 
and salary share of costs for employees of the nursing home, and 
does not include the wages and salaries from contract labor, which 
is allocated to wages and salaries at a later step.
    <bullet> Employee Benefits: The weight for employee benefits was 
determined using 1997 Medicare Cost Reports. The share was derived 
using wage-related costs from Worksheet S-3, part II.
    <bullet> Contract Labor: The weight for the contract labor cost 
category was derived using 1997 Medicare Cost Reports. For the 
proposed 1997-based SNF market basket, we used an edited group of 
cost reports with data filled in for contract labor on Worksheet S-
3, part II. This methodology differed from that of the 1992 SNF 
market basket (where we estimated contract labor costs using data 
from Worksheet A) since Worksheet S-3, part II, was not available in 
the 1992 Cost Reports. This methodology produces results that are 
similar to the contract labor share in the 1997 Business 
Expenditures Survey. Contract labor was not available in the 1992 
Asset and Expenditure Survey. As explained in the preamble, contract 
labor costs were distributed between the wages and salaries and 
employee benefits cost categories, under the assumption that 
contract costs should move at the same rate as direct labor costs 
even though unit labor cost levels may be different.
    <bullet> Pharmaceuticals: The pharmaceuticals cost weight was 
derived from 1997 SNF Medicare Cost Reports. This share was 
calculated using non-salary costs from the pharmacy and drugs 
charged to patients' cost centers from Worksheet A.
    <bullet> Capital-Related: The weight for the overall capital-
related expenses cost category was derived using 1997 SNF Medicare 
Cost Report data from Worksheet B. The subcategory and vintage 
weights within the overall capital-related expenses were derived 
using additional data sources. The methodology for deriving these 
weights is described below.
    In determining the subcategory weights for capital, we used a 
combination of information from the 1997 SNF Medicare Cost Reports 
and the 1997 Census Business Expenditures Survey. We estimated the 
depreciation expense share of capital-related expenses from the SNF 
Medicare Cost Reports using data from edited cost reports with data 
completed on Worksheet G. For the 1992-based SNF market basket, we 
had used depreciation expenses from the 1992 Asset

[[Page 24034]]

and Expenditure Survey. When we calculated the ratio of depreciation 
to wages from the 1997 SNF Medicare Cost Reports, the result was 
consistent with the ratio from the 1997 Business Expenditures 
Survey. The distribution between building and fixed equipment and 
movable equipment was determined from the 1997 Business Expenditures 
Survey. From these calculations, depreciation expenses (not 
including depreciation expenses implicit from leases) were estimated 
to be 33.2 percent of total capital-related expenditures in 1997.
    The interest expense share of capital-related expenses was also 
derived from the same edited 1997 SNF Medicare Cost Reports. 
Interest expenses are not identifiable in the 1997 Business 
Expenditures Survey. We determined the split of interest expense 
between for-profit and not-for-profit facilities based on the 
distribution of long-term debt outstanding by type of SNF (for-
profit or not-for-profit) from the 1997 SNF Medicare Cost Reports. 
Interest expense (not including interest expenses implicit from 
leases) was estimated to be 24.3 percent of total capital-related 
expenditures in 1997.
    We used the 1997 Business Expenditures Survey to estimate the 
proportion of capital-related expenses attributable to leasing 
building and fixed and movable equipment. This share was estimated 
to be 34.9 percent of capital-related expenses in 1997. The split 
between fixed and movable lease expenses was directly available from 
the 1997 Business Expenditures Survey. We used this split, and the 
distribution of depreciation and interest calculated above to 
distribute leases among these cost categories. The remaining 
residual is considered to be other capital-related expenses 
(insurance, taxes, other). Other capital-related expenses were 
estimated to be 7.7 percent of total capital-related expenditures in 
1997.
    Table A-1 shows the capital-related expense distribution 
(including expenses from leases) in the proposed 1997 SNF PPS market 
basket and the 1992 SNF market basket.

            Table A-1.--Capital-Related Expense Distribution
------------------------------------------------------------------------
                                                          Proposed 1997-
                                          1992-based SNF     based SNF
                                             capital-        capital-
                                              related         related
                                            expenses *      expenses *
------------------------------------------------------------------------
Total...................................           100.0           100.0
Depreciation............................            60.5            53.3
Building and Fixed Equipment............            42.1            36.5
Movable equipment.......................            18.4            16.8
Interest................................            32.6            39.0
Other capital-related expense...........             6.9            7.7
------------------------------------------------------------------------
* As a percent of Total Capital-Related Expenses.

    As explained in section III.B of the preamble, our methodology 
for determining the price change of capital-related expenses 
accounts for the vintage nature of capital, which is the acquisition 
and use of capital over time. In order to capture this vintage 
nature, the price proxies must be vintage-weighted. The 
determination of these vintage weights occurs in two steps. First, 
we must determine the expected useful life of capital and debt 
instruments in SNFs. Second, we must identify the proportion of 
expenditures within a cost category that are attributable to each 
individual year over the useful life of the relevant capital assets, 
or the vintage weights.
    The derivation of useful life of capital is explained in detail 
in the May 12, 1998 interim final rule (63 FR 26252). The useful 
lives for the proposed 1997-based SNF market basket are the same as 
the 1992-based SNF market basket. The data source that was 
previously used to develop the useful lives of capital is no longer 
available and a suitable replacement has not been identified. We 
welcome comments on any data sources that would provide the 
necessary information for determining useful lives of capital and 
debt instruments.
    Given the expected useful life of capital and debt instruments, 
we must determine the proportion of capital expenditures 
attributable to each year of the expected useful life by cost 
category. These proportions represent the vintage weights. We were 
not able to find an historical time series of capital expenditures 
by SNFs. Therefore, we approximated the capital expenditure patterns 
of SNFs over time using alternative SNF data sources. For building 
and fixed equipment, we used the stock of beds in nursing homes from 
the HCFA National Health Accounts for 1962 through 1997. We then 
used the change in the stock of beds each year to approximate 
building and fixed equipment purchases for that year. This procedure 
assumes that bed growth reflects the growth in capital-related costs 
in SNFs for building and fixed equipment. We believe this assumption 
is reasonable since the number of beds reflects the size of the SNF, 
and as the SNF adds beds, it also adds fixed capital.
    For movable equipment, we used available SNF data to capture the 
changes in intensity of SNF services that would cause SNFs to 
purchase movable equipment. We estimated the change in intensity as 
the trend in the ratio of non-therapy ancillary costs to routine 
costs from the 1989 through 1997 SNF Medicare Cost Reports. We 
estimated this ratio for 1962 through 1988 using regression 
analysis. The time series of the ratio of non-therapy ancillary 
costs to routine costs for SNFs measures changes in intensity in SNF 
services, which are assumed to be associated with movable equipment 
purchase patterns. The assumption here is that as non-therapy 
ancillary costs increase compared with routine costs, the SNF 
caseload becomes more complex and would require more movable 
equipment. Again, the lack of direct movable equipment purchase data 
for SNFs over time required us to use alternative SNF data sources. 
The resulting two time series, determined from beds and the ratio of 
non-therapy ancillary to routine costs, reflect real capital 
purchases of building and fixed equipment and movable equipment over 
time, respectively.
    To obtain nominal purchases, which are used to determine the 
vintage weights for interest, we converted the two real capital 
purchase series from 1963 through 1997 determined above to nominal 
capital purchase series using their respective price proxies (Boeckh 
institutional construction index and PPI for machinery and 
equipment). We then combined the two nominal series into one nominal 
capital purchase series for 1963 through 1997. Nominal capital 
purchases are needed for interest vintage weights to capture the 
value of the debt instrument.
    Once these capital purchase time series were created for 1963 
through 1997, we averaged different periods to obtain an average 
capital purchase pattern over time. For building and fixed equipment 
we averaged thirteen 23-year periods, for movable equipment we 
averaged twenty-six 10-year periods, and for interest we averaged 
fourteen 22-year periods. The vintage weight for a given year is 
calculated by dividing the capital purchase amount in any given year 
by the total amount of purchases during the expected useful life of 
the equipment or debt instrument. This methodology was described in 
full in the May 12, 1998 Federal Register (63 FR 26252). The 
resulting vintage weights for each of these cost categories are 
shown in Table A-2.

[[Page 24035]]



  Appendix Table A-2.--Vintage Weights for Proposed 1997-Based SNF PPS
                      Capital-Related Price Proxies
------------------------------------------------------------------------
                                       Building
                Year                   and fixed    Movable    Interest
                                       equipment   equipment
------------------------------------------------------------------------
1...................................       0.082       0.083       0.025
2...................................       0.086       0.088       0.028
3...................................       0.085       0.089       0.031
4...................................       0.083       0.090       0.034
5...................................       0.077       0.091       0.038
6...................................       0.069       0.097       0.042
7...................................       0.063       0.106       0.046
8...................................       0.060       0.111       0.049
9...................................       0.050       0.116       0.051
10..................................       0.040       0.128       0.051
11..................................       0.040  ..........       0.052
12..................................       0.036  ..........       0.053
13..................................       0.030  ..........       0.051
14..................................       0.020  ..........       0.050
15..................................       0.016  ..........       0.049
16..................................       0.014  ..........       0.048
17..................................       0.012  ..........       0.049
18..................................       0.017  ..........       0.050
19..................................       0.018  ..........       0.051
20..................................       0.023  ..........       0.051
21..................................       0.025  ..........       0.049
22..................................       0.027  ..........       0.051
23..................................       0.029  ..........  ..........
                                     -----------------------------------
      Total.........................       1.000       1.000      1.000
------------------------------------------------------------------------
Sources: 1997 SNF Medicare Cost Reports; HCFA, National Health Accounts.
 
Note: Totals may not sum to 1.000 due to rounding.

    <bullet> All Other: Subcategory weights for the All Other 
category were derived using information from two U.S. Department of 
Commerce data sources. Weights for the three utilities cost 
categories, as well as that for telephone services, were derived 
from the 1997 Business Expenditure Survey. Weights for other cost 
categories were derived from the 1997 Annual Input-Output tables.

III. Price Proxies Used To Measure Cost Category Growth

A. Wages and Salaries

    For measuring price growth in the wages and salaries cost 
component of the 1997-based SNF market basket, we propose using the 
percentage change in the ECI for wages and salaries for private 
nursing homes. The ECI for wages and salaries for private nursing 
homes is a fixed-weight index that measures the rate of change in 
employee wage rates per hour worked. It measures pure price change 
and is not affected by shifts among occupations. Average Hourly 
Earnings (AHE) confounds changes in the proportion of different 
occupations with changes in earnings levels for a given occupation 
and, thus, is an inferior price proxy for our purpose. Even so, 
using the AHE for nursing homes has little effect on the percentage 
change in the overall proposed 1997 SNF market basket. If we used 
the AHE instead of the ECI, the average annual growth rate between 
1995 and 2000 would have been higher by 0.1 percentage points per 
year. This difference reflects skill mix shifts that would be 
reflected in other factors of an update framework as conceptualized 
in section IV of the preamble. In addition, while the ECI is for all 
nursing homes, not just SNFs, 77 percent of employment in the 
nursing home industry in 1998 and 1999 was in SNFs. While this wage 
measure includes other nursing homes in addition to skilled nursing 
facilities, we believe it adequately reflects the wage changes 
occurring in SNFs. It is also the only acceptable statistical source 
for nursing home wages that met our criteria of reliability, 
timeliness, accessibility, and relevance.

B. Employee Benefits

    For measuring price growth in the proposed 1997-based market 
basket, the percentage change in the ECI for benefits for private 
nursing homes is used. The ECI for benefits for private nursing 
homes is also a fixed-weight index that measures pure price change 
and is not affected by shifts in occupation. Again, we believe that 
the ECI for nursing homes is the most acceptable and appropriate 
benefit series available from reliable, timely, accessible, and 
relevant statistical sources.

C. All Other Expenses

    <bullet> Nonmedical professional fees: The ECI for compensation 
for Private Industry Professional, Technical, and Specialty Workers 
is used to measure price changes in nonmedical professional fees.
    <bullet> Electricity: For measuring price change in the 
electricity cost category, the PPI for Commercial Electric Power is 
used.
    <bullet> Fuels, nonhighway: For measuring price change in the 
Fuels, Nonhighway cost category, the PPI for Commercial Natural Gas 
is used.
    <bullet> Water and Sewerage: For measuring price change in the 
Water and Sewerage cost category, the CPI-U (Consumer Price Index 
for All Urban Consumers) for Water and Sewerage is used.
    <bullet> Food-wholesale purchases: For measuring price change in 
the Food-wholesale purchases cost category, the PPI for Processed 
Foods is used.
    <bullet> Food-retail purchases: For measuring price change in 
the Food-retail purchases cost category, the CPI-U for Food Away 
From Home is used. This reflects the use of contract food service by 
some SNFs.
    <bullet> Pharmaceuticals: For measuring price change in the 
Pharmaceuticals cost category, the PPI for Prescription Drugs is 
used.
    <bullet> Chemicals: For measuring price change in the Chemicals 
cost category, the PPI for Industrial Chemicals is used.
    <bullet> Rubber and Plastics: For measuring price change in the 
Rubber and Plastics cost category, the PPI for Rubber and Plastic 
Products is used.
    <bullet> Paper Products: For measuring price change in the Paper 
Products cost category, the PPI for Converted Paper and Paperboard 
is used.
    <bullet> Miscellaneous Products: For measuring price change in 
the Miscellaneous Products cost category, the PPI for Finished Goods 
less Food and Energy is used. This represents a change from the 1992 
SNF market basket, in which the PPI for Finished Goods is used. Both 
food and energy are already adequately represented in separate cost 
categories and should not also be reflected in this cost category.
    <bullet> Telephone Services: The percentage change in the price 
of Telephone Services as measured by the CPI-U is applied to this 
component.
    <bullet> Labor-Intensive Services: For measuring price change in 
the Labor-Intensive Services cost category, the ECI for Compensation 
for Private Service Occupations is used.
    <bullet> Non Labor-Intensive Services: For measuring price 
change in the Non Labor-Intensive Services cost category, the CPI-U 
for All Items is used.

D. Capital-Related

    All capital-related expense categories have the same price 
proxies as those used in the 1992-based SNF PPS market basket 
described in the May 12, 1998 Federal Register (63 FR 26252). The 
price proxies for the SNF capital-related expenses are described 
below:
    <bullet> Depreciation--Building and Fixed Equipment: The Boeckh 
Institutional Construction Index for unit prices of fixed assets.
    <bullet> Depreciation--Movable Equipment: The PPI for Machinery 
and Equipment.
    <bullet> Interest--Government and Nonprofit SNFs: The Average 
Yield for Municipal Bonds from the Bond Buyer Index of 20 bonds. 
HCFA input price indexes, including this rebased SNF index, 
appropriately reflect the rate of change in the price proxy and not 
the level of the price proxy. While SNFs may face different interest 
rate levels than those included in the Bond Buyer Index, the rate of 
change between the two is not significantly different.
    <bullet> Interest--For-profit SNFs: The Average Yield for 
Moody's AAA Corporate Bonds. Again, the proposed rebased SNF index 
focuses on the rate of change in this interest rate and not the 
level of the interest rate.
    <bullet> Other Capital-related Expenses: The CPI-U for 
Residential Rent.

  Appendix Table A-3.--A Comparison of Price Proxies Used in the 1992-
  Based and Proposed 1997-Based Skilled Nursing Facility Market Baskets
------------------------------------------------------------------------
                                1992-based price      1997-based price
        Cost category                 proxy                 proxy
------------------------------------------------------------------------
Wages and Salaries..........  ECI for Wages and     Same.
                               Salaries for
                               Private Nursing
                               Homes.
Employee Benefits...........  ECI for Benefits for  Same.
                               Private Nursing
                               Homes.

[[Page 24036]]

 
Nonmedical professional fees  ECI for Compensation  Same.
                               for Private
                               Professional and
                               Technical Workers.
Electricity.................  PPI for Commercial    Same.
                               Electric Power.
Fuels.......................  PPI for Commercial    Same.
                               Natural Gas.
Water and sewerage..........  CPI-U for Water and   Same.
                               Sewerage.
Food--Wholesale purchases...  PPI--Processed Foods  Same.
Food--Retail purchases......  CPI-U--Food Away      Same.
                               From Home.
Pharmaceuticals.............  PPI for Prescription  Same.
                               Drugs.
Chemicals...................  PPI for Industrial    Same.
                               Chemicals.
Rubber and plastics.........  PPI for Rubber and    Same.
                               Plastic Products.
Paper products..............  PPI for Converted     Same.
                               Paper and
                               Paperboard.
Miscellaneous products......  PPI for Finished      PPI for Finished
                               Goods.                Goods less Food and
                                                     Energy.
Telephone services..........  CPI-U for Telephone   Same.
                               Services.
Labor-intensive services....  ECI for Compensation  Same.
                               for private service
                               occupations.
Non labor-intensive services  CPI-U for All Items.  Same.
Depreciation: Building and    Boeckh Institutional  Same.
 Fixed Equipment.              Construction Index.
Depreciation: Movable         PPI for Machinery     Same.
 Equipment.                    and Equipment.
Interest: Government and      Average Yield         Same.
 Nonprofit SNFs.               Municipal Bonds
                               (Bond Buyer Index-
                               20 bonds).
Interest: For-profit SNFs...  Average Yield         Same.
                               Moody's AAA Bonds.
Other Capital-related         CPI-U for             Same.
 Expenses.                     Residential Rent.
------------------------------------------------------------------------


(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare-Hospital Insurance Program; and No. 93.774, Medicare-
Supplementary Medical Insurance Program)
    Dated: March 8, 2001.
Michael McMullan,
Acting Deputy Administrator, Health Care Financing Administration.
    Dated: April 23, 2001.
Tommy G. Thompson,
Secretary.

[FR Doc. 01-11560 Filed 5-9-01; 8:45 am]
BILLING CODE 4120-01-P