[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Proposed Rules]
[Pages 25918-25960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1214]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 413



 Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2009; Proposed Rule

Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 413

[CMS-1534-P]
RIN 0938-AP11


Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities for FY 2009

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the payment rates used under 
the prospective payment system (PPS) for skilled nursing facilities 
(SNFs), for fiscal year (FY) 2009. In addition, it would recalibrate 
the case-mix indexes so that they more accurately reflect parity in 
expenditures related to the implementation of case-mix refinements in 
January 2006. It also discusses our ongoing analysis of nursing home 
staff time measurement data collected in the Staff Time and Resource 
Intensity Verification (STRIVE) project. Finally, the proposed rule 
would make technical corrections in the regulations text with respect 
to Medicare bad debt payments to SNFs and the reference to the 
definition of urban and rural as applied to SNFs.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 30, 2008.

ADDRESSES: In commenting, please refer to file code CMS-1534-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.regulations.gov. Follow the 
instructions for ``Comment or Submission'' and enter the file code to 
find the document accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1534-P, P.O. Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1534-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses.
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the address indicated as appropriate for hand or 
courier delivery may be delayed and received after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Ellen Berry, (410) 786-4528 (for 
information related to clinical issues). Jeanette Kranacs, (410) 786-
9385 (for information related to the development of the payment rates 
and case-mix indexes). Bill Ullman, (410) 786-5667 (for information 
related to level of care determinations, consolidated billing, and 
general information).

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1534-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.
    To assist readers in referencing sections contained in this 
document, we are providing the following Table of Contents.

Table of Contents

I. Background
    A. Current System for Payment of SNF Services Under Part A of 
the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 (BBA) for 
Updating the Prospective Payment System for Skilled Nursing 
Facilities
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (BBRA)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)
    E. The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA)
    F. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rate
    2. Rate Updates Using the Skilled Nursing Facility Market Basket 
Index
II. Annual Update of Payment Rates Under the Prospective Payment 
System for Skilled Nursing Facilities
    A. Federal Prospective Payment System
    1. Costs and Services Covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    B. Case-Mix Adjustments
    1. Background
    2. Development of the Case-Mix Indexes
    C. Wage Index Adjustment to Federal Rates
    1. Clarification of New England Deemed Counties
    2. Multi-Campus Hospital Wage Index Data
    D. Updates to Federal Rates
    E. Relationship of RUG-III Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    F. Example of Computation of Adjusted PPS Rates and SNF Payment

[[Page 25919]]

    G. Other Issues
    1. Staff Time and Resource Intensity Verification (STRIVE) 
Project
    2. Minimum Data Set (MDS) 3.0
    3. Integrated Post Acute Care Payment
    H. Miscellaneous Technical Corrections and Clarifications
    1. Bad Debt Payments
    2. Additional Clarifications
III. The Skilled Nursing Facility Market Basket Index
    A. Use of the Skilled Nursing Facility Market Basket Percentage
    B. Market Basket Forecast Error Adjustment
    C. Federal Rate Update Factor
IV. Consolidated Billing
V. Application of the SNF PPS to SNF Services Furnished by Swing-Bed 
Hospitals
VI. Provisions of the Proposed Rule
VII. Collection of Information Requirements
VIII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered
    D. Accounting Statement
    E. Conclusion
Regulation Text
Addendum: FY 2009 CBSA-Based Wage Index Tables (Tables 8 & 9)

Abbreviations

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

AIDS Acquired Immune Deficiency Syndrome
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. 106-554
CAH Critical Access Hospital
CARE Continuity Assessment Record and Evaluation
CBSA Core-Based Statistical Area
CFR Code of Federal Regulations
CMI Case-Mix Index
CMS Centers for Medicare & Medicaid Services
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
HAC Hospital-Acquired Condition
HCPCS Healthcare Common Procedure Coding System
HIPPS Health Insurance Prospective Payment System
HIT Health Information Technology
IFC Interim Final Rule with Comment Period
IPPS Hospital Inpatient Prospective Payment System
MDS Minimum Data Set
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub.L. 108-173
MSA Metropolitan Statistical Area
MS-DRG Medicare Severity Diagnosis-Related Group
NRST Non-Resident Specific Time
NTA Non-Therapy Ancillary
OIG Office of the Inspector General
OMB Office of Management and Budget
OMRA Other Medicare Required Assessment
PAC-PRD Post-Acute Care Payment Reform Demonstration
PPS Prospective Payment System
RAI Resident Assessment Instrument
RAP Resident Assessment Protocol
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Pub. L. 96-354
RHC Rural Health Clinic
RIA Regulatory Impact Analysis
RUG-III Resource Utilization Groups, Version III
RUG-53 Refined 53-Group RUG-III Case-Mix Classification System
RST Resident Specific Time
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
STM Staff Time Measurement
STRIVE Staff Time and Resource Intensity Verification
UMRA Unfunded Mandates Reform Act, Pub. L. 104-4
VBP Value-Based Purchasing

I. Background

    [If you choose to comment on issues in this section, please include 
the caption ``BACKGROUND'' at the beginning of your comments.]
    Annual updates to the prospective payment system (PPS) rates for 
skilled nursing facilities (SNFs) are required by section 1888(e) of 
the Social Security Act (the Act), as added by section 4432 of the 
Balanced Budget Act of 1997 (BBA), and amended by the Medicare, 
Medicaid, and State Children's Health Insurance Program (SCHIP) 
Balanced Budget Refinement Act of 1999 (BBRA), the Medicare, Medicaid, 
and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), and 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA). Our most recent annual update occurred in a final rule (72 
FR 43412, August 3, 2007) that set forth updates to the SNF PPS payment 
rates for fiscal year (FY) 2008. We subsequently published two 
correction notices (72 FR 55085, September 28, 2007, and 72 FR 67652, 
November 30, 2007) with respect to those payment rate updates.

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

    Section 4432 of the BBA amended section 1888 of the Act to provide 
for the implementation of a per diem PPS for SNFs, covering all costs 
(routine, ancillary, and capital-related) of covered SNF services 
furnished to beneficiaries under Part A of the Medicare program, 
effective for cost reporting periods beginning on or after July 1, 
1998. In this proposed rule, we propose to update the per diem payment 
rates for SNFs for FY 2009. Major elements of the SNF PPS include:
    <bullet> Rates. As discussed in section I.F.1. of this proposed 
rule, we established per diem Federal rates for urban and rural areas 
using allowable costs from FY 1995 cost reports. These rates also 
included an estimate of the cost of services that, before July 1, 1998, 
had been paid under Part B but were furnished to Medicare beneficiaries 
in a SNF during a Part A covered stay. We adjust the rates annually 
using a SNF market basket index, and we adjust them by the hospital 
inpatient wage index to account for geographic variation in wages. We 
also apply a case-mix adjustment to account for the relative resource 
utilization of different patient types. This adjustment utilizes a 
refined, 53-group version of the Resource Utilization Groups, version 
III (RUG-III) case-mix classification system, based on information 
obtained from the required resident assessments using the Minimum Data 
Set (MDS) 2.0. Additionally, as noted in the August 4, 2005 final rule 
(70 FR 45028), the payment rates at various times have also reflected 
specific legislative provisions, including section 101 of the BBRA, 
sections 311, 312, and 314 of the BIPA, and section 511 of the MMA.
    <bullet> Transition. Under sections 1888(e)(1)(A) and (e)(11) of 
the Act, the SNF PPS included an initial, three-phase transition that 
blended a facility-specific rate (reflecting the individual facility's 
historical cost experience) with the Federal case-mix adjusted rate. 
The transition extended through the facility's first three cost 
reporting periods under the PPS, up to and including the one that began 
in FY 2001. Thus, the SNF PPS is no longer operating under the 
transition, as all facilities have been paid at the full Federal rate 
effective with cost reporting periods beginning in FY 2002. As we now 
base payments entirely on the adjusted Federal per diem rates, we no 
longer include adjustment factors related to facility-specific rates 
for the coming FY.
    <bullet> Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the RUG-III classification is based, in part, on the beneficiary's need 
for skilled nursing

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care and therapy, we have attempted, where possible, to coordinate 
claims review procedures with the output of beneficiary assessment and 
RUG-III classifying activities. This approach includes an 
administrative presumption that utilizes a beneficiary's initial 
classification in one of the upper 35 RUGs of the refined 53-group 
system to assist in making certain SNF level of care determinations, as 
discussed in greater detail in section II.E. of this proposed rule.
    <bullet> Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills to its fiscal intermediary or Medicare Administrative Contractor 
for almost all of the services that its residents receive during the 
course of a covered Part A stay. In addition, this provision places 
with the SNF the Medicare billing responsibility for physical, 
occupational, and speech-language therapy that the resident receives 
during a noncovered stay. The statute excludes a small list of services 
from the consolidated billing provision (primarily those of physicians 
and certain other types of practitioners), which remain separately 
billable under Part B when furnished to a SNF's Part A resident. A more 
detailed discussion of this provision appears in section IV. of this 
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. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section V. of this proposed rule.

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

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

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

    There were several provisions in the BBRA that resulted in 
adjustments to the SNF PPS. We described these provisions in detail in 
the final rule that we published in the Federal Register on July 31, 
2000 (65 FR 46770). In particular, section 101(a) of the BBRA provided 
for a temporary 20 percent increase in the per diem adjusted payment 
rates for 15 specified RUG-III groups. In accordance with section 
101(c)(2) of the BBRA, this temporary payment adjustment expired on 
January 1, 2006, upon the implementation of case-mix refinements (see 
section I.F.1. of this proposed rule). We included further information 
on BBRA provisions that affected the SNF PPS in Program Memorandums A-
99-53 and A-99-61 (December 1999).
    Also, section 103 of the BBRA designated certain additional 
services for exclusion from the consolidated billing requirement, as 
discussed in section IV. of this proposed rule. Further, for swing-bed 
hospitals with more than 49 (but less than 100) beds, section 408 of 
the BBRA provided for the repeal of certain statutory restrictions on 
length of stay and aggregate payment for patient days, effective with 
the end of the SNF PPS transition period described in section 
1888(e)(2)(E) of the Act. In the July 31, 2001 final rule (66 FR 
39562), we made conforming changes to the regulations at Sec.  
413.114(d), effective for services furnished in cost reporting periods 
beginning on or after July 1, 2002, to reflect section 408 of the BBRA.

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

    The BIPA also included several provisions that resulted in 
adjustments to the SNF PPS. We described these provisions in detail in 
the final rule that we published in the Federal Register on July 31, 
2001 (66 FR 39562). In particular:
    <bullet> Section 203 of the BIPA exempted CAH swing-beds from the 
SNF PPS. We included further information on this provision in Program 
Memorandum A-01-09 (Change Request <greek-i>1509), issued January 16, 
2001, which is available online at http://www.cms.hhs.gov/transmittals/downloads/a0109.pdf.
    <bullet> Section 311 of the BIPA revised the statutory update 
formula for the SNF market basket, and also directed us to conduct a 
study of alternative case-mix classification systems for the SNF PPS. 
In 2006, we submitted a report to the Congress on this study, which is 
available online at http://www.cms.hhs.gov/SNFPPS/Downloads/RC__2006_PC__PPSSNF.pdf.
    <bullet> Section 312 of the BIPA provided for a temporary increase 
of 16.66 percent in the nursing component of the case-mix adjusted 
Federal rate for services furnished on or after April 1, 2001, and 
before October 1, 2002. The add-on is no longer in effect. This section 
also directed the Government Accountability Office (GAO) to conduct an 
audit of SNF nursing staff ratios and submit a report to the Congress 
on whether the temporary increase in the nursing component should be 
continued. The report (GAO-03-176), which GAO issued in November 2002, 
is available online at http://www.gao.gov/new.items/d03176.pdf.
    <bullet> Section 313 of the BIPA repealed the consolidated billing 
requirement for services (other than physical, occupational, and 
speech-language therapy) furnished to SNF residents during noncovered 
stays, effective January 1, 2001. (A more detailed discussion of this 
provision appears in section IV. of this proposed rule.)
    <bullet> Section 314 of the BIPA corrected an anomaly involving 
three of the RUGs that the BBRA had designated to receive the temporary 
payment adjustment discussed above in section I.C. of this proposed 
rule. (As noted previously, in accordance with section 101(c)(2) of the 
BBRA, this temporary payment adjustment expired upon the implementation 
of case-mix refinements on January 1, 2006.)
    <bullet> Section 315 of the BIPA authorized us to establish a 
geographic reclassification procedure that is specific to SNFs, but 
only after collecting the data necessary to establish a SNF wage index 
that is based on wage data from nursing homes. To date, this has proven 
to be infeasible due to the volatility of existing SNF wage data and 
the significant amount of resources that

[[Page 25921]]

would be required to improve the quality of that data.
    We included further information on several of the BIPA provisions 
in Program Memorandum A-01-08 (Change Request <greek-i>1510), issued 
January 16, 2001, which is available online at www.cms.hhs.gov/transmittals/downloads/a0108.pdf.

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

    The MMA included a provision that results in a further adjustment 
to the SNF PPS. Specifically, section 511 of the MMA amended section 
1888(e)(12) of the Act, to provide for a temporary increase of 128 
percent in the PPS per diem payment for any SNF resident with Acquired 
Immune Deficiency Syndrome (AIDS), effective with services furnished on 
or after October 1, 2004. This special AIDS add-on was to remain in 
effect until ``* * * such date as the Secretary certifies that there is 
an appropriate adjustment in the case mix. * * *'' The AIDS add-on is 
also discussed in Program Transmittal <greek-i>160 (Change Request 
<greek-i>3291), issued on April 30, 2004, which is available online at 
http://www.cms.hhs.gov/transmittals/downloads/r160cp.pdf. As discussed 
in the SNF PPS final rule for FY 2006 (70 FR 45028, August 4, 2005), we 
did not address the certification of the AIDS add-on with the 
implementation of the case-mix refinements, thus allowing the temporary 
add-on payment created by section 511 of the MMA to continue in effect.
    For the limited number of SNF residents that qualify for the AIDS 
add-on, implementation of this provision results in a significant 
increase in payment. For example, using FY 2006 data, we identified 
less than 2,700 SNF residents with a diagnosis code of 042 (Human 
Immunodeficiency Virus (HIV) Infection). For FY 2009, an urban facility 
with a resident with AIDS in RUG group ``SSA'' would have a case-mix 
adjusted payment of almost $246.55 (see Table 4) before the application 
of the MMA adjustment. After an increase of 128 percent, this urban 
facility would receive a case-mix adjusted payment of approximately 
$562.13.
    In addition, section 410 of the MMA contained a provision that 
excluded from consolidated billing certain practitioner and other 
services furnished to SNF residents by rural health clinics (RHCs) and 
Federally Qualified Health Centers (FQHCs). (Further information on 
this provision appears in section IV. of this proposed rule.)

F. Skilled Nursing Facility Prospective Payment--General Overview

    We implemented the Medicare SNF PPS effective with cost reporting 
periods beginning on or after July 1, 1998. This PPS pays SNFs through 
prospective, case-mix adjusted per diem payment rates applicable to all 
covered SNF services. These payment rates cover all costs of furnishing 
covered skilled nursing services (routine, ancillary, and capital-
related costs) other than costs associated with approved educational 
activities. Covered SNF services include post-hospital services for 
which benefits are provided under Part A and all items and services 
that, before July 1, 1998 had been paid under Part B (other than 
physician and certain other services specifically excluded under the 
BBA) but furnished to Medicare beneficiaries in a SNF during a covered 
Part A stay. A comprehensive discussion of these provisions appears in 
the May 12, 1998 interim final rule (63 FR 26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the PPS. We developed the Federal payment rates using allowable costs 
from hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of the PPS (the 15-month period beginning July 
1, 1998) using a SNF market basket index, and then standardized for the 
costs of facility differences in case-mix and for geographic variations 
in wages. In compiling the database used to compute the Federal payment 
rates, we excluded those providers that received new provider 
exemptions from the routine cost limits, as well as costs related to 
payments for exceptions to the routine cost limits. Using the formula 
that the BBA prescribed, we set the Federal rates at a level equal to 
the weighted mean of freestanding costs plus 50 percent of the 
difference between the freestanding mean and weighted mean of all SNF 
costs (hospital-based and freestanding) combined. We computed and 
applied separately the payment rates for facilities located in urban 
and rural areas. In addition, we adjusted the portion of the Federal 
rate attributable to wage-related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix, using a classification system that accounts for the 
relative resource utilization of different patient types. The RUG-III 
classification system uses beneficiary assessment data from the Minimum 
Data Set (MDS) completed by SNFs to assign beneficiaries to one of 53 
RUG-III groups. The original RUG-III case-mix classification system 
included 44 groups. However, under refinements that became effective on 
January 1, 2006, we added nine new groups--comprising a new 
Rehabilitation plus Extensive Services category--at the top of the RUG 
hierarchy. The May 12, 1998 interim final rule (63 FR 26252) included a 
detailed description of the original 44-group RUG-III case-mix 
classification system. A comprehensive description of the refined 53-
group RUG-III case-mix classification system (RUG-53) appeared in the 
proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 
FR 45026, August 4, 2005).
    Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the 
Act, the Federal rates in this proposed rule reflect an update to the 
rates that we published in the August 3, 2007 final rule for FY 2008 
(72 FR 43412) and the associated correction notices (on September 28, 
2007, 72 FR 55085, and November 30, 2007, 72 FR 67652), equal to the 
full change in the SNF market basket index. A more detailed discussion 
of the SNF market basket index and related issues appears in sections 
I.F.2. and III. of this proposed rule.
    2. Rate Updates Using the Skilled Nursing Facility Market Basket 
Index
    Section 1888(e)(5) of the Act requires us to establish a SNF market 
basket index that reflects changes over time in the prices of an 
appropriate mix of goods and services included in covered SNF services. 
We use the SNF market basket index to update the Federal rates on an 
annual basis. In the August 3, 2007, FY 2008 SNF PPS final rule (72 FR 
43425 through 43430), we revised and rebased the market basket, which 
included updating the base year from FY 1997 to FY 2004. The proposed 
FY 2009 market basket increase is 3.1 percent.
    In addition, as explained in the August 4, 2003, final rule for FY 
2004 (66 FR 46058) and in section III.B. of this proposed rule, the 
annual update of the payment rates includes, as appropriate, an 
adjustment to account for market basket forecast error. As described in 
the final rule for FY 2008,

[[Page 25922]]

the threshold percentage that serves to trigger an adjustment to 
account for market basket forecast error is 0.5 percentage point 
effective for FY 2008 and subsequent years. This adjustment takes into 
account the forecast error from the most recently available FY for 
which there is final data, and applies whenever the difference between 
the forecasted and actual change in the market basket exceeds a 0.5 
percentage point threshold. For FY 2007 (the most recently available FY 
for which there is final data), the estimated increase in the market 
basket index was 3.1 percentage points, while the actual increase was 
3.1 percentage points, resulting in no difference. Accordingly, as the 
difference between the estimated and actual amount of change does not 
exceed the 0.5 percentage point threshold, the payment rates for FY 
2009 do not include a forecast error adjustment. Table 1 below shows 
the forecasted and actual market basket amounts for FY 2007.

           Table 1.--Difference Between the Forecasted and Actual Market Basket Increases for FY 2007
----------------------------------------------------------------------------------------------------------------
                                                                Forecasted FY    Actual FY 2007      FY 2007
                            Index                               2007 Increase*     Increase**     Difference***
----------------------------------------------------------------------------------------------------------------
SNF..........................................................              3.1              3.1             0.0
----------------------------------------------------------------------------------------------------------------
*Published in Federal Register; based on second quarter 2006 Global Insight Inc. forecast (97 index).
**Based on the first quarter 2008 Global Insight Inc.forecast (97 index).
***The FY 2007 forecast error correction for the PPS Operating portion will be applied to the FY 2009 PPS update
  recommendations. Any forecast error less than 0.5 percentage points will not be reflected in the update
  recommendation.

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

    [If you choose to comment on issues in this section, please include 
the caption ``Annual Update'' at the beginning of your comments.]

A. Federal Prospective Payment System

    This proposed rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2008. 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
    In accordance with section 1888(e)(2)(B) of the Act, the Federal 
rates apply to all costs (routine, ancillary, and capital-related) of 
covered SNF services other than costs associated with approved 
educational activities as defined in Sec.  413.85. Under section 
1888(e)(2)(A)(i) of the Act, covered SNF services include post-hospital 
SNF services for which benefits are provided under Part A (the hospital 
insurance program), as well as all items and services (other than those 
services excluded by statute) that, before July 1, 1998, were paid 
under Part B (the supplementary medical insurance program) but 
furnished to Medicare beneficiaries in a SNF during a Part A covered 
stay. (These excluded service categories are discussed in greater 
detail in section V.B.2. of the May 12, 1998 interim final rule (63 FR 
26295 through 26297)).
2. Methodology Used for the Calculation of the Federal Rates
    The proposed FY 2009 rates would reflect an update using the full 
amount of the latest market basket index. The proposed FY 2009 market 
basket increase factor is 3.1 percent. A complete description of the 
multi-step process used to calculate Federal rates initially appeared 
in the May 12, 1998 interim final rule (63 FR 26252), as further 
revised in subsequent rules. We note that in accordance with section 
101(c)(2) of the BBRA, the previous temporary increases in the per diem 
adjusted payment rates for certain designated RUGs, as specified in 
section 101(a) of the BBRA and section 314 of the BIPA, are no longer 
in effect due to the implementation of case-mix refinements as of 
January 1, 2006. However, the temporary increase of 128 percent in the 
per diem adjusted payment rates for SNF residents with AIDS, enacted by 
section 511 of the MMA, remains in effect.
    We used the SNF market basket to adjust each per diem component of 
the Federal rates forward to reflect cost increases occurring between 
the midpoint of the Federal FY beginning October 1, 2007, and ending 
September 30, 2008, and the midpoint of the Federal FY beginning 
October 1, 2008, and ending September 30, 2009, to which the payment 
rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) of the 
Act, we update the payment rates for FY 2009 by a factor equal to the 
full market basket index percentage increase. (We note, however, that 
the President's budget currently includes a provision that would 
establish a zero percent market basket update for FYs 2009 through 
2011, and that the provisions outlined in this proposed rule would need 
to reflect any legislation that the Congress may enact to adopt that 
proposal.) We further adjust the rates by a wage index budget 
neutrality factor, described later in this section. Tables 2 and 3 
reflect the updated components of the unadjusted Federal rates for FY 
2009.

                            Table 2.--FY 2009 Unadjusted Federal Rate Per Diem--Urban
----------------------------------------------------------------------------------------------------------------
                                                  Nursing-- Case- Therapy-- Case- Therapy-- Non-
                 Rate component                         mix             mix          case-mix      Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................................         $151.30         $113.97          $15.00          $77.22
----------------------------------------------------------------------------------------------------------------


                            Table 3.--FY 2009 Unadjusted Federal Rate Per Diem--Rural
----------------------------------------------------------------------------------------------------------------
                                                  Nursing-- Case- Therapy-- Case- Therapy-- Non-
                 Rate component                         mix             mix          case-mix      Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................................         $144.55         $131.42          $16.04          $78.64
----------------------------------------------------------------------------------------------------------------


[[Page 25923]]

B. Case-Mix Adjustments

1. Background
    Section 1888(e)(4)(G)(i) of the Act requires the Secretary to make 
an adjustment to account for case-mix. The statute specifies that the 
adjustment is to reflect both a resident classification system that the 
Secretary establishes to account for the relative resource use of 
different patient types, as well as resident assessment and other data 
that the Secretary considers appropriate. In first implementing the SNF 
PPS (63 FR 26252, May 12, 1998), we developed the Resource Utilization 
Groups, version III (RUG-III) case-mix classification system, which 
tied the amount of payment to resident resource use in combination with 
resident characteristic information. Staff time measurement (STM) 
studies conducted in 1990, 1995, and 1997 provided information on 
resource use (time spent by staff members on residents) and resident 
characteristics that enabled us not only to establish RUG-III, but also 
to create case-mix indexes.
    Under the BBA, each update of the SNF PPS payment rates must 
include the case-mix classification methodology applicable for the 
coming Federal FY. As indicated in section I.F.1 of this proposed rule, 
the payment rates set forth herein reflect the use of the refined RUG-
53 system that we discussed in detail in the proposed and final rules 
for FY 2006.
    When we developed the refined RUG-53 system, we constructed new 
case-mix indexes, using the Staff Time Measurement (STM) study data 
that was collected during the 1990s and originally used in creating the 
SNF PPS case-mix classification system and case-mix indexes. In section 
II.B.2 of this proposed rule, we discuss further adjustments to those 
new case-mix indexes.
2. Development of the Case-Mix Indexes
    In the SNF PPS final rule for FY 2006 (70 FR 45032, August 4, 
2005), we introduced two refinements to the SNF PPS: nine new case-mix 
groups to account for the care needs of beneficiaries requiring both 
extensive medical and rehabilitation services, and an adjustment to 
reflect the variability in the use of non-therapy ancillaries (NTAs). 
We made these refinements by using the resource minute data from the 
original 44-group RUG-III model to create a new set of relative 
weights, or case-mix indexes (CMIs), for the 53-group RUG-III model. We 
then compared the CMIs for the two models to ensure that estimated 
total payments under the 53-group model would maintain parity to those 
that would have been made under the 44-group model.
    In conducting this analysis, we used FY 2001 claims data (the most 
current data available at the time) to compare the distribution of 
payment days by RUG category in the original, 44-group model with 
anticipated payments by RUG category in the refined 53-group model. 
Based on the results of this analysis, we adjusted the new CMIs upward 
by applying a parity adjustment factor, in order to ensure that the 
RUG-III model was expanded in a budget-neutral manner. We then applied 
a second adjustment to the CMIs to account for the variability in the 
use of NTA services. These two adjustments resulted in a combined 17.9 
percent increase in the CMIs that went into effect on January 1, 2006, 
as part of the case-mix refinement implementation. A detailed 
description of the methods used to make these two adjustments to the 
CMIs appears in the SNF PPS proposed rule for FY 2006 (70 FR 29077 
through 29078, May 19, 2005). However, we recognized that utilization 
patterns change over time, and in the FY 2006 final rule (70 FR 45031, 
August 4, 2005), we committed to monitoring the accuracy and 
effectiveness of the CMIs used in the 53-group model.
    In monitoring recent claims data, we observed that actual 
utilization patterns differed significantly from those we had projected 
using the 2001 data. In particular, the proportion of patients grouped 
in the highest paying RUG categories--combining high therapy with 
extensive services--greatly exceeded our projections. We have, 
therefore, used actual claims data to recalibrate both of the 
adjustments to the CMIs: the parity adjustment designed to make the 
change from the 44-group model to the 53-group model in a budget-
neutral manner, and the factor used to recognize the variability in NTA 
utilization.
    To determine the parity adjustment factor needed to re-establish 
budget neutrality, we compared simulated CY 2006 payments (using the 
most recent data available) for the 44-group and 53-group RUG-III 
models using the same methodology that we described in the SNF PPS 
proposed rule for FY 2006 (70 FR 29077 through 29078, May 19, 2005). 
Once we had identified the recalibrated parity adjustment factor 
necessary to re-establish budget neutrality, we then determined the 
recalibrated percentage adjustment that would be needed to reset the 
NTA component of the CMIs at the appropriate level specified in the SNF 
PPS final rule for FY 2006 (70 FR 45031, August 4, 2005). Under our 
proposed recalibration, these two adjustments, which had initially 
produced a combined increase of 17.9 percent in the FY 2006 refinement, 
would instead result in an overall 9.68 percent increase for FY 2009. 
Thus, for FY 2009, the aggregate impact of this proposed recalibration 
would be the difference between the original, FY 2006 total increase of 
17.9 percent and the recalibrated total increase of 9.68 percent, or a 
negative $770 million.
    It is extremely important to note that this adjustment, as 
proposed, would be made prospectively. However, we are responsible for 
maintaining the fiscal integrity of the SNF PPS, and by using the 
actual claims data, the SNF PPS would better reflect the resources 
used, resulting in more accurate payment. To that end, we have 
developed our proposed recalibration of the parity and NTA adjustments 
to the CMIs using actual claims distribution data. Although the 2001 
data were the best source available at the time the FY 2006 refinements 
were introduced, the 2006 data provide the most recent and a more 
accurate source of RUG-53 utilization. (We also note that pursuant to 
our ongoing commitment to monitoring the accuracy and effectiveness of 
the CMIs under the refined case-mix system, there may be further 
revisions to the recalibration as we develop the FY 2009 final rule, 
based on the data available at that time.)
    We note that the negative $770 million adjustment described above 
would be largely offset by the FY 2009 market basket adjustment factor 
of 3.1 percent, or $710 million, with a net result of a negative annual 
update of approximately $60 million. We are, nevertheless, confident 
that this proposed recalibration would achieve the goals of the 
refinement provision implemented in January 2006, and that, as a 
result, payments would better reflect those policies. We also wish to 
note that after it conducted a thorough review of SNF profit margins, 
MedPAC concluded that, in the aggregate, SNFs are operating on a sound 
financial basis. As evidenced by MedPAC's recent recommendation for a 
zero percent update for SNFs in FY 2009, we believe that this 
recalibration could be made without creating undue hardship on 
providers.
    We list the case-mix adjusted payment rates separately for urban 
and rural SNFs in Tables 4 and 5, with the corresponding case-mix 
values. These tables do not reflect the AIDS add-on enacted by section 
511 of the MMA, which we apply only after making all other adjustments 
(wage and case-mix).

[[Page 25924]]



                                     Table 4.--RUG-53 Case-Mix Adjusted Federal Rates and Associated Indexes--Urban
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Non-case     Non-case
                      RUG-III  category                          Nursing      Therapy      Nursing      Therapy    mix therapy      mix       Total rate
                                                                  index        index      component    component       comp      component
--------------------------------------------------------------------------------------------------------------------------------------------------------
RUX..........................................................         1.77         2.25       267.80       256.43  ...........        77.22       601.45
RUL..........................................................         1.31         2.25       198.20       256.43  ...........        77.22       531.85
RVX..........................................................         1.44         1.41       217.87       160.70  ...........        77.22       455.79
RVL..........................................................         1.24         1.41       187.61       160.70  ...........        77.22       425.53
RHX..........................................................         1.33         0.94       201.23       107.13  ...........        77.22       385.58
RHL..........................................................         1.27         0.94       192.15       107.13  ...........        77.22       376.50
RMX..........................................................         1.80         0.77       272.34        87.76  ...........        77.22       437.32
RML..........................................................         1.57         0.77       237.54        87.76  ...........        77.22       402.52
RLX..........................................................         1.22         0.43       184.59        49.01  ...........        77.22       310.82
RUC..........................................................         1.20         2.25       181.56       256.43  ...........        77.22       515.21
RUB..........................................................         0.92         2.25       139.20       256.43  ...........        77.22       472.85
RUA..........................................................         0.78         2.25       118.01       256.43  ...........        77.22       451.66
RVC..........................................................         1.14         1.41       172.48       160.70  ...........        77.22       410.40
RVB..........................................................         1.01         1.41       152.81       160.70  ...........        77.22       390.73
RVA..........................................................         0.77         1.41       116.50       160.70  ...........        77.22       354.42
RHC..........................................................         1.13         0.94       170.97       107.13  ...........        77.22       355.32
RHB..........................................................         1.03         0.94       155.84       107.13  ...........        77.22       340.19
RHA..........................................................         0.88         0.94       133.14       107.13  ...........        77.22       317.49
RMC..........................................................         1.07         0.77       161.89        87.76  ...........        77.22       326.87
RMB..........................................................         1.01         0.77       152.81        87.76  ...........        77.22       317.79
RMA..........................................................         0.97         0.77       146.76        87.76  ...........        77.22       311.74
RLB..........................................................         1.06         0.43       160.38        49.01  ...........        77.22       286.61
RLA..........................................................         0.79         0.43       119.53        49.01  ...........        77.22       245.76
SE3..........................................................         1.72  ...........       260.24  ...........        15.00        77.22       352.46
SE2..........................................................         1.38  ...........       208.79  ...........        15.00        77.22       301.01
SE1..........................................................         1.17  ...........       177.02  ...........        15.00        77.22       269.24
SSC..........................................................         1.14  ...........       172.48  ...........        15.00        77.22       264.70
SSB..........................................................         1.05  ...........       158.87  ...........        15.00        77.22       251.09
SSA..........................................................         1.02  ...........       154.33  ...........        15.00        77.22       246.55
CC2..........................................................         1.13  ...........       170.97  ...........        15.00        77.22       263.19
CC1..........................................................         0.99  ...........       149.79  ...........        15.00        77.22       242.01
CB2..........................................................         0.91  ...........       137.68  ...........        15.00        77.22       229.90
CB1..........................................................         0.84  ...........       127.09  ...........        15.00        77.22       219.31
CA2..........................................................         0.83  ...........       125.58  ...........        15.00        77.22       217.80
CA1..........................................................         0.75  ...........       113.48  ...........        15.00        77.22       205.70
IB2..........................................................         0.69  ...........       104.40  ...........        15.00        77.22       196.62
IB1..........................................................         0.67  ...........       101.37  ...........        15.00        77.22       193.59
IA2..........................................................         0.57  ...........        86.24  ...........        15.00        77.22       178.46
IA1..........................................................         0.53  ...........        80.19  ...........        15.00        77.22       172.41
BB2..........................................................         0.68  ...........       102.88  ...........        15.00        77.22       195.10
BB1..........................................................         0.65  ...........        98.35  ...........        15.00        77.22       190.57
BA2..........................................................         0.56  ...........        84.73  ...........        15.00        77.22       176.95
BA1..........................................................         0.48  ...........        72.62  ...........        15.00        77.22       164.84
PE2..........................................................         0.79  ...........       119.53  ...........        15.00        77.22       211.75
PE1..........................................................         0.77  ...........       116.50  ...........        15.00        77.22       208.72
PD2..........................................................         0.72  ...........       108.94  ...........        15.00        77.22       201.16
PD1..........................................................         0.70  ...........       105.91  ...........        15.00        77.22       198.13
PC2..........................................................         0.66  ...........        99.86  ...........        15.00        77.22       192.08
PC1..........................................................         0.65  ...........        98.35  ...........        15.00        77.22       190.57
PB2..........................................................         0.52  ...........        78.68  ...........        15.00        77.22       170.90
PB1..........................................................         0.50  ...........        75.65  ...........        15.00        77.22       167.87
PA2..........................................................         0.49  ...........        74.14  ...........        15.00        77.22       166.36
PA1..........................................................         0.46  ...........        69.60  ...........        15.00        77.22       161.82
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                     Table 5.--RUG-53 Case-mix Adjusted Federal Rates and Associated Indexes--Rural
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Non-case     Non-case
                       RUG-III category                          Nursing      Therapy      Nursing      Therapy    mix therapy      mix       Total rate
                                                                  Index        index      component    component       comp      component
--------------------------------------------------------------------------------------------------------------------------------------------------------
RUX..........................................................         1.77         2.25       255.85       295.70  ...........        78.64       630.19
RUL..........................................................         1.31         2.25       189.36       295.70  ...........        78.64       563.70
RVX..........................................................         1.44         1.41       208.15       185.30  ...........        78.64       472.09
RVL..........................................................         1.24         1.41       179.24       185.30  ...........        78.64       443.18
RHX..........................................................         1.33         0.94       192.25       123.53  ...........        78.64       394.42
RHL..........................................................         1.27         0.94       183.58       123.53  ...........        78.64       385.75
RMX..........................................................         1.80         0.77       260.19       101.19  ...........        78.64       440.02
RML..........................................................         1.57         0.77       226.94       101.19  ...........        78.64       406.77
RLX..........................................................         1.22         0.43       176.35        56.51  ...........        78.64       311.50

[[Page 25925]]

 
RUC..........................................................         1.20         2.25       173.46       295.70  ...........        78.64       547.80
RUB..........................................................         0.92         2.25       132.99       295.70  ...........        78.64       507.33
RUA..........................................................         0.78         2.25       112.75       295.70  ...........        78.64       487.09
RVC..........................................................         1.14         1.41       164.79       185.30  ...........        78.64       428.73
RVB..........................................................         1.01         1.41       146.00       185.30  ...........        78.64       409.94
RVA..........................................................         0.77         1.41       111.30       185.30  ...........        78.64       375.24
RHC..........................................................         1.13         0.94       163.34       123.53  ...........        78.64       365.51
RHB..........................................................         1.03         0.94       148.89       123.53  ...........        78.64       351.06
RHA..........................................................         0.88         0.94       127.20       123.53  ...........        78.64       329.37
RMC..........................................................         1.07         0.77       154.67       101.19  ...........        78.64       334.50
RMB..........................................................         1.01         0.77       146.00       101.19  ...........        78.64       325.83
RMA..........................................................         0.97         0.77       140.21       101.19  ...........        78.64       320.04
RLB..........................................................         1.06         0.43       153.22        56.51  ...........        78.64       288.37
RLA..........................................................         0.79         0.43       114.19        56.51  ...........        78.64       249.34
SE3..........................................................         1.72  ...........       248.63  ...........        16.04        78.64       343.31
SE2..........................................................         1.38  ...........       199.48  ...........        16.04        78.64       294.16
SE1..........................................................         1.17  ...........       169.12  ...........        16.04        78.64       263.80
SSC..........................................................         1.14  ...........       164.79  ...........        16.04        78.64       259.47
SSB..........................................................         1.05  ...........       151.78  ...........        16.04        78.64       246.46
SSA..........................................................         1.02  ...........       147.44  ...........        16.04        78.64       242.12
CC2..........................................................         1.13  ...........       163.34  ...........        16.04        78.64       258.02
CC1..........................................................         0.99  ...........       143.10  ...........        16.04        78.64       237.78
CB2..........................................................         0.91  ...........       131.54  ...........        16.04        78.64       226.22
CB1..........................................................         0.84  ...........       121.42  ...........        16.04        78.64       216.10
CA2..........................................................         0.83  ...........       119.98  ...........        16.04        78.64       214.66
CA1..........................................................         0.75  ...........       108.41  ...........        16.04        78.64       203.09
IB2..........................................................         0.69  ...........        99.74  ...........        16.04        78.64       194.42
IB1..........................................................         0.67  ...........        96.85  ...........        16.04        78.64       191.53
IA2..........................................................         0.57  ...........        82.39  ...........        16.04        78.64       177.07
IA1..........................................................         0.53  ...........        76.61  ...........        16.04        78.64       171.29
BB2..........................................................         0.68  ...........        98.29  ...........        16.04        78.64       192.97
BB1..........................................................         0.65  ...........        93.96  ...........        16.04        78.64       188.64
BA2..........................................................         0.56  ...........        80.95  ...........        16.04        78.64       175.63
BA1..........................................................         0.48  ...........        69.38  ...........        16.04        78.64       164.06
PE2..........................................................         0.79  ...........       114.19  ...........        16.04        78.64       208.87
PE1..........................................................         0.77  ...........       111.30  ...........        16.04        78.64       205.98
PD2..........................................................         0.72  ...........       104.08  ...........        16.04        78.64       198.76
PD1..........................................................         0.70  ...........       101.19  ...........        16.04        78.64       195.87
PC2..........................................................         0.66  ...........        95.40  ...........        16.04        78.64       190.08
PC1..........................................................         0.65  ...........        93.96  ...........        16.04        78.64       188.64
PB2..........................................................         0.52  ...........        75.17  ...........        16.04        78.64       169.85
PB1..........................................................         0.50  ...........        72.28  ...........        16.04        78.64       166.96
PA2..........................................................         0.49  ...........        70.83  ...........        16.04        78.64       165.51
PA1..........................................................         0.46  ...........        66.49  ...........        16.04        78.64       161.17
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs. We propose to continue that practice for FY 2009, as 
we continue to believe that in the absence of SNF-specific wage data, 
using the hospital inpatient wage index is appropriate and reasonable 
for the SNF PPS. As explained in the update notice for FY 2005 (69 FR 
45786, July 30, 2004), the SNF PPS does not use the hospital area wage 
index's occupational mix adjustment, as this adjustment serves 
specifically to define the occupational categories more clearly in a 
hospital setting; moreover, the collection of the occupational wage 
data also excludes any wage data related to SNFs. Therefore, we believe 
that using the updated wage data exclusive of the occupational mix 
adjustment continues to be appropriate for SNF payments.
    Since the implementation of the SNF PPS, as set forth in Sec.  
413.337(a)(1)(ii), a SNF's wage index is determined based on the 
location of the SNF in an urban or rural area as defined in Sec.  
413.333 and further defined in Sec.  412.62(f)(1)(ii) and Sec.  
412.62(f)(1)(iii) as urban and rural areas, respectively. In the FY 
2006 SNF PPS final rule (70 FR 45041, August 4, 2005), we adopted 
revised labor market area definitions based on CBSAs. At the time, we 
noted that these were the same labor market area definitions (based on 
OMB's new CBSA designations) implemented under the Hospital Inpatient 
Prospective Payment System (IPPS) at Sec.  412.64(b), which were 
effective for those hospitals beginning October 1, 2004, as discussed 
in the IPPS final rule for FY 2005 (69 FR at 49026 through 49034, 
August 11, 2004). In the FY 2006 SNF PPS final rule, we inadvertently 
omitted making a conforming regulation text change for Sec.  413.333. 
However, no change was made to our decision to follow the IPPS 
definition of urban and rural. We are proposing to make that conforming 
regulation text change to revise the definitions for rural and urban 
areas

[[Page 25926]]

effective for services provided on or after October 1, 2005, to 
reference the regulations at Sec.  412.64(b)(1)(ii)(A) through (C), 
consistent with the revision under the IPPS.
1. Clarification of New England Deemed Counties
    We are taking this opportunity to address the change in the 
treatment of ``New England deemed counties'' (that is, those counties 
in New England listed in Sec.  412.64(b)(1)(ii)(B) that were deemed to 
be part of urban areas under section 601(g) of the Social Security 
Amendments of 1983) that was made in the FY 2008 IPPS final rule with 
comment period (72 FR 47337 through 47338, August 22, 2007). These 
counties include the following: Litchfield County, Connecticut; York 
County, Maine; Sagadahoc County, Maine; Merrimack County, New 
Hampshire; and Newport County, Rhode Island. Of these five ``New 
England deemed counties,'' three (York County, Sagadahoc County, and 
Newport County) are also included in metropolitan statistical areas 
defined by OMB and are considered urban under both the current IPPS and 
SNF PPS labor market area definitions in Sec.  412.64(b)(1)(ii)(A). The 
remaining two, Litchfield County and Merrimack County, are 
geographically located in areas that are considered rural under the 
current IPPS (and SNF PPS) labor market area definitions, but have been 
previously deemed urban under the IPPS in certain circumstances, as 
discussed below.
    In the FY 2008 IPPS final rule with comment period, Sec.  
412.64(b)(1)(ii)(B) was revised such that the two ``New England deemed 
counties'' that are still considered rural under the OMB definitions 
(Litchfield County, CT and Merrimack County, NH), are no longer 
considered urban effective for discharges occurring on or after October 
1, 2007, and therefore, are considered rural in accordance with Sec.  
412.64(b)(1)(ii)(C). However, for purposes of payment under the IPPS, 
acute-care hospitals located within those areas are treated as being 
reclassified to their deemed urban area effective for discharges 
occurring on or after October 1, 2007 (see 72 FR 47337 through 47338). 
We note that the SNF PPS does not provide for such geographic 
reclassification. Also, in the FY 2008 IPPS final rule with comment 
period (72 FR 47338), we explained that we have limited this policy 
change for the ``New England deemed counties'' only to IPPS hospitals, 
and any change to non-IPPS provider wage indexes would be addressed in 
the respective payment system rules. Accordingly, we are taking this 
opportunity to clarify the treatment of ``New England deemed counties'' 
under the SNF PPS in this proposed rule.
    As discussed above, the SNF PPS has consistently used the IPPS 
definition of ``urban'' and ``rural'' with regard to the wage index 
used in the SNF PPS. Historical changes to the labor market area/
geographic classifications and annual updates to the wage index values 
under the SNF PPS are made effective October 1 each year. When we 
established the most recent SNF PPS payment rate update, effective for 
SNF services provided on or after October 1, 2007 through September 30, 
2008, we considered the ``New England deemed counties'' (including 
Litchfield County, CT and Merrimack County, NH) as urban for FY 2008, 
as evidenced by the inclusion of Litchfield County as one of the 
constituent counties of urban CBSA 25540 (Hartford-West Hartford-East 
Hartford, CT), and the inclusion of Merrimack County as one of the 
constituent counties of urban CBSA 31700 (Manchester-Nashua, NH)).
    As noted above, Sec.  413.333 indicates that the terms ``rural'' 
and ``urban'' are defined according to the definitions of those terms 
as used in the IPPS. Applying the IPPS definitions, Litchfield County, 
CT and Merrimack County, NH are not considered ``urban'' under Sec.  
412.64(b)(1)(ii)(A) through (B) as revised under the FY 2008 IPPS final 
rule and, therefore, are considered ``rural'' under Sec.  
412.64(b)(1)(ii)(C). Accordingly, reflecting our policy to use the IPPS 
definitions of ``urban'' and ``rural,'' these two counties will be 
considered ``rural'' under the SNF PPS effective with the next update 
of the SNF PPS payment rates on October 1, 2008, and will no longer be 
included in urban CBSA 25540 (Hartford-West Hartford-East Hartford, CT) 
and urban CBSA 31700 (Manchester-Nashua, NH), respectively. We note 
that this policy is consistent with our policy of not taking into 
account IPPS geographic reclassifications in determining payments under 
the SNF PPS. As indicated above, we are proposing to make a technical 
change to the regulations at Sec.  413.333 to reflect the updated IPPS 
regulation reference.
2. Multi-Campus Hospital Wage Index Data
    In the FY 2008 SNF PPS final rule (72 FR 43412, August 3, 2007), we 
established SNF PPS wage index values for FY 2008 calculated from the 
same data (collected from cost reports submitted by hospitals for cost 
reporting periods beginning during FY 2004) used to compute the FY 2008 
acute care hospital inpatient wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. However, the IPPS policy that apportions the wage data for 
multi-campus hospitals was not finalized before the SNF PPS final rule. 
The SNF PPS wage index values applicable for services provided on or 
after October 1, 2007 through September 30, 2008 are shown in Table 8 
(for urban areas) and Table 9 (for rural areas) and in the Addendum to 
the FY 2008 SNF PPS final rule (72 FR 43437 through 43463).
    We are continuing to use IPPS wage data for FY 2009 because we 
believe that in the absence of SNF-specific wage data, using the 
hospital inpatient wage data is appropriate and reasonable for the SNF 
PPS. We note that the IPPS wage data used to determine the proposed FY 
2009 SNF wage index values reflect our policy that was adopted under 
the IPPS beginning in FY 2008, which apportions the wage data for 
multi-campus hospitals located in different labor market areas, or 
Core-Based Statistical Areas (CBSAs), to each CBSA where the campuses 
are located (see the FY 2008 IPPS final rule with comment period (72 FR 
47317 through 47320)). Specifically, for the proposed FY 2009 SNF PPS, 
the wage index was computed using IPPS wage data (published by 
hospitals for cost reporting periods beginning in 2005, as with the FY 
2009 IPPS wage index), which allocated salaries and hours to the 
campuses of two multi-campus hospitals with campuses that are located 
in different labor areas; one is Massachusetts and the other is 
Illinois. The wage index values for the proposed FY 2009 SNF PPS in the 
following CBSAs are affected by this policy: Boston-Quincy, MA (CBSA 
14484), Providence-New Bedford-Falls River, RI-MA (CBSA 39300), 
Chicago-Naperville-Joliet, IL (CBSA 16974) and Lake County-Kenosha 
County, IL-WI (CBSA 29404) (please refer to Table 8 in the Addendum of 
this proposed rule).
    In summary, for FY 2009, we propose to use the FY 2009 wage index 
data (collected from cost reports submitted by hospitals for cost 
reporting periods beginning during FY 2005) to adjust SNF PPS payments 
beginning October 1, 2008. These data reflect the multi-campus and New 
England deemed counties policies discussed above.
    Finally, we propose to continue using the same methodology 
discussed in the SNF PPS final rule for FY 2008 (72 FR 43423) to 
address those geographic areas in which there are no hospitals and, 
thus, no hospital wage index data on

[[Page 25927]]

which to base the calculation of the FY 2009 SNF PPS wage index. For 
rural geographic areas that do not have hospitals and, therefore, lack 
hospital wage data on which to base an area wage adjustment, we would 
use the average wage index from all contiguous CBSAs as a reasonable 
proxy. This methodology is used to construct the wage index for rural 
Massachusetts. However, we would not apply this methodology to rural 
Puerto Rico due to the distinct economic circumstances that exist 
there, but instead would continue using the most recent wage index 
previously available for that area. For urban areas without specific 
hospital wage index data, we would use the average wage indexes of all 
of the urban areas within the State to serve as a reasonable proxy for 
the wage index of that urban CBSA. The only urban area without wage 
index data available is CBSA (25980) Hinesville-Fort Stewart, GA.
    To calculate the SNF PPS wage index adjustment, we would apply the 
wage index adjustment to the labor-related portion of the Federal rate, 
which is 69.994 percent of the total rate. This percentage reflects the 
labor-related relative importance for FY 2009, using the revised and 
rebased FY 2004-based market basket. The labor-related relative 
importance for FY 2008 was 70.249, as shown in Table 11. We calculate 
the labor-related relative importance from the SNF market basket, and 
it approximates the labor-related portion of the total costs after 
taking into account historical and projected price changes between the 
base year and FY 2009. 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 2009 than the base year weights from the SNF market 
basket.
    We calculate the labor-related relative importance for FY 2009 in 
four steps. First, we compute the FY 2009 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 
2009 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2009 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 2004) weight. Finally, we add the FY 2009 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, non-medical professional fees, labor-intensive 
services, and a portion of capital-related expenses) to produce the FY 
2009 labor-related relative importance. Tables 6 and 7 below show the 
Federal rates by labor-related and non-labor-related components.

Table 6.--RUG-53 Case-Mix Adjusted Federal Rates for Urban SNFs by Labor
                         and Non-Labor Component
------------------------------------------------------------------------
                                                   Labor      Non-labor
         RUG-III category           Total rate    portion      portion
------------------------------------------------------------------------
RUX..............................       601.45       420.98       180.47
RUL..............................       531.85       372.26       159.59
RVX..............................       455.79       319.03       136.76
RVL..............................       425.53       297.85       127.68
RHX..............................       385.58       269.88       115.70
RHL..............................       376.50       263.53       112.97
RMX..............................       437.32       306.10       131.22
RML..............................       402.52       281.74       120.78
RLX..............................       310.82       217.56        93.26
RUC..............................       515.21       360.62       154.59
RUB..............................       472.85       330.97       141.88
RUA..............................       451.66       316.13       135.53
RVC..............................       410.40       287.26       123.14
RVB..............................       390.73       273.49       117.24
RVA..............................       354.42       248.07       106.35
RHC..............................       355.32       248.70       106.62
RHB..............................       340.19       238.11       102.08
RHA..............................       317.49       222.22        95.27
RMC..............................       326.87       228.79        98.08
RMB..............................       317.79       222.43        95.36
RMA..............................       311.74       218.20        93.54
RLB..............................       286.61       200.61        86.00
RLA..............................       245.76       172.02        73.74
SE3..............................       352.46       246.70       105.76
SE2..............................       301.01       210.69        90.32
SE1..............................       269.24       188.45        80.79
SSC..............................       264.70       185.27        79.43
SSB..............................       251.09       175.75        75.34
SSA..............................       246.55       172.57        73.98
CC2..............................       263.19       184.22        78.97
CC1..............................       242.01       169.39        72.62
CB2..............................       229.90       160.92        68.98
CB1..............................       219.31       153.50        65.81
CA2..............................       217.80       152.45        65.35
CA1..............................       205.70       143.98        61.72
IB2..............................       196.62       137.62        59.00
IB1..............................       193.59       135.50        58.09
IA2..............................       178.46       124.91        53.55
IA1..............................       172.41       120.68        51.73
BB2..............................       195.10       136.56        58.54
BB1..............................       190.57       133.39        57.18
BA2..............................       176.95       123.85        53.10
BA1..............................       164.84       115.38        49.46

[[Page 25928]]

 
PE2..............................       211.75       148.21        63.54
PE1..............................       208.72       146.09        62.63
PD2..............................       201.16       140.80        60.36
PD1..............................       198.13       138.68        59.45
PC2..............................       192.08       134.44        57.64
PC1..............................       190.57       133.39        57.18
PB2..............................       170.90       119.62        51.28
PB1..............................       167.87       117.50        50.37
PA2..............................       166.36       116.44        49.92
PA1..............................       161.82       113.26        48.56
------------------------------------------------------------------------


Table 7.--RUG-53 Case-Mix Adjusted Federal Rates for Rural SNFs by Labor
                         and Non-Labor Component
------------------------------------------------------------------------
                                                   Labor      Non-labor
         RUG-III category           Total rate    portion      portion
------------------------------------------------------------------------
RUX..............................       630.19       441.10       189.09
RUL..............................       563.70       394.56       169.14
RVX..............................       472.09       330.43       141.66
RVL..............................       443.18       310.20       132.98
RHX..............................       394.42       276.07       118.35
RHL..............................       385.75       270.00       115.75
RMX..............................       440.02       307.99       132.03
RML..............................       406.77       284.71       122.06
RLX..............................       311.50       218.03        93.47
RUC..............................       547.80       383.43       164.37
RUB..............................       507.33       355.10       152.23
RUA..............................       487.09       340.93       146.16
RVC..............................       428.73       300.09       128.64
RVB..............................       409.94       286.93       123.01
RVA..............................       375.24       262.65       112.59
RHC..............................       365.51       255.84       109.67
RHB..............................       351.06       245.72       105.34
RHA..............................       329.37       230.54        98.83
RMC..............................       334.50       234.13       100.37
RMB..............................       325.83       228.06        97.77
RMA..............................       320.04       224.01        96.03
RLB..............................       288.37       201.84        86.53
RLA..............................       249.34       174.52        74.82
SE3..............................       343.31       240.30       103.01
SE2..............................       294.16       205.89        88.27
SE1..............................       263.80       184.64        79.16
SSC..............................       259.47       181.61        77.86
SSB..............................       246.46       172.51        73.95
SSA..............................       242.12       169.47        72.65
CC2..............................       258.02       180.60        77.42
CC1..............................       237.78       166.43        71.35
CB2..............................       226.22       158.34        67.88
CB1..............................       216.10       151.26        64.84
CA2..............................       214.66       150.25        64.41
CA1..............................       203.09       142.15        60.94
IB2..............................       194.42       136.08        58.34
IB1..............................       191.53       134.06        57.47
IA2..............................       177.07       123.94        53.13
IA1..............................       171.29       119.89        51.40
BB2..............................       192.97       135.07        57.90
BB1..............................       188.64       132.04        56.60
BA2..............................       175.63       122.93        52.70
BA1..............................       164.06       114.83        49.23
PE2..............................       208.87       146.20        62.67
PE1..............................       205.98       144.17        61.81
PD2..............................       198.76       139.12        59.64
PD1..............................       195.87       137.10        58.77
PC2..............................       190.08       133.04        57.04
PC1..............................       188.64       132.04        56.60
PB2..............................       169.85       118.88        50.97
PB1..............................       166.96       116.86        50.10
PA2..............................       165.51       115.85        49.66
PA1..............................       161.17       112.81        48.36
------------------------------------------------------------------------


[[Page 25929]]

    Section 1888(e)(4)(G)(ii) of the Act also requires that we apply 
this wage index in a manner that does not result in aggregate payments 
that are greater or less than would otherwise be made in the absence of 
the wage adjustment. For FY 2009 (Federal rates effective October 1, 
2008), we would apply an adjustment to fulfill the budget neutrality 
requirement. We would meet this requirement by multiplying each of the 
components of the unadjusted Federal rates by a budget neutrality 
factor equal to the ratio of the weighted average wage adjustment 
factor for FY 2008 to the weighted average wage adjustment factor for 
FY 2009. For this calculation, we use the same 2006 claims utilization 
data for both the numerator and denominator of this ratio. We define 
the wage adjustment factor used in this calculation as the labor share 
of the rate component multiplied by the wage index plus the non-labor 
share of the rate component. The proposed budget neutrality factor for 
this year is 1.0009. The wage index applicable to FY 2009 is set forth 
in Tables 8 and 9, which appear in the Addendum of this proposed rule.
    In the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 
2005), we adopted the changes discussed in the Office of Management and 
Budget (OMB) Bulletin No. 03-04 (June 6, 2003), available online at 
www.whitehouse.gov/omb/bulletins/b03-04.html, which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
addition, OMB published subsequent bulletins regarding CBSA changes, 
including changes in CBSA numbers and titles. As indicated in the FY 
2008 SNF PPS final rule (72 FR 43423, August 3, 2007), this and all 
subsequent SNF PPS rules and notices are considered to incorporate the 
CBSA changes published in the most recent OMB bulletin that applies to 
the hospital wage data used to determine the current SNF PPS wage 
index. The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.
    In adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, we provided for a 1-year transition with a blended wage 
index for all providers. For FY 2006, the wage index for each provider 
consisted of a blend of 50 percent of the FY 2006 MSA-based wage index 
and 50 percent of the FY 2006 CBSA-based wage index (both using FY 2002 
hospital data). We referred to the blended wage index as the FY 2006 
SNF PPS transition wage index. As discussed in the SNF PPS final rule 
for FY 2006 (70 FR 45041), subsequent to the expiration of this 1-year 
transition on September 30, 2006, we used the full CBSA-based wage 
index values, as now presented in Tables 8 and 9 of this proposed rule.

D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act, as amended by 
section 311 of the BIPA, the proposed payment rates in this proposed 
rule reflect an update equal to the full SNF market basket, estimated 
at 3.1 percentage points. We would continue to disseminate the rates, 
wage index, and case-mix classification methodology through the Federal 
Register before the August 1 that precedes the start of each succeeding 
FY.

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

    As discussed in Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. This 
designation reflects an administrative presumption under the refined 
RUG-53 that beneficiaries who are correctly assigned to one of the 
upper 35 of the RUG-53 groups on the initial 5-day, Medicare-required 
assessment are automatically classified as meeting the SNF level of 
care definition up to and including the assessment reference date on 
the 5-day Medicare required assessment.
    A beneficiary assigned to any of the lower 18 groups is not 
automatically classified as either meeting or not meeting the 
definition, but instead receives an individual level of care 
determination using the existing administrative criteria. This 
presumption recognizes the strong likelihood that beneficiaries 
assigned to one of the upper 35 groups during the immediate post-
hospital period require a covered level of care, which would be 
significantly less likely for those beneficiaries assigned to one of 
the lower 18 groups.
    In this proposed rule, we are continuing the designation of the 
upper 35 groups for purposes of this administrative presumption, 
consisting of the following RUG-53 classifications: All groups within 
the Rehabilitation plus Extensive Services category; All groups within 
the Ultra High Rehabilitation category; all groups within the Very High 
Rehabilitation category; all groups within the High Rehabilitation 
category; all groups within the Medium Rehabilitation category; all 
groups within the Low Rehabilitation category; all groups within the 
Extensive Services category; all groups within the Special Care 
category; and, all groups within the Clinically Complex category.

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

    Using the hypothetical SNF XYZ described in Table 10 below, the 
following shows the adjustments made to the Federal per diem rate to 
compute the provider's actual per diem PPS payment. SNF XYZ's 12-month 
cost reporting period begins October 1, 2008. SNF XYZ's total PPS 
payment would equal $29,719. We derive the Labor and Non-labor columns 
from Table 6 of this proposed rule.

                                        Table 10.--RUG-53 SNF XYZ: Located in Cedar Rapids, IA (Urban CBSA 16300)
                                                                  [Wage Index: 0.8924]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  Medicare
                    RUG Group                        Labor      Wage index   Adj. labor   Non-labor    Adj. rate   Percent adj      days       payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVX.............................................      $319.03       0.8924      $284.70      $136.76      $421.46      $421.46           14    $5,900.00
RLX.............................................       217.56       0.8924       194.15        93.26       287.41       287.41           30     8,622.00
RHA.............................................       222.22       0.8924       198.31        95.27       293.58       293.58           16     4,697.00
CC2.............................................       184.22       0.8924       164.40        78.97       243.37      554.88*           10     5,549.00
IA2.............................................       124.91       0.8924       111.47        53.55       165.02       165.02           30     4,951.00
                                                                                                                               -------------------------
    Total.......................................  ...........  ...........  ...........  ...........  ...........  ...........          100    29,719.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Reflects a 128 percent adjustment from section 511 of the MMA.


[[Page 25930]]

G. Other Issues

1. Staff Time and Resource Intensity Verification (STRIVE) Project
    [If you choose to comment on issues in this section, please include 
the caption ``STRIVE Project'' at the beginning of your comments.]
    As noted previously in section II.B.1 of this proposed rule, 
section 1888(e)(4)(G)(i) of the Act requires the Secretary to make an 
adjustment to account for case-mix. The statute specifies that the 
adjustment is to reflect both a resident classification system that the 
Secretary establishes to account for the relative resource use of 
different patient types, as well as resident assessment and other data 
that the Secretary considers appropriate. In first implementing the SNF 
PPS (63 FR 26252, May 12, 1998), we developed the RUG-III case-mix 
classification system, which tied the amount of payment to resident 
resource use in combination with resident characteristic information. 
Staff time measurement (STM) studies conducted in 1990, 1995, and 1997 
provided information on resource use (time spent by staff members on 
residents) and resident characteristics that enabled us not only to 
establish RUG-III, but also to create case-mix indexes.
    Since that time, we have become concerned that incentives of the 
SNF PPS and the public reporting of nursing home quality measures 
likely have altered industry practices, and have affected the nursing 
resources required to treat different types of patients. Changes to 
technology might also have affected care methods, while more choices in 
housing alternatives (such as assisted living and community housing) 
may have altered the population mix served by nursing homes.
    To help ensure that the SNF PPS payment rates reflect current 
practices and resource needs, CMS sponsored a national nursing home 
time study, STRIVE, which began in the Fall of 2005. Information 
collected in STRIVE includes the amount of time that staff members 
spend on residents and information on residents'' physical and clinical 
status derived from MDS assessment data.
    Two hundred and five nursing homes from the following fifteen 
States and jurisdictions volunteered to participate in STRIVE: The 
District of Columbia, Nevada, Florida, Illinois, Iowa, Kentucky, 
Louisiana, Michigan, Montana, New York, Ohio, South Dakota, Texas, 
Virginia, and Washington. We are currently analyzing staff time and MDS 
assessment data for approximately 9,700 residents.
    Nursing homes with poor survey histories or pending enforcement 
actions were excluded from the sample. In addition, nursing homes with 
poor quality measure (QM) scores, low occupancy rates, or large 
proportions of private pay or pediatric patients were also excluded.
    Nursing homes were randomly recruited within five strata. The five 
strata follow: Hospital-based facilities; facilities with high 
concentrations of residents on ventilators; facilities with high 
concentrations of residents with Human Immunodeficiency Virus (HIV); 
facilities with high concentrations of residents on Medicare Part A 
stays; and all other facilities. Facilities with large concentrations 
of residents on ventilators, residents with HIV, or residents on Part A 
stays were over-sampled in order to assure sufficient numbers of 
residents in those populations. Nursing homes were voluntarily 
recruited in random order until enough facilities in each targeted 
category agreed to participate.
    Participating facilities included both not-for-profit entities and 
corporations; chains and independent operators; nursing homes with 
populations small to large in size; and facilities situated in urban 
and rural locations.
    STRIVE began on-site data collection at both SNFs and Medicaid 
Nursing Facilities (NFs) in the Spring of 2006. STRIVE collected data 
from both types of facilities because almost half of the States use a 
version of the RUG-III system for their Medicaid reimbursement systems.
    Participating facilities submitted both time and MDS assessment 
data. Nursing staff recorded their time over 48 hours. Nursing staff 
included registered nurses, licensed practical nurses, and nursing 
aides. Therapy staff recorded their time over 7 consecutive days. 
Therapy staff included physical therapists and aides; occupational 
therapists and aides; and speech-language pathologists. Each nursing 
home staff member recorded his or her time at the facility in different 
categories (for example, resident-specific time (RST), non-resident-
specific time (NRST), unpaid time, and non-study time).
    As our analysis continues, we expect to introduce changes to the 
RUG-III grouper methodology and clinical assessment instrument. Further 
exploration of STRIVE data and possible refinements to the SNF PPS may 
ultimately culminate in a new RUG model, version IV.
    To date, STRIVE has benefited from stakeholder input, starting with 
the December 2005 Open Door Forum to which the public was invited. The 
educators, researchers, beneficiary advocates, clinicians, consultants, 
government experts, and representatives from health care, nursing home, 
and other related industry associations serving on the STRIVE technical 
expert panel (TEP) have provided valuable insights on topics such as 
sample populations. Beginning in 2005 until its most recent February 
2008 meeting, the TEP has met twice and held two teleconferences. 
Additionally, our contractor recently established a smaller Analytic 
Panel consisting of various stakeholders who meet regularly with our 
researchers to discuss the analysis of the STRIVE data.
    Our preliminary analyses of RUG III-related resource times and 
payment rates indicated that, as mentioned previously, SNF care 
patterns have changed significantly over the decade since we last 
conducted STMs. We note that calculating CMIs based upon STRIVE data 
for use within a RUG-III model constructed over a decade ago would 
create methodological challenges and, therefore, could only be 
considered an interim step, as we would have to reexamine the CMIs 
after changes to the structural model are finalized. We will continue 
to analyze STRIVE data and intend to create an updated RUG 
classification structure that would more accurately reflect current 
care practices and resource use. Our contractors also plan to receive 
input from the TEP and the Analytic Panel to guide the STRIVE analysis. 
We may also use the results of the contractors' analyses to make 
changes to the RUG classification structure. It is our intention to 
introduce new case-mix weights in FY 2010 that reflect the results of 
the STRIVE analysis and any changes to the RUG classification 
structure.
    More information on STRIVE appears at the following Web site: 
https://www.qtso.com/strive.html. Items posted there include: 
Assessment forms distributed by STRIVE; ``train the trainer'' materials 
used to teach the data monitors who, in turn, instructed nursing home 
staff members on how to record their time; materials from State 
teleconferences; and slides presented at STRIVE TEPs. We plan to post 
preliminary results of the STRIVE analyses, when available, on the 
following Web site: http://www.cms.hhs.gov/SNFPPS/10_TimeStudy.asp.
    2. Minimum Data Set (MDS) 3.0
    [If you choose to comment on issues in this section, please include 
the caption ``MDS 3.0'' at the beginning of your comments.]
    Sections 1819(f)(6)(A)-(B) and 1919(f)(6)(A)-(B) of the Social 
Security

[[Page 25931]]

Act, as amended by the Omnibus Budget Reconciliation Act of 1987 (OBRA 
1987), require the Secretary of the Department of Health and Human 
Services (the Secretary) to specify a minimum data set of core elements 
for use in conducting comprehensive assessments. As stated in Sec.  
483.20, Medicare- and Medicaid-participating nursing homes must conduct 
``a comprehensive, accurate, standardized, reproducible assessment'' of 
each nursing home resident's functional capacity.
    CMS is developing a new version of the MDS, MDS 3.0, to reflect 
more accurately each resident's clinical, cognitive, and functional 
status as well as the care that nursing homes provide residents. The 
regulations at Sec.  483.20(b)(1)(i) through (xviii) list the clinical 
domains that must be included in the Resident Assessment Instrument 
(RAI). These domains have been incorporated into the MDS 2.0 and would 
also be included in MDS 3.0. We anticipate that in FY 2010, MDS 3.0 
would become the current version of the MDS. MDS 3.0, like MDS 2.0, 
would focus on the clinical assessment of each nursing home resident to 
screen for common, often unrecognized or unevaluated, conditions and 
syndromes. We made clinical revisions to the instrument based on input 
from subject-area experts, feedback from MDS users, resident advocates 
and families, and new knowledge and evidence about resident assessment. 
With the implementation of MDS 3.0, we aim to increase the clinical 
relevance, accuracy, and efficiency of assessments; require assessors 
to record direct resident responses on some items; include assessment 
items used in other care settings; and move items toward future 
electronic health record formats. On January 24, 2008, CMS hosted a 
special Open Door Forum to provide details about MDS 3.0.
    We now plan to evaluate the impact of the MDS 3.0 changes on the 
RUG-III resident classification system used in the Medicare payment 
structure. We intend to develop ways to adapt the RUG system to the MDS 
3.0 assessment instrument as part of the STRIVE study. We would then 
finalize changes to the MDS 3.0 and any necessary adaptations to the 
RUG classification system. Our intent would be to implement the updated 
system nationally in FY 2010.
    We are very much aware that the transition to a new MDS instrument 
in conjunction with the possible release of a new RUG grouper requires 
careful planning and extensive provider training. CMS staff are already 
working on training plans that would include a new MDS 3.0 manual, 
documentation explaining the updated RUG grouper methodology, data 
specifications for providers and vendors, training videos, a help desk 
call and e-mail center, and a train-the-trainer conference tentatively 
scheduled for Spring 2009. However, we realize that the most effective 
training would require coordination between CMS and its key 
stakeholders, including provider and professional associations, Fiscal 
Intermediaries and Part A and Part B Medicare Administrative 
Contractors (MACs), and State agencies. We want to encourage 
stakeholders to work with CMS staff to provide additional training 
opportunities on the local level to ensure a smooth transition. We plan 
to publish a transition plan in 2008 that should highlight 
opportunities for joint action. In 2009, we intend to make draft MDS 
3.0 specifications available to providers and vendors. We also 
tentatively plan to include in the update to the FY 2010 SNF PPS rates 
(which we intend to introduce in Spring 2009 and finalize by the end of 
July, 2009) definitive information on the final MDS 3.0 and RUG grouper 
specifications. Additional information is available online at http://www.cms.hhs.gov via the following links:
    <bullet> MDS 3.0 information: http://www.cms.hhs.gov/NursingHomeQualityInits/25_NHQIMDS30.asp.
    <bullet> January 15, 2008 version of the MDS 3.0 instrument: http://www.cms.hhs.gov/NursingHomeQualityInits/Downloads/MDS30DraftVersion.pdf.
    <bullet> MDS 3.0 timeline: http://www.cms.hhs.gov/NursingHomeQualityInits/Downloads/MDS30Timeline.pdf.
3. Integrated Post Acute Care Payment
    [If you choose to comment on issues in this section, please include 
the caption ``Integrated Post Acute Care Payment'' at the beginning of 
your comments.]
    Under current law, Medicare covers post-acute care (PAC) services 
in various care settings, including SNFs, home health agencies (HHAs), 
long-term care hospitals (LTCHs), and inpatient rehabilitation 
facilities (IRFs). Each of the PAC sites has a separate payment system 
that relies on different patient assessment instruments, although there 
is no mandated assessment instrument for LTCHs. The current model is 
based on provider-oriented ``silos'' with significant payment 
differentials existing between provider types that treat similar 
patients and provide similar services.
    In the SNF PPS update notice for FY 2007 (71 FR 43172 through 
43173, July 31, 2006), we described our plans to explore refinements to 
the existing PAC payment methodologies to create a more seamless system 
for payment and delivery of PAC under Medicare. The new model will 
focus on beneficiary needs rather than provider type and will be 
characterized by more consistent payments for the same type of care 
across different sites of service, quality-driven pay-for-performance 
incentives, and collection of uniform clinical assessment information 
to support quality and discharge planning functions.
    We also noted in the FY 2007 SNF PPS update notice (71 FR 43172) 
that section 5008 of the Deficit Reduction Act (DRA) of 2005 mandates a 
PAC payment reform demonstration for purposes of understanding costs 
and outcomes across different PAC sites. To meet this mandate, CMS 
implemented the PAC Payment Reform Demonstration (PAC-PRD) to examine 
differences in costs and outcomes for PAC patients of similar case-mix 
who use different types of PAC providers and to develop a standardized 
patient assessment tool for use at hospital discharge and at PAC 
admission and discharge. This tool, the Continuity Assessment Record 
and Evaluation (CARE) tool, will measure the health and functional 
status of Medicare acute discharges. During the demonstration, CARE 
will be used at hospital discharge and upon admission and discharge 
from PAC settings. The CARE instrument consists of a core set of 
assessment items that are common to all patients and care settings and 
are organized under several major domains: Medical, Functional, 
Cognitive, Social, and Continuity of Care, in addition to supplemental 
items for specific conditions and care settings. Additional information 
on the PAC-PRD is available at: http://www.cms.hhs.gov/DemoProjectsEvalRpts/MD/itemdetail.asp?filterType=dual,%20keyword&filterValue=post%20acute%20care&filterByDID=0&sortByDID=3&sortOrder=descending&itemID=CMS1201325&intNumPerPage=10.
    We are interested in receiving public comments on the CARE 
instrument, and specifically invite comments on how CARE might advance 
the use of Health Information Technology (HIT) in automating the 
process for collecting and submitting quality data. The CARE tool is 
available at http://www.cms.hhs.gov/paperworkreductionactof1995/pral/list.asp. Viewers should scroll down to the entry for CMS-10243, ``Data

[[Page 25932]]

Collection for Administering the Medicare Continuity Assessment Record 
and Evaluation (CARE) Instrument.'' Viewers can then click on the link 
to CMS-10243, click on the link to ``Downloads,'' and open Appendix A 
(``CARE Tool Item Matrix,'' a .pdf file) and Appendix B (``CARE Tool 
Master Document,'' in Microsoft Word).
    In addition, we wish to take this opportunity to discuss recent 
developments in the related area of value-based purchasing (VBP). VBP 
ties payment to performance through the use of incentives based on 
measures of quality and cost of care. The implementation of VBP is 
rapidly transforming CMS from being a passive payer of claims to an 
active purchaser of higher quality, more efficient health care for 
Medicare beneficiaries. Our VBP initiatives include hospital pay for 
reporting (the Reporting Hospital Quality Data for the Annual Payment 
Update Program), physician pay for reporting (the Physician Quality 
Reporting Initiative), home health pay for reporting, the Hospital VBP 
Plan Report to Congress, and various VBP demonstration programs across 
payment settings, including the Premier Hospital Quality Incentive 
Demonstration and the Physician Group Practice Demonstration.
    The preventable hospital-acquired conditions (HAC) payment 
provision for IPPS hospitals is another of CMS'' value-based purchasing 
initiatives. The principal behind the HAC payment provision (Medicare 
not paying more for healthcare-associated conditions) could be applied 
to the Medicare payment systems for other settings of care. Section 
1886(d)(4)(D) of the Act required the Secretary to select for the HAC 
IPPS payment provision conditions that: (a) are high cost, high volume, 
or both; (b) are assigned to a higher-paying Medicare severity 
diagnosis-related group (MS-DRG) when present as a secondary diagnosis; 
and (c) could reasonably have been prevented through the application of 
evidence-based guidelines. Beginning October 1, 2008, Medicare can no 
longer assign an inpatient hospital discharge to a higher-paying MS-DRG 
if a selected HAC condition was not present on admission. That is, the 
case will be paid as though the secondary diagnosis were not present. 
(Medicare will continue to assign a discharge to a higher-paying MS-DRG 
in those instances where the selected condition was, in fact, present 
on admission).
    The broad principle articulated in the HAC payment provision for 
IPPS hospitals--of Medicare not paying for these types of preventable 
conditions--could potentially be applied to other Medicare payment 
systems for similar conditions that occur in settings other than IPPS 
hospitals. Other possible settings of care might include hospital 
outpatient departments, SNFs, HHAs, end-stage renal disease facilities, 
and physician practices. The implementation would be different for each 
setting, as each payment system is different and the reasonable 
preventability through the application of evidence-based guidelines 
could vary for candidate conditions over the different settings. 
However, alignment of incentives across settings of care is an 
important goal for all of CMS'' VBP initiatives, including the HAC 
provision.
    A related application of the broad principle behind the HAC payment 
provision for IPPS hospitals could be considered through Medicare 
secondary payer policy by requiring the provider that failed to prevent 
the occurrence of a preventable condition in one setting to pay for all 
or part of the necessary follow-up care in a second setting. This would 
help shield the Medicare program from inappropriately paying for the 
downstream effects of a preventable condition acquired in the first 
setting but treated in the second setting.
    We note that we are not proposing new Medicare policy in this 
discussion of the possible application of HACs payment policy for IPPS 
hospitals to other settings, as some of these approaches may require 
new statutory authority. Rather, we are seeking public comment on the 
application of the preventable HACs payment provision for IPPS 
hospitals to other Medicare payment systems and settings. We look 
forward to working with stakeholders in the fight against these 
preventable conditions.

H. Miscellaneous Technical Corrections and Clarifications

    We are also taking the opportunity to set forth certain technical 
corrections and clarifications in this proposed rule, as discussed 
below.
1. Bad Debt Payments
    We are proposing to make a technical revision in the SNF PPS 
regulations at Sec.  413.335(b) to reflect Medicare bad debt payments 
to SNFs. Under section 1861(v)(1) of the Act and Sec.  413.89 of the 
regulations, Medicare may pay some or all of the uncollectible 
deductible and coinsurance amounts to those entities paid under a 
reasonable cost payment methodology that are eligible to receive 
payment for ``bad debt'' as defined in Sec.  413.89(b)(1). Under the 
original reasonable cost SNF payment methodology that preceded the 
introduction of the SNF PPS, SNFs did, in fact, receive bad debt 
payments for uncollectible SNF coinsurance amounts (the SNF benefit has 
no deductible). As we noted in the preamble to the July 30, 1999 SNF 
PPS final rule (64 FR 41656), while the SNF PPS has maintained this 
longstanding practice of recognizing SNF bad debt payments ever since 
its inception, these payments are not included within the SNF PPS per 
diem itself, but rather, are claimed on the SNF's Medicare cost report. 
However, in drafting the regulations text in Sec.  413.335(b) on the 
scope of the SNF PPS per diem payment, we inadvertently omitted a 
reference to this practice.
    Accordingly, in this proposed rule, we now propose to rectify that 
inadvertent omission by adding a new clause to Sec.  413.335(b), to 
clarify that in addition to the Federal per diem payment amounts, SNFs 
receive payment for bad debts of Medicare beneficiaries, as specified 
in the provisions of the regulations at Sec.  413.89. We note that 
those provisions include the 30 percent reduction in applicable SNF bad 
debt payments made in accordance with section 5004 of the DRA, as 
specified in Sec.  413.89(h)(2). Further, we note that the President's 
budget currently includes a provision that would eliminate Medicare bad 
debt payments altogether, and that the provisions outlined in this 
proposed rule would need to reflect any legislation that the Congress 
may enact to adopt that proposal. Finally, we note that our proposed 
revision is similar to language that already appears in the regulations 
text for the inpatient psychiatric facility PPS, at Sec.  
412.422(b)(2).
2. Additional Clarifications
    We are also proposing to make clarifications in two other areas: 
When a SNF may bill at the default payment rate, and the role of 
rehabilitation services evaluations in SNFs.
    A recent analysis of claims data has confirmed confusion among 
providers as to when it is permissible to submit a claim using the 
Health Insurance Prospective Payment System (HIPPS) rate code of AAA00, 
which is the default code. Under the SNF PPS, SNFs are required to 
submit resident assessment data according to an assessment schedule. 
When the resident assessment is prepared timely, the provider should 
bill the RUG payment group that is assigned to the assessment. When the 
SNF fails to comply with the assessment schedule, it must file a late 
assessment in order to be paid. In this

[[Page 25933]]

situation, CMS pays a ``default rate''--a reduced payment made in lieu 
of the full SNF PPS rate that would have been paid had the resident 
been assessed in a timely manner. Noncompliance with the schedule is 
determined by the assessment reference date (ARD) on the resident 
assessment.
    Program instructions also allow for payment at the default rate in 
the following limited circumstances where the SNF has failed to assess 
the beneficiary: When the stay is less than 8 days within a spell of 
illness; the SNF is notified on an untimely basis or is unaware of a 
Medicare Secondary Payer denial; the SNF is notified on an untimely 
basis of the revocation of a payment ban; the beneficiary requests a 
demand bill; or, the SNF is notified on an untimely basis or is unaware 
of a beneficiary's disenrollment from a Medicare Advantage plan. 
Further information regarding these limited circumstances can be found 
in the Provider Reimbursement Manual, Part I (CMS Pub. 15-1), Chapter 
28.
    In circumstances other than those described above, no payment is 
available to the SNF where the SNF fails to assess the resident. 
However, even when no payment will be made, we wish to clarify that the 
SNF must nonetheless submit a claim using the HIPPS default rate code 
and an occurrence code 77 indicating provider liability in order to 
ensure that the beneficiary's spell of illness (benefit period) is 
updated.
    We have also recently received questions concerning Change Request 
(CR) 5532 (Transmittal no. 73, dated June 29, 2007), regarding coverage 
of rehabilitation services in a SNF (see CMS Pub. 100-2, Chapter 8, 
Sec.  30.4.1.1). As a result, we wish to clarify the requirement that 
an initial evaluation must be completed and the plan of treatment 
developed before recording the number of minutes of rehabilitation 
services provided or estimated for each discipline on the Resident 
Assessment Instrument (RAI).
    For Medicare to cover rehabilitation services in a SNF, the 
services must be directly and specifically related to an active written 
treatment plan that is developed before the start of rehabilitation 
services. The plan must be based upon an initial evaluation performed 
by a qualified therapist (after SNF admission and before the start of 
rehabilitation services in the SNF) and must be approved by the 
physician after any needed consultation with the qualified therapist. 
This means that the evaluation must have been performed for each 
discipline and the plan of treatment developed in order to include 
minutes for each discipline under Section P (``Special Treatments and 
Procedures'') of the Resident Assessment Instrument, and also to 
project minutes under Section T (``Therapy Supplement for Medicare 
PPS'') of the Resident Assessment Instrument. Section T of the MDS is 
completed for Medicare 5-day assessments and in certain cases, when a 
beneficiary is readmitted to the SNF, whereas Section P is completed 
for each Medicare-required assessment. In those cases where a 
beneficiary is discharged during the SNF stay and later readmitted, an 
initial evaluation must be performed upon readmission to the SNF, prior 
to the start of rehabilitation services in the SNF.

III. The Skilled Nursing Facility Market Basket Index

    [If you choose to comment on issues in this section, please include 
the caption ``Market Basket Index'' at the beginning of your comments.]
    Section 1888(e)(5)(A) of the Act requires us to establish a SNF 
market basket index (input price index), that reflects changes over 
time in the prices of an appropriate mix of goods and services included 
in the SNF PPS. This proposed rule incorporates the latest available 
projections of the SNF market basket index. We will incorporate updated 
projections based on the latest available projections when we publish 
the SNF final rule. Accordingly, we have developed a SNF market basket 
index that encompasses the most commonly used cost categories for SNF 
routine services, ancillary services, and capital-related expenses.
    Each year, we calculate a revised labor-related share based on the 
relative importance of labor-related cost categories in the input price 
index. Table 11 below summarizes the proposed updated labor-related 
share for FY 2009.

    Table 11.--Labor-related Relative Importance, FY 2008 and FY 2009
------------------------------------------------------------------------
                                          Relative          Relative
                                         importance,       importance,
                                       labor-related,    labor-related,
                                        FY 2008 07:2      FY 2009 08:1
                                          forecast          forecast
------------------------------------------------------------------------
 Wages and salaries.................            51.218            51.139
 Employee benefits..................            11.720            11.595
 Nonmedical professional fees.......             1.333             1.331
 Labor-intensive services...........             3.456             3.454
 Capital-related (.391).............             2.522             2.475
                                     -----------------------------------
     Total..........................            70.249            69.994
------------------------------------------------------------------------
Source: Global Insight, Inc., formerly DRI-WEFA.

A. Use of the Skilled Nursing Facility Market Basket Percentage

    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index from 
the average of the previous FY to the average of the current FY. For 
the Federal rates established in this proposed rule, we use the 
percentage increase in the SNF market basket index to compute the 
update factor for FY 2009. We use the Global Insight, Inc. (formerly 
DRI-WEFA), first quarter 2008 forecasted percentage increase in the FY 
2004-based SNF market basket index for routine, ancillary, and capital-
related expenses, described in the previous section, to compute the 
update factor in this proposed rule. Finally, as discussed in section 
I.A. of this proposed rule, we no longer compute update factors to 
adjust a facility-specific portion of the SNF PPS rates because the 
initial three-phase transition period from facility-specific to full 
Federal rates that started with cost reporting periods beginning in 
July 1998 has expired.

B. Market Basket Forecast Error Adjustment

    As discussed in the June 10, 2003, supplemental proposed rule (68 
FR 34768) and finalized in the August 4,

[[Page 25934]]

2003, final rule (68 FR 46067), the regulations at Sec.  413.337(d)(2) 
provide for an adjustment to account for market basket forecast error. 
The initial adjustment applied to the update of the FY 2003 rate for FY 
2004, and took into account the cumulative forecast error for the 
period from FY 2000 through FY 2002. Subsequent adjustments in 
succeeding FYs take into account the forecast error from the most 
recently available FY for which there is final data, and apply whenever 
the difference between the forecasted and actual change in the market 
basket exceeds a specified threshold. We originally used a 0.25 
percentage point threshold for this purpose; however, for the reasons 
specified in the FY 2008 SNF PPS final rule (72 FR 43425, August 3, 
2007), we adopted a 0.5 percentage point threshold effective with FY 
2008. As discussed previously in section I.F.2. of this proposed rule, 
as the difference between the estimated and actual amounts of increase 
in the market basket index for FY 2007 (the most recently available FY 
for which there is final data) does not exceed the 0.5 percentage point 
threshold, the proposed payment rates for FY 2009 do not include a 
forecast error adjustment.

C. Federal Rate Update Factor

    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2009 Federal rates be at a level equal 
to the full market basket percentage change. Accordingly, to establish 
the update factor, we determined the total growth from the average 
market basket level for the period of October 1, 2007 through September 
30, 2008 to the average market basket level for the period of October 
1, 2008 through September 30, 2009. Using this process, the proposed 
market basket update factor for FY 2009 SNF Federal rates is 3.1 
percent. We used this revised proposed update factor to compute the 
Federal portion of the SNF PPS rate shown in Tables 2 and 3.

IV. Consolidated Billing

    [If you choose to comment on issues in this section, please include 
the caption ``Consolidated Billing'' at the beginning of your 
comments.]
    Section 4432(b) of the BBA established a consolidated billing 
requirement that places the Medicare billing responsibility for 
virtually all of the services that the SNF's residents receive on the 
SNF, except for a small number of services that the statute 
specifically identifies as being excluded from this provision. As noted 
previously in section I. of this proposed rule, subsequent legislation 
enacted a number of modifications in the consolidated billing 
provision.
    Specifically, section 103 of the BBRA amended this provision by 
further excluding a number of individual ``high-cost, low-probability'' 
services, identified by the Healthcare Common Procedure Coding System 
(HCPCS) codes, within several broader categories (chemotherapy and its 
administration, radioisotope services, and customized prosthetic 
devices) that otherwise remained subject to the provision. We discuss 
this BBRA amendment in greater detail in the proposed and final rules 
for FY 2001 (65 FR 19231 through 19232, April 10, 2000, and 65 FR 46790 
through 46795, July 31, 2000), as well as in Program Memorandum AB-00-
18 (Change Request <greek-i>1070), issued March 2000, which is 
available online at http://www.cms.hhs.gov/transmittals/downloads/ab001860.pdf.
    Section 313 of the BIPA further amended this provision by repealing 
its Part B aspect; that is, its applicability to services furnished to 
a resident during a SNF stay that Medicare does not cover. (However, 
physical, occupational, and speech-language therapy remain subject to 
consolidated billing, regardless of whether the resident who receives 
these services is in a covered Part A stay.) We discuss this BIPA 
amendment in greater detail in the proposed and final rules for FY 2002 
(66 FR 24020 through 24021, May 10, 2001, and 66 FR 39587 through 
39588, July 31, 2001).
    In addition, section 410 of the MMA amended this provision by 
excluding certain practitioner and other services furnished to SNF 
residents by RHCs and FQHCs. We discuss this MMA amendment in greater 
detail in the update notice for FY 2005 (69 FR 45818-45819, July 30, 
2004), as well as in Program Transmittal <greek-i>390 (Change Request 
<greek-i>3575), issued December 10, 2004, which is available online at 
http://www.cms.hhs.gov/transmittals/downloads/r390cp.pdf.
    To date, the Congress has enacted no further legislation affecting 
the consolidated billing provision. However, as noted above and 
explained in the proposed rule for FY 2001 (65 FR 19232, April 10, 
2000), the amendments enacted in section 103 of the BBRA not only 
identified for exclusion from this provision a number of particular 
service codes within four specified categories (that is, chemotherapy 
items, chemotherapy administration services, radioisotope services, and 
customized prosthetic devices), but also gave the Secretary ``* * * the 
authority to designate additional, individual services for exclusion 
within each of the specified service categories.'' In the proposed rule 
for FY 2001, we also noted that the BBRA Conference report (H.R. Rep. 
No.
    106-479 at 854 (1999) (Conf. Rep.)) characterizes the individual 
services that this legislation targets for exclusion as, ``* * * high-
cost, low probability events that could have devastating financial 
impacts because their costs far exceed the payment [SNFs] receive under 
the prospective payment system * * *''. According to the conferees, 
section 103(a), ``is an attempt to exclude from the PPS certain 
services and costly items that are provided infrequently in SNFs * * 
*''. By contrast, we noted that the Congress declined to designate for 
exclusion any of the remaining services within those four categories 
(thus leaving all of those services subject to SNF consolidated 
billing), because they are relatively inexpensive and are furnished 
routinely in SNFs.
    As we further explained in the final rule for FY 2001 (65 FR 46790, 
July 31, 2000), and as our longstanding policy, any additional service 
codes that we might designate for exclusion under our discretionary 
authority must meet the same criteria that the Congress used in 
identifying the original codes excluded from consolidated billing under 
section 103(a) of the BBRA: they must fall within one of the four 
service categories specified in the BBRA, and they also must meet the 
same standards of high cost and low probability in the SNF setting. 
Accordingly, we characterized this statutory authority to identify 
additional service codes for exclusion ``* * * as essentially affording 
the flexibility to revise the list of excluded codes in response to 
changes of major significance that may occur over time (for example, 
the development of new medical technologies or other advances in the 
state of medical practice)'' (65 FR 46791). In this proposed rule, we 
specifically invite public comments identifying codes in any of these 
four service categories (chemotherapy items, chemotherapy 
administration services, radioisotope services, and customized 
prosthetic devices) representing recent medical advances that might 
meet our criteria for exclusion from SNF consolidated billing.
    We note that the original BBRA legislation (as well as the 
implementing regulations) identified a set of excluded services by 
means of specifying HCPCS codes that were in effect as of a particular 
date (in that case, as of July 1, 1999). Identifying the excluded 
services in this manner made it possible for us to utilize program 
issuances as the vehicle for accomplishing routine updates of the 
excluded codes, in order

[[Page 25935]]

to reflect any minor revisions that might subsequently occur in the 
coding system itself (for example, the assignment of a different code 
number to the same service). Accordingly, in the event that we identify 
through the current rulemaking cycle any new services that would 
actually represent a substantive change in the scope of the exclusions 
from SNF consolidated billing, we would identify these additional 
excluded services by means of the HCPCS codes that are in effect as of 
a specific date (in this case, as of October 1, 2008). By making any 
new exclusions in this manner, we could similarly accomplish routine 
future updates of these additional codes through the issuance of 
program instructions.

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

    [If you choose to comment on issues in this section, please include 
the caption ``Swing-Bed Hospitals'' at the beginning of your comments.]
    In accordance with section 1888(e)(7) of the Act, as amended by 
section 203 of the BIPA, Part A pays CAHs on a reasonable cost basis 
for SNF services furnished under a swing-bed agreement. However, 
effective with cost reporting periods beginning on or after July 1, 
2002, the swing-bed services of non-CAH rural hospitals are paid under 
the SNF PPS. As explained in the final rule for FY 2002 (66 FR 39562, 
July 31, 2001), we selected this effective date consistent with the 
statutory provision to integrate swing-bed rural hospitals into the SNF 
PPS by the end of the SNF transition period, June 30, 2002.
    Accordingly, all non-CAH swing-bed rural hospitals have come under 
the SNF PPS as of June 30, 2003. Therefore, all rates and wage indexes 
outlined in earlier sections of this proposed rule for the SNF PPS also 
apply to all non-CAH swing-bed rural hospitals. A complete discussion 
of assessment schedules, the MDS and the transmission software (RAVEN-
SB for Swing Beds) appears in the final rule for FY 2002 (66 FR 39562, 
July 31, 2001). The latest changes in the MDS for swing-bed rural 
hospitals appear on our SNF PPS Web site, www.cms.hhs.gov/snfpps.

VI. Provisions of the Proposed Rule

    [If you choose to comment on issues in this section, please include 
the caption ``Provisions of the Proposed Rule'' at the beginning of 
your comments.]
    In this proposed rule, in addition to accomplishing the required 
annual update of the SNF PPS payment rates, we also propose making the 
following revisions in the regulations text:
    <bullet> Revise the existing SNF PPS definitions of ``urban'' and 
``rural'' areas that appear in Sec.  413.333 to include updated cross-
references to the corresponding IPPS definitions in Part 412, subpart 
D.
    <bullet> Make a technical revision at Sec.  413.335(b) to reflect 
Medicare bad debt payments to SNFs.

VII. Collection of Information Requirements

    [If you choose to comment on issues in this section, please include 
the caption ``Collection of Information'' at the beginning of your 
comments.]
    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

VIII. Regulatory Impact Analysis

    [If you choose to comment on issues in this section, please include 
the caption ``Impact Analysis'' at the beginning of your comments.]

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (September 19, 1980, RFA, Pub. L. 96-354), 
section 1102(b) of the Social Security Act (the Act), the Unfunded 
Mandates Reform Act of 1995 (UMRA, Pub. L. 104-4), Executive Order 
13132 on Federalism, and the Congressional Review Act (5 U.S.C. 
804(2)).
    Executive Order 12866, as amended, directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This proposed rule is a major rule, as defined in Title 5, United 
States Code, section 804(2), because we estimate the FY 2009 impact 
reflects a $710 million increase from the update to the payment rates 
and a $770 million reduction from the recalibration of the case-mix 
adjustment, thereby yielding a net decrease of $60 million on payments 
to SNFs.
    The proposed update set forth in this proposed rule would apply to 
payments in FY 2009. Accordingly, the analysis that follows only 
describes the impact of this single year. In accordance with the 
requirements of the Act, we will publish a notice for each subsequent 
FY that will provide for an update to the payment rates and include an 
associated impact analysis.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small government 
jurisdictions. Most SNFs and most other providers and suppliers are 
small entities, either by their nonprofit status or by having revenues 
of $11.5 million or less in any 1 year. For purposes of the RFA, 
approximately 53 percent of SNFs are considered small businesses 
according to the Small Business Administration's latest size standards, 
with total revenues of $11.5 million or less in any 1 year (for further 
information, see 65 FR 69432, November 17, 2000). Individuals and 
States are not included in the definition of a small entity. In 
addition, approximately 29 percent of SNFs are nonprofit organizations.
    This proposed rule would update the SNF PPS rates published in the 
final rule for FY 2008 (72 FR 43412, August 3, 2007) and the associated 
correction notices (72 FR 55085, September 28, 2007, and 72 FR 67652, 
November 30, 2007), thereby decreasing net payments by an estimated $60 
million. As indicated in Table 12, the effect on facilities will be a 
net negative impact of 0.3 percent. The total impact reflects a $770 
million reduction from the recalibration of the case-mix adjustment, 
offset by a $710 million increase from the update to the payment rates. 
We note that some individual providers may experience a net increase in 
payments while most others experience a decrease. This is due to the 
distributional impact of the FY 2009 wage indexes and the degree of 
Medicare utilization. While this proposed rule is considered major, its 
relative impact on SNFs overall is extremely small; that is, less than 
3 percent of total SNF revenues from all payor sources. Therefore, the 
Secretary has determined that this proposed rule will not have a 
significant economic impact on a substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to

[[Page 25936]]

the provisions of section 603 of the RFA. For purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital that 
is located outside of a Metropolitan Statistical Area and has fewer 
than 100 beds. The proposed rule will affect small rural hospitals that 
(a) furnish SNF services under a swing-bed agreement or (b) have a 
hospital-based SNF. We anticipate that the impact on small rural 
hospitals will be similar to the impact on SNF providers overall.
    Section 202 of UMRA also requires that agencies assess anticipated 
costs and benefits before issuing any rule whose mandates require 
spending in any 1 year of $100 million in 1995 dollars, updated 
annually for inflation. In 2008, that threshold is approximately $130 
million. This proposed rule would not have a substantial effect on the 
governments mentioned, or on private sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates regulations that impose 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. As stated 
above, this proposed rule would have no substantial effect on State and 
local governments.

B. Anticipated Effects

    This proposed rule sets forth proposed updates of the SNF PPS rates 
contained in the final rule for FY 2008 (72 FR 43412, August 3, 2007) 
and the associated correction notices (72 FR 55085, September 28, 2007, 
and 72 FR 67652, November 30, 2007). Based on the above, we estimate 
the FY 2009 impact would be a net decrease of $60 million on payments 
to SNFs (this reflects a $770 million reduction from the recalibration 
of the case-mix adjustment, offset by a $710 million increase from the 
update to the payment rates. The impact analysis of this proposed rule 
represents the projected effects of the changes in the SNF PPS from FY 
2008 to FY 2009. We estimate the effects by estimating payments while 
holding all other payment variables constant. We use the best data 
available, but we do not attempt to predict behavioral responses to 
these changes, and we do not make adjustments for future changes in 
such variables as days or case-mix.
    We note that certain events may combine to limit the scope or 
accuracy of our impact analysis, because 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 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 
previously-enacted legislation, or new statutory provisions. Although 
these changes may not be specific to the SNF PPS, the nature of the 
Medicare program is that the changes may interact, and the complexity 
of the interaction of these changes could make it difficult to predict 
accurately the full scope of the impact upon SNFs.
    In accordance with section 1888(e)(4)(E) of the Act, we update the 
payment rates for FY 2008 by a factor equal to the full market basket 
index percentage increase plus the FY 2007 forecast error adjustment to 
determine the payment rates for FY 2009. The special AIDS add-on 
established by section 511 of the MMA remains in effect until ``* * 
*such date as the Secretary certifies that there is an appropriate 
adjustment in the case mix. * * *'' We have not provided a separate 
impact analysis for the MMA provision. Our latest estimates indicate 
that there are less than 2,700 beneficiaries who qualify for the AIDS 
add-on payment. The impact to Medicare is included in the ``total'' 
column of Table 12. In proposing to update the rates for FY 2009, 
standard annual revisions and clarifications mentioned elsewhere in 
this proposed rule (for example, the update to the wage and market 
basket indexes used for adjusting the Federal rates). These revisions 
would increase payments to SNFs by approximately $710 million.
    The net decrease in payments associated with this proposed rule is 
estimated to be $60 million for FY 2009. The decrease of $770 million 
due to the recalibration of the case-mix adjustment, together with the 
market basket increase of $710 million, results in a net decrease of 
$60 million.
    The impacts are shown in Table 12. The breakdown of the various 
categories of data in the table follows.
    The first column shows the breakdown of all SNFs by urban or rural 
status, hospital-based or freestanding status, and census region.
    The first row of figures in the first column describes the 
estimated effects of the various changes on all facilities. The next 
six rows show the effects on facilities split by hospital-based, 
freestanding, urban, and rural categories. The urban and rural 
designations are based on the location of the facility under the CBSA 
designation. The next twenty-two rows show the effects on urban versus 
rural status by census region.
    The second column in the table shows the number of facilities in 
the impact database.
    The third column of the table shows the effect of the annual update 
to the wage index. This represents the effect of using the most recent 
wage data available. The total impact of this change is zero percent; 
however, there are distributional effects of the change.
    The fourth column shows the effect of recalibrating the two 
adjustments (parity and NTA) to the CMIs. As explained previously in 
section II.B.2 of this proposed rule, we are proposing this 
recalibration so that the CMIs more accurately reflect parity in 
expenditures under the refined, 53-group RUG system introduced in 2006 
relative to payments made under the original, 44-group RUG system, and 
in order to keep the NTA component at the appropriate level specified 
in the FY 2006 SNF PPS final rule. The total impact of this change is a 
decrease of 3.3 percent. We note that some individual providers may 
experience larger decreases in payments than others due to case-mix 
utilization.
    The fifth column shows the effect of all of the changes on the FY 
2009 payments. The market basket increase of 3.1 percentage points is 
constant for all providers and, though not shown individually, is 
included in the total column. It is projected that aggregate payments 
will decrease by 0.3 percent, assuming facilities do not change their 
care delivery and billing practices in response.
    As can be seen from this table, the combined effects of all of the 
changes vary by specific types of providers and by location. For 
example, though most facilities experience payment decreases, some 
providers (for example, those in the urban Pacific region) show an 
increase of 1.0 percent. Payment increases for facilities in the urban 
and rural Pacific areas of the country are the highest for any of the 
provider categories.

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C. Alternatives Considered

    Section 1888(e) of the Act establishes the SNF PPS for the payment 
of Medicare SNF services for cost reporting periods beginning on or 
after July 1, 1998. This section of the statute prescribes a detailed 
formula for calculating payment rates under the SNF PPS, and does not 
provide for the use of any alternative methodology. It specifies that 
the base year cost data to be used for computing the SNF PPS payment 
rates must be from FY 1995 (October 1, 1994, through September 30, 
1995.) In accordance with the statute, we also incorporated a number of 
elements into the SNF PPS (for example, case-mix classification 
methodology, the MDS assessment schedule, a market basket index, a wage 
index, and the urban and rural distinction used in the development or 
adjustment of the Federal rates). Further, section 1888(e)(4)(H) of the 
Act specifically requires us to disseminate the payment rates for each 
new FY through the Federal Register, and to do so before the August 1 
that precedes the start of the new FY. Accordingly, we are not pursuing 
alternatives with respect to the payment methodology as discussed 
above.
    The proposed rule would recalibrate the case-mix adjustment to the 
case-mix indexes based on actual CY 2006 data instead of continuing to 
use FY 2001 data, in order to make the change from the 44-group RUG 
model to the refined 53-group model in a budget-neutral manner, as 
described in section II.B.2. In the FY 2006 SNF PPS final rule (70 FR 
45031, August 4, 2005), we committed to monitoring the accuracy and 
effectiveness of the case-mix indexes used in the 53-group model. We 
believe that using actual data instead of superseded historical data 
better meets our objective of paying SNFs more accurately.
    We considered various options for implementing the revised case-mix 
adjustment. For example, we considered implementing partial adjustments 
to the case-mix indexes over multiple years until parity was achieved. 
However, we believe that these options would further delay moving to 
the most appropriate payment amounts. Moreover, in anticipation of the 
possible changes resulting from STRIVE in the RUG-III structural model 
and the CMIs used in payment, we believe it is important for the 
recalibration to be entirely completed beforehand, in order to ensure 
stability in the base as we move forward with these other changes.
    We also considered introducing new case-mix weights derived from 
the STRIVE time study data. However, our initial analyses show that it 
would be more efficient and less burdensome to providers to introduce 
any new case-mix weights as part of an overall restructuring of the 
RUG-III model that is currently scheduled for October 2009.

D. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 13 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule. This 
table provides our best estimate of the change in Medicare payments 
under the SNF PPS as a result of the policies in this proposed rule 
based on the data for 15,346 SNFs in our database. All expenditures are 
classified as transfers to Medicare providers (that is, SNFs).

      Table 13.--Accounting Statement: Classification of Estimated
   Expenditures, From the 2008 SNF PPS Fiscal Year to the 2009 SNF PPS
                               Fiscal Year
                              [In Millions]
------------------------------------------------------------------------
                Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers..........  $60 million*
From Whom To Whom?......................  SNF Medicare Providers to
                                           Federal Government
------------------------------------------------------------------------
* The net decrease of $60 million in transfer payments is a result of
  the decrease of $770 million due to the proposed recalibration of the
  case-mix adjustment, together with the proposed market basket increase
  of $710 million.

E. Conclusion

    Overall estimated payments for SNFs in FY 2009 are projected to 
decrease by 0.3 percent compared with those in FY 2008. We estimate 
that SNFs in urban areas would experience a 0.3 percent decrease in 
estimated payments compared with FY 2008. We estimate that SNFs in 
rural areas would experience a 0.2 percent decrease in estimated 
payments compared with FY 2008. Providers in the urban Pacific region 
and the rural Pacific region show increases in payments of 1.0 and 0.9 
percent, respectively.
    Finally, in accordance with the provisions of Executive Order 
12866, this regulation was reviewed by the Office of Management and 
Budget.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as follows:

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

    1. The authority citation for part 413 continues to read as 
follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of 
Public Law 106-133 (113 Stat. 1501A-332).

Subpart J--Prospective Payment for Skilled Nursing Facilities

    2. In Sec.  413.333, the definitions of the terms ``rural area'' 
and ``urban area'' are revised to read as follows:


Sec.  413.333  Definitions.

* * * * *
    Rural area means, for services provided on or after July 1, 1998, 
but before October 1, 2005, an area as defined in Sec.  
412.62(f)(1)(iii) of this chapter. For services provided on or after 
October 1, 2005, rural area means an area as defined in Sec.  
412.64(b)(1)(ii)(C) of this chapter.
    Urban area means, for services provided on or after July 1, 1998, 
but before October 1, 2005, an area as defined in Sec.  
412.62(f)(1)(ii) of this chapter. For services provided on or after 
October 1, 2005, urban area means an area as defined in Sec.  
412.64(b)(1)(ii)(A) and Sec.  412.64(b)(1)(ii)(B) of this chapter.


Sec.  413.335  [Amended]

    3. Section 413.335 is amended by revising paragraph (b) to read as 
follows:


Sec.  413.335  Basis of payment.

* * * * *
    (b) Payment in full. (1) The payment rates represent payment in 
full (subject to applicable coinsurance as described in subpart G of 
part 409 of this chapter) for all costs (routine, ancillary, and 
capital-related) associated with furnishing inpatient SNF services to 
Medicare beneficiaries other than costs associated with approved 
educational activities as described in Sec.  413.85.
    (2) In addition to the Federal per diem payment amounts, SNFs 
receive payment for bad debts of Medicare

[[Page 25939]]

beneficiaries, as specified in Sec.  413.89 of this part.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare-Hospital Insurance Program; and No. 93.774, Medicare-
Supplementary Medical Insurance Program)

    Dated: March 14, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: April 24, 2008.
Michael O. Leavitt,
Secretary.
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