Proposed Rule: Medicare: Skilled Nursing Facilities Prospective Payment System and Consolidated Billing (2008 FY)

Friday,
May 4, 2007
Part IV
Department of
Health and Human
Services
Centers for Medicare & Medicaid Services
42 CFR Part 413

Medicare Program; Prospective Payment
System and Consolidated Billing for
Skilled Nursing Facilities for FY 2008;
Proposed Rule
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25526 Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Proposed Rules
DEPARTMENT OF HEALTH AND 7500 Security Boulevard, Baltimore, MD been received: http://www.cms.hhs.gov/
HUMAN SERVICES 21244–1850. eRulemaking. Click on the link
4. By hand or courier. If you prefer, ‘‘Electronic Comments on CMS
Centers for Medicare & Medicaid you may deliver (by hand or courier) Regulations’’ on that Web site to view
Services your written comments (one original public comments.
and two copies) before the close of the Comments received timely will also
42 CFR Part 413 comment period to one of the following be available for public inspection as
addresses. If you intend to deliver your they are received, generally beginning
[CMS–1545–P]
comments to the Baltimore address, approximately 3 weeks after publication
RIN 0938–AO64 please call telephone number (410) 786– of a document, at the headquarters of
9994 in advance to schedule your the Centers for Medicare & Medicaid
Medicare Program; Prospective arrival with one of our staff members. Services, 7500 Security Boulevard,
Payment System and Consolidated Room 445–G, Hubert H. Humphrey Baltimore, Maryland 21244, Monday
Billing for Skilled Nursing Facilities for Building, 200 Independence Avenue, through Friday of each week from 8:30
FY 2008 SW., Washington, DC 20201; or 7500 a.m. to 4 p.m. To schedule an
AGENCY: Centers for Medicare & Security Boulevard, Baltimore, MD appointment to view public comments,
Medicaid Services (CMS), HHS. 21244–1850. phone 1–800–743–3951.
(Because access to the interior of the To assist readers in referencing
ACTION: Proposed rule.
HHH Building is not readily available to sections contained in this document, we
SUMMARY: This proposed rule would persons without Federal Government are providing the following Table of
update the payment rates used under identification, commenters are Contents.
the prospective payment system (PPS) encouraged to leave their comments in Table of Contents
for skilled nursing facilities (SNFs), for the CMS drop slots located in the main I. Background
fiscal year (FY) 2008. In addition, this lobby of the building. A stamp-in clock A. Current System for Payment of SNF
proposed rule would revise and rebase is available for persons wishing to retain Services Under Part A of the Medicare
the SNF market basket, and would a proof of filing by stamping in and Program
modify the threshold for the adjustment retaining an extra copy of the comments B. Requirements of the Balanced Budget
to account for market basket forecast being filed.) Act of 1997 (BBA) for Updating the
error. Comments mailed to the addresses Prospective Payment System for Skilled
Nursing Facilities
DATES: To be assured consideration, indicated as appropriate for hand or
C. The Medicare, Medicaid, and SCHIP
comments must be received at one of courier delivery may be delayed and Balanced Budget Refinement Act of 1999
the addresses provided below, no later received after the comment period. (BBRA)
than 5 p.m. on June 29, 2007. For information on viewing public D. The Medicare, Medicaid, and SCHIP
comments, see the beginning of the Benefits Improvement and Protection
ADDRESSES: In commenting, please refer Act of 2000 (BIPA)
SUPPLEMENTARY INFORMATION section.
to file code CMS–1545–P. Because of E. The Medicare Prescription Drug,
FOR FURTHER INFORMATION CONTACT:
staff and resource limitations, we cannot Improvement, and Modernization Act of
accept comments by facsimile (FAX) Ellen Berry, (410) 786–4528 (for 2003 (MMA)
transmission. information related to the case-mix F. Skilled Nursing Facility Prospective
You may submit comments in one of classification methodology). Mollie Payment System—General Overview
four ways (no duplicates, please): Knight, (410) 786–7948 (for information 1. Payment Provisions—Federal Rate
related to the SNF market basket and 2. Rate Updates Using the Skilled Nursing
1. Electronically. You may submit
labor-related share). Jeanette Kranacs, Facility Market Basket Index
electronic comments on specific issues II. Annual Update of Payment Rates Under
in this regulation to http:// (410) 786–9385 (for information related
the Prospective Payment System for
www.cms.hhs.gov/eRulemaking. Click to the development of the payment Skilled Nursing Facilities
on the link ‘‘Submit electronic rates). Bill Ullman, (410) 786–5667 (for A. Federal Prospective Payment System
comments on CMS regulations with an information related to level of care 1. Costs and Services Covered by the
open comment period.’’ (Attachments determinations, consolidated billing, Federal Rates
should be in Microsoft Word, and general information). 2. Methodology Used for the Calculation of
SUPPLEMENTARY INFORMATION:
the Federal Rates
WordPerfect, or Excel; however, we B. Case-Mix Refinements
prefer Microsoft Word.) Submitting Comments: We welcome C. Wage Index Adjustment to Federal Rates
2. By regular mail. You may mail comments from the public on all issues D. Updates to Federal Rates
written comments (one original and two set forth in this rule to assist us in fully E. Relationship of RUG–III Classification
copies) to the following address ONLY: considering issues and developing System to Existing Skilled Nursing
Centers for Medicare & Medicaid policies. You can assist us by Facility Level-of-Care Criteria
Services, Department of Health and referencing the file code CMS–1545–P F. Example of Computation of Adjusted
and the specific ‘‘issue identifier’’ that PPS Rates and SNF Payment
Human Services, Attention: CMS–1545–
III. The Skilled Nursing Facility Market
P, P.O. Box 8016, Baltimore, MD 21244– precedes the section on which you Basket Index
8016. choose to comment. A. Use of the Skilled Nursing Facility
Please allow sufficient time for mailed Inspection of Public Comments: All Market Basket Percentage
comments to be received before the comments received before the close of B. Market Basket Forecast Error
close of the comment period. the comment period are available for Adjustment
3. By express or overnight mail. You viewing by the public, including any C. Federal Rate Update Factor
may send written comments (one personally identifiable or confidential IV. Revising and Rebasing the Skilled
original and two copies) to the following business information that is included in Nursing Facility Market Basket Index
A. Background
address ONLY: Centers for Medicare & a comment. We post all comments B. Rebasing and Revising the Skilled
Medicaid Services, Department of received before the close of the Nursing Facility Market Basket
Health and Human Services, Attention: comment period on the following Web C. Price Proxies Used to Measure Cost
CMS–1545–P, Mail Stop C4–26–05, site as soon as possible after they have Category Growth
Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Proposed Rules 25527
1. Wages and Salaries MEDPAR Medicare Provider Analysis A. Current System for Payment of
2. Employee Benefits and Review File Skilled Nursing Facility Services Under
3. All Other Expenses Part A of the Medicare Program
4. Capital-Related
MMA Medicare Prescription Drug,
D. Proposed Market Basket Estimate for the Improvement, and Modernization
Section 4432 of the Balanced Budget
FY 2008 SNF Update Act of 2003, Pub. L. 108–173
Act of 1997 (BBA) amended section
V. Consolidated Billing MSA Metropolitan Statistical Area 1888 of the Act to provide for the
VI. Application of the SNF PPS to SNF NAICS North American Industrial
Services Furnished by Swing-Bed
implementation of a per diem PPS for
Classification System SNFs, covering all costs (routine,
Hospitals
VII. Provisions of the Proposed Rule OIG Office of the Inspector General ancillary, and capital-related) of covered
VIII. Collection of Information Requirements OMB Office of Management and SNF services furnished to beneficiaries
IX. Regulatory Impact Analysis Budget under Part A of the Medicare program,
A. Overall Impact OMRA Other Medicare Required effective for cost reporting periods
B. Anticipated Effects beginning on or after July 1, 1998. In
Assessment
C. Accounting Statement this proposed rule, we propose to
D. Alternatives Considered PPI Producer Price Index
update the per diem payment rates for
E. Conclusion PPS Prospective Payment System
Addendum: FY 2008 CBSA Wage Index
SNFs for FY 2008. Major elements of the
RAI Resident Assessment Instrument SNF PPS include:
Tables (Tables 8 & 9)
RAP Resident Assessment Protocol
• Rates. As discussed in section I.F.1
Abbreviations RAVEN Resident Assessment of this proposed rule, we established per
In addition, because of the many Validation Entry diem Federal rates for urban and rural
terms to which we refer by abbreviation RFA Regulatory Flexibility Act, Pub. areas using allowable costs from FY
in this proposed rule, we are listing L. 96–354 1995 cost reports. These rates also
these abbreviations and their RHC Rural Health Clinic included an estimate of the cost of
corresponding terms in alphabetical RIA Regulatory Impact Analysis services that, before July 1, 1998, had
order below: RUG–III Resource Utilization Groups, been paid under Part B but furnished to
ADL Activity of Daily Living Version III Medicare beneficiaries in a SNF during
AIDS Acquired Immune Deficiency RUG–53 Refined 53-Group RUG–III a Part A covered stay. We adjust the
Syndrome Case-Mix Classification System rates annually using a SNF market
ARD Assessment Reference Date basket index, and we adjust them by the
BBA Balanced Budget Act of 1997, SCHIP State Children’s Health
hospital inpatient wage index to
Pub. L. 105–33 Insurance Program
account for geographic variation in
BBRA Medicare, Medicaid and SCHIP SIC Standard Industrial Classification wages. We also apply a case-mix
Balanced Budget Refinement Act of System adjustment to account for the relative
1999, Pub. L. 106–113 SNF Skilled Nursing Facility resource utilization of different patient
BIPA Medicare, Medicaid, and SCHIP STM Staff Time Measurement types. This adjustment utilizes a
Benefits Improvement and UMRA Unfunded Mandates Reform refined, 53-group version of the
Protection Act of 2000, Pub. L. 106– Act, Public Law 104–4 Resource Utilization Groups, version III
554 (RUG–III) case-mix classification
BLS Bureau of Labor Statistics I. Background system, based on information obtained
CAH Critical Access Hospital [If you choose to comment on issues from the required resident assessments
CBSA Core-Based Statistical Area in this section, please include the using the Minimum Data Set (MDS) 2.0.
CFR Code of Federal Regulations caption ‘‘BACKGROUND’’ at the Additionally, as noted in the August 4,
CMS Centers for Medicare & Medicaid beginning of your comments.] 2005 final rule (70 FR 45028), the
Services payment rates at various times have also
CPT (Physicians’) Current Procedural Annual updates to the prospective
payment system (PPS) rates for skilled reflected specific legislative provisions,
Terminology including section 101 of the BBRA,
DRA Deficit Reduction Act of 2005, nursing facilities (SNFs) are required by
section 1888(e) of the Social Security sections 311, 312, and 314 of the BIPA,
Pub. L. 109–171 and section 511 of the MMA.
DRG Diagnosis Related Group Act (the Act), as added by section 4432
ECI Employment Cost Index of the Balanced Budget Act of 1997 • Transition. Under sections
FI Fiscal Intermediary (BBA), and amended by the Medicare, 1888(e)(1)(A) and (e)(11) of the Act, the
FQHC Federally Qualified Health Medicaid, and SCHIP Balanced Budget SNF PPS included an initial, three-
Center Refinement Act of 1999 (BBRA), the phase transition that blended a facility-
FR Federal Register Medicare, Medicaid, and SCHIP specific rate (reflecting the individual
FY Fiscal Year Benefits Improvement and Protection facility’s historical cost experience) with
GAO Government Accountability Act of 2000 (BIPA), and the Medicare the Federal case-mix adjusted rate. The
Office Prescription Drug, Improvement, and transition extended through the
HCPCS Healthcare Common Procedure Modernization Act of 2003 (MMA) facility’s first three cost reporting
Coding System relating to Medicare payments and periods under the PPS, up to and
HIT Health Information Technology consolidated billing for SNFs. Our most including the one that began in FY
ICD–9–CM International Classification recent annual update occurred in an 2001. Thus, the SNF PPS is no longer
of Diseases, Ninth Edition, Clinical update notice (71 FR 43158, July 31, operating under the transition, as all
Modification 2006) that set forth updates to the SNF facilities have been paid at the full
IFC Interim Final Rule with Comment PPS payment rates for fiscal year (FY) Federal rate effective with cost reporting
Period 2007. We subsequently published a periods beginning in FY 2002. As we
MDS Minimum Data Set correction notice (71 FR 57519, now base payments entirely on the
MEDPAC Medicare Payment Advisory September 29, 2006) with respect to adjusted Federal per diem rates, we no
Commission those payment rate updates. longer include adjustment factors
related to facility-specific rates for the B. Requirements of the Balanced Budget 1888(e)(2)(E) of the Act. In the July 31,
coming fiscal year. Act of 1997 (BBA) for Updating the 2001 final rule (66 FR 39562), we made
• Coverage. The establishment of the Prospective Payment System for Skilled conforming changes to the regulations at
SNF PPS did not change Medicare’s Nursing Facilities § 413.114(d), effective for services
Section 1888(e)(4)(H) of the Act furnished in cost reporting periods
fundamental requirements for SNF
requires that we publish annually in the beginning on or after July 1, 2002, to
coverage. However, because the RUG–III
Federal Register: reflect section 408 of the BBRA.
classification is based, in part, on the
beneficiary’s need for skilled nursing 1. The unadjusted Federal per diem D. The Medicare, Medicaid, and SCHIP
care and therapy, we have attempted, rates to be applied to days of covered Benefits Improvement and Protection
where possible, to coordinate claims SNF services furnished during the FY. Act of 2000 (BIPA)
review procedures with the output of 2. The case-mix classification system The BIPA also included several
beneficiary assessment and RUG–III to be applied with respect to these provisions that resulted in adjustments
classifying activities. This approach services during the FY. to the SNF PPS. We described these
3. The factors to be applied in making provisions in detail in the final rule that
includes an administrative presumption
the area wage adjustment with respect we published in the Federal Register on
that utilizes a beneficiary’s initial
to these services. July 31, 2001 (66 FR 39562). In
classification in one of the upper 35
In the July 30, 1999 final rule (64 FR particular:
RUGs of the refined 53-group system to 41670), we indicated that we would
assist in making certain SNF level of • Section 203 of the BIPA exempted
announce any changes to the guidelines CAH swing-beds from the SNF PPS. We
care determinations, as discussed in for Medicare level of care included further information on this
greater detail in section II.E. of this determinations related to modifications provision in Program Memorandum
proposed rule. in the RUG–III classification structure A–01–09 (Change Request #1509),
• Consolidated Billing. The SNF PPS (see section II.E of this proposed rule for issued January 16, 2001, which is
includes a consolidated billing a discussion of the relationship between available online at www.cms.hhs.gov/
provision that requires a SNF to submit the case-mix classification system and transmittals/downloads/a0109.pdf.
consolidated Medicare bills to its fiscal SNF level of care determinations). • Section 311 of the BIPA revised the
intermediary for almost all of the Along with a number of other statutory update formula for the SNF
services that its residents receive during revisions proposed later in this market basket, and also directed us to
the course of a covered Part A stay. preamble, this proposed rule provides conduct a study of alternative case-mix
While section 313 of the BIPA repealed the annual updates to the Federal rates classification systems for the SNF PPS.
the Part B aspect of the consolidated as mandated by the Act. In 2006, we submitted a report to the
billing requirement, SNFs maintain C. The Medicare, Medicaid, and SCHIP Congress on this study, which is
responsibility for submitting Balanced Budget Refinement Act of available online at www.cms.hhs.gov/
consolidated Medicare bills to the fiscal 1999 (BBRA) SNFPPS/Downloads/RC_2006_PC–
intermediary for physical, occupational, PPSSNF.pdf.
There were several provisions in the • Section 312 of the BIPA provided
and speech-language therapy that BBRA that resulted in adjustments to for a temporary increase of 16.66
residents receive during a noncovered the SNF PPS. We described these percent in the nursing component of the
stay. The statute excludes a small list of provisions in detail in the final rule that case-mix adjusted Federal rate for
services from the consolidated billing we published in the Federal Register on services furnished on or after April 1,
provision (primarily those of physicians July 31, 2000 (65 FR 46770). In 2001, and before October 1, 2002. The
and certain other types of practitioners), particular, section 101(a) of the BBRA add-on is no longer in effect. This
which remain separately billable under provided for a temporary 20 percent section also directed the General
Part B when furnished to a SNF’s Part increase in the per diem adjusted Accounting Office (GAO) to conduct an
A resident. A more detailed discussion payment rates for 15 specified RUG–III audit of SNF nursing staff ratios and
of this provision appears in section V. groups. In accordance with section submit a report to the Congress on
of this proposed rule. 101(c)(2) of the BBRA, this temporary whether the temporary increase in the
• Application of the SNF PPS to SNF payment adjustment expired on January nursing component should be
1, 2006, upon the implementation of continued. The report (GAO–03–176),
services furnished by swing-bed
case-mix refinements (see section I.F.1. which GAO issued in November 2002,
hospitals. Section 1883 of the Act
of this proposed rule). We included is available online at www.gao.gov/
permits certain small, rural hospitals to
further information on BBRA provisions new.items/d03176.pdf.
enter into a Medicare swing-bed that affected the SNF PPS in Program • Section 313 of the BIPA repealed
agreement, under which the hospital Memorandums A–99–53 and A–99–61 the consolidated billing requirement for
can use its beds to provide either acute (December 1999). services (other than physical,
or SNF care, as needed. For critical Also, section 103 of the BBRA occupational, and speech-language
access hospitals (CAHs), Part A pays on designated certain additional services therapy) furnished to SNF residents
a reasonable cost basis for SNF services for exclusion from the consolidated during noncovered stays, effective
furnished under a swing-bed agreement. billing requirement, as discussed in January 1, 2001. (A more detailed
However, in accordance with section section IV of this proposed rule. discussion of this provision appears in
1888(e)(7) of the Act, these services Further, for swing-bed hospitals with section V. of this proposed rule.)
furnished by non-CAH rural hospitals more than 49 (but less than 100) beds, • Section 314 of the BIPA corrected
are paid under the SNF PPS, effective section 408 of the BBRA provided for an anomaly involving three of the RUGs
with cost reporting periods beginning the repeal of certain statutory that the BBRA had designated to receive
on or after July 1, 2002. A more detailed restrictions on length of stay and the temporary payment adjustment
discussion of this provision appears in aggregate payment for patient days, discussed above in section I.C. of this
section VI. of this proposed rule. effective with the end of the SNF PPS proposed rule. (As noted previously, in
transition period described in section accordance with section 101(c)(2) of the
BBRA, this temporary payment of 128 percent, this urban facility would cost limits, as well as costs related to
adjustment expired upon the receive a case-mix adjusted payment of payments for exceptions to the routine
implementation of case-mix refinements approximately $572.07. cost limits. Using the formula that the
on January 1, 2006.) In addition, section 410 of the MMA BBA prescribed, we set the Federal rates
• Section 315 of the BIPA authorized contained a provision that excluded at a level equal to the weighted mean of
us to establish a geographic from consolidated billing certain freestanding costs plus 50 percent of the
reclassification procedure that is practitioner and other services difference between the freestanding
specific to SNFs, but only after furnished to SNF residents by rural mean and weighted mean of all SNF
collecting the data necessary to establish health clinics (RHCs) and Federally costs (hospital-based and freestanding)
a SNF wage index that is based on wage Qualified Health Centers (FQHCs). (A combined. We computed and applied
data from nursing homes. At this time, more detailed discussion of this separately the payment rates for
this has proven to be infeasible due to provision appears in section V. of this facilities located in urban and rural
the volatility of existing SNF wage data proposed rule.) areas. In addition, we adjusted the
and the significant amount of resources portion of the Federal rate attributable
F. Skilled Nursing Facility Prospective
that would be required to improve the to wage-related costs by a wage index.
Payment System—General Overview
quality of that data. The Federal rate also incorporates
We included further information on We implemented the Medicare SNF adjustments to account for facility case-
several of the BIPA provisions in PPS effective with cost reporting mix, using a classification system that
Program Memorandum A–01–08 periods beginning on or after July 1, accounts for the relative resource
(Change Request #1510), issued January 1998. This PPS pays SNFs through utilization of different patient types.
16, 2001, which is available online at prospective, case-mix adjusted per diem The RUG–III classification system uses
www.cms.hhs.gov/transmittals/ payment rates applicable to all covered beneficiary assessment data from the
downloads/a0108.pdf. SNF services. These payment rates Minimum Data Set (MDS) completed by
cover all costs of furnishing covered SNFs to assign beneficiaries to one of 53
E. The Medicare Prescription Drug, skilled nursing services (routine,
Improvement, and Modernization Act of RUG–III groups. The original RUG–III
ancillary, and capital-related costs) case-mix classification system included
2003 (MMA) other than costs associated with 44 groups. However, under refinements
The MMA included a provision that approved educational activities. that became effective on January 1,
results in a further adjustment to the Covered SNF services include post- 2006, we added nine new groups—
SNF PPS. Specifically, section 511 of hospital services for which benefits are comprising a new Rehabilitation plus
the MMA amended section 1888(e)(12) provided under Part A and all items and Extensive Services category—at the top
of the Act to provide for a temporary services that, before July 1, 1998, had of the RUG hierarchy. The May 12, 1998
increase of 128 percent in the PPS per been paid under Part B (other than interim final rule (63 FR 26252)
diem payment for any SNF resident physician and certain other services included a complete and detailed
with Acquired Immune Deficiency specifically excluded under the BBA) description of the original 44-group
Syndrome (AIDS), effective with but were furnished to Medicare RUG–III case-mix classification system.
services furnished on or after October 1, beneficiaries in a SNF during a covered A comprehensive description of the
2004. This special AIDS add-on was to Part A stay. A complete discussion of refined 53-group RUG–III case-mix
remain in effect until ‘‘* * * such date these provisions appears in the May 12, classification system (RUG–53)
as the Secretary certifies that there is an 1998 interim final rule (63 FR 26252). appeared in the proposed and final rules
appropriate adjustment in the case mix for FY 2006 (70 FR 29070, May 19,
* * *.’’ The AIDS add-on is also 1. Payment Provisions—Federal Rate
2005, and 70 FR 45026, August 4, 2005).
discussed in Program Transmittal #160 The PPS uses per diem Federal Further, in accordance with section
(Change Request #3291), issued on April payment rates based on mean SNF costs 1888(e)(4)(E)(ii)(IV) of the Act, the
30, 2004, which is available online at in a base year updated for inflation to Federal rates in this proposed rule
www.cms.hhs.gov/transmittals/ the first effective period of the PPS. We reflect an update to the rates that we
downloads/r160cp.pdf. As discussed in developed the Federal payment rates published in the July 31, 2006 final rule
the SNF PPS final rule for FY 2006 (70 using allowable costs from hospital- for FY 2007 (71 FR 43158) and the
FR 45028, August 4, 2005), we did not based and freestanding SNF cost reports associated correction notice (71 FR
address the certification of the AIDs for reporting periods beginning in FY 57519, September 29, 2006), equal to the
add-on with the implementation of the 1995. The data used in developing the full change in the SNF market basket
case-mix refinements, thus allowing the Federal rates also incorporated an index. A more detailed discussion of the
temporary add-on payment created by estimate of the amounts that would be SNF market basket index and related
section 511 of the MMA to continue in payable under Part B for covered SNF issues appears in sections I.F.2. and III.
effect. services furnished to individuals during of this proposed rule.
For the limited number of SNF the course of a covered Part A stay in
residents that qualify for the AIDS add- a SNF. 2. Rate Updates Using the Skilled
on, implementation of this provision In developing the rates for the initial Nursing Facility Market Basket Index
results in a significant increase in period, we updated costs to the first Section 1888(e)(5) of the Act requires
payment. For example, using 2005 data, effective year of the PPS (the 15-month us to establish a SNF market basket
we identified 1276 SNF residents with period beginning July 1, 1998) using a index that reflects changes over time in
a principal diagnosis code of 042 SNF market basket index, and then the prices of an appropriate mix of
(‘‘Human Immunodeficiency Virus standardized for the costs of facility goods and services included in covered
(HIV) Infection’’). For FY 2008, an urban differences in case-mix and for SNF services. We use the SNF market
facility with a resident with AIDS in geographic variations in wages. In basket index to update the Federal rates
RUG group ‘‘SSA’’ would have a case- compiling the database used to compute on an annual basis. For FY 2008, we
mix adjusted payment of almost $250.91 the Federal payment rates, we excluded propose to revise and rebase the market
(see Table 4) before the application of those providers that received new basket to reflect 2004 total cost data as
the MMA adjustment. After an increase provider exemptions from the routine detailed in section III.A. The proposed
FY 2008 market basket increase is 3.3 cumulative 3.26 percent forecast error This would be consistent with the
percent. (However, we note that both adjustment relating to FYs 2000 through relative magnitude of forecast error that
the President’s budget and the 2002 updates, the differences between is addressed by the inpatient hospital
recommendations of the Medicare the forecasted and actual increases in capital PPS forecast error adjustment.
Payment Advisory Commission the market basket for each of the Both the SNF and inpatient hospital
(MedPAC) include a proposal for a zero subsequent fiscal years have been far capital PPS forecast error adjustments
percent update in the SNF market smaller in magnitude (0.3 percentage currently utilize a 0.25 percent
basket for FY 2008, and that the point or less) than the ones that threshold. However, the inpatient
provisions outlined in this proposed originally had prompted the adoption of hospital capital PPS’s average annual
rule would need to reflect any this policy. forecasted market basket update from
legislation that the Congress enacts to Accordingly, we believe it would be FY 1996 through FY 2006 (the period of
adopt this proposal.) appropriate at this point to recalibrate historical data used for forecast error
As explained in the final rule for FY the specified threshold for triggering a adjustments to date) was approximately
2004 (66 FR 46058, August 4, 2003), the forecast error adjustment, in a manner 0.9 percent. In contrast, the SNF PPS’s
annual update of the payment rates that distinguishes between the major average annual forecasted market basket
includes, as appropriate, an adjustment forecast errors that gave rise to this update from FY 2000 through FY 2006
to account for market basket forecast policy initially and the far more typical (the period of historical data used for
error. When we initially proposed the minor variances that have consistently forecast error adjustments to date) was
forecast error adjustment (68 FR 34768, occurred in each of the succeeding approximately 3.1 percent. Thus, the
June 10, 2003), we noted that significant years. As indicated in our original 0.25 percentage point threshold
previous forecast errors had resulted proposal for a forecast error adjustment, addressed forecast errors equaling 28
from wages and benefits for SNF we believe that establishing a minimum percent or more of the average annual
workers increasing more rapidly than threshold for making such adjustments forecasted market basket update under
expected. In the SNF PPS final rule for reflects the concept that there is the inpatient hospital capital PPS,
FY 2004, we then proceeded to correct generally a minimal amount of compared with 8 percent of the average
for those forecast errors with a one-time, imprecision that is inherently associated annual forecasted market basket update
cumulative adjustment relating to the with measuring statistics, and that any under the SNF PPS. Utilizing a 1
FYs 2000 through 2002 updates, such threshold should be sufficiently percentage point forecast error
resulting in a 3.26 percentage point high to screen out small variations that adjustment threshold under the SNF
addition to the market basket update. may arise from this imprecision. At this PPS would address forecast errors
We also provided for subsequent point, however, we are concerned that equaling 32 percent or more of the
adjustments in succeeding fiscal years the existing 0.25 percentage point average annual forecasted market basket
whenever the difference between the threshold may not be high enough to update, which is more consistent with
forecasted and actual market basket accomplish this and to focus instead on the relative magnitude of forecast error
increases exceeds a specified threshold, the more significant variations—those of for which adjustment is made under the
which we indicated at the time would a magnitude that would indicate a inpatient hospital capital PPS.
likely be 0.25 percentage point. failure to reflect accurately the actual
However, we believe that it is now While this rule proposes applying the
historical price changes faced by
appropriate to draw a distinction new threshold in FY 2008, we are also
SNFs—which the forecast error
between the kind of exceptional, considering delaying implementation of
adjustment was originally created to
unanticipated major increases in wages this change to FY 2009. We specifically
address.
and benefits that initially gave rise to We believe that a threshold of 0.5 invite comments on increasing the
this policy and the much smaller percentage point represents an amount forecast error adjustment threshold and
variances between forecasted and actual that is sufficiently high to screen out the making the proposal effective in FY
change that more typically occur from expected minor variances in a projected 2009.
year to year, in recognition that a certain statistical methodology, while at the As the difference between the
level of imprecision is inherently same time appropriately serving to estimated and actual amount of change
associated with measuring statistics. In trigger an adjustment in those instances falls below the proposed 0.5 percentage
general, the SNF market basket is where it is clear that the historical price point threshold, no forecast error
expected to reasonably project changes are not being adequately adjustment is appropriate in FY 2008.
inflationary price pressures. Further, reflected. Therefore, this proposed rule For FY 2006 (the most recently available
according to MedPAC analysis, we note would raise the threshold for triggering fiscal year for which there is final data),
that freestanding SNFs (which represent a forecast error adjustment under the the estimated increase in the market
more than 80 percent of all SNFs) have SNF PPS from the current 0.25 basket index was 3.1 percentage points,
received Medicare payments that percentage point to 0.5 percentage while the actual increase was 3.4
exceeded costs by 10.8 percent or more point, effective with FY 2008. percentage points, resulting in a 0.3
since 2001, and Medicare margins are We are also considering a higher percentage point difference. Table 1
projected to be 11 percent in 2007. threshold for the forecast error below shows the forecasted and actual
Moreover, following the initial, adjustment, up to 1.0 percentage point. market basket amount for FY 2006.
TABLE 1.—DIFFERENCE BETWEEN THE FORECASTED AND ACTUAL MARKET BASKET INCREASES FOR FY 2006
Forecasted Actual FY 2006

Index Actual FY 2006 increase** FY 2006 difference
increase*
SNF 3.1 3.4 0.3

*Published in FEDERAL REGISTER; based on second quarter 2005 Global Insight Inc. forecast (97 index).
**Based on the first quarter 2007 Global Insight forecast (97 index).
II. Annual Update of Payment Rates under Part A (the hospital insurance the BBRA and section 314 of the BIPA,
Under the Prospective Payment System program), as well as all items and are no longer in effect due to the
for Skilled Nursing Facilities services (other than those services implementation of case-mix refinements
[If you choose to comment on issues excluded by statute) that, before July 1, as of January 1, 2006. However, the
in this section, please include the 1998, were paid under Part B (the temporary increase of 128 percent in the
caption ‘‘Annual Update’’ at the supplementary medical insurance per diem adjusted payment rates for
beginning of your comments.] program) but furnished to Medicare SNF residents with AIDS, enacted by
beneficiaries in a SNF during a Part A section 511 of the MMA, remains in
A. Federal Prospective Payment System covered stay. (These excluded service effect.
This proposed rule sets forth a categories are discussed in greater detail We used the SNF market basket to
schedule of Federal prospective in section V.B.2. of the May 12, 1998 adjust each per diem component of the
payment rates applicable to Medicare interim final rule (63 FR 26295–97)). Federal rates forward to reflect cost
Part A SNF services beginning October 2. Methodology Used for the Calculation increases occurring between the
1, 2007. The schedule incorporates per of the Federal Rates midpoint of the Federal fiscal year
diem Federal rates that provide Part A beginning October 1, 2006, and ending
payment for all costs of services The proposed FY 2008 rates would September 30, 2007, and the midpoint
furnished to a beneficiary in a SNF reflect an update using the full amount of the Federal fiscal year beginning
during a Medicare-covered stay. of the latest market basket index. The October 1, 2007, and ending September
FY 2008 market basket increase factor is 30, 2008, to which the payment rates
1. Costs and Services Covered by the 3.3 percent. A complete description of apply. In accordance with section
Federal Rates the multi-step process initially appeared 1888(e)(4)(E)(ii)(IV) of the Act, we
The Federal rates apply to all costs in the May 12, 1998 interim final rule update the payment rates for FY 2008 by
(routine, ancillary, and capital-related) (63 FR 26252), as further revised in a factor equal to the full market basket
of covered SNF services other than costs subsequent rules. We note that in index percentage increase. We further
associated with approved educational accordance with section 101(c)(2) of the adjust the rates by a wage index budget
activities as defined in § 413.85. Under BBRA, the previous, temporary neutrality factor, described later in this
section 1888(e)(2) of the Act, covered increases in the per diem adjusted section. Tables 2 and 3 reflect the
SNF services include post-hospital SNF payment rates for certain designated updated components of the unadjusted
services for which benefits are provided RUGs, as specified in section 101(a) of Federal rates for FY 2008.
TABLE 2.—FY 2008 UNADJUSTED FEDERAL RATE PER DIEM URBAN

Nursing— Therapy— Therapy—non-
Rate component Non-case-mix
case-mix case-mix case-mix
Per Diem Amount ............................................................................................ $146.77 $110.55 $14.56 $74.90
TABLE 3.—FY 2008 UNADJUSTED FEDERAL RATE PER DIEM RURAL

Nursing— Therapy— Therapy—non-
Rate component Non-case-mix
case-mix case-mix case-mix
Per Diem Amount ............................................................................................ $140.22 $127.48 $15.55 $76.29
B. Case-Mix Refinements the proposed and final rules for FY 2006 We list the case-mix adjusted
Under the BBA, each update of the (70 FR 29070, May 19, 2005, and 70 FR payment rates separately for urban and
SNF PPS payment rates must include 45026, August 4, 2005). As noted in the rural SNFs in Tables 4 and 5, with the
the case-mix classification methodology FY 2006 final rule, we deferred RUG–53 corresponding case-mix values. These
applicable for the coming Federal fiscal implementation from the beginning of tables do not reflect the AIDS add-on
year. As indicated in section I.F.1. of FY 2006 (October 1, 2005) until January enacted by section 511 of the MMA,
this proposed rule, the payment rates set 1, 2006, in order to allow sufficient time which we apply only after making all
forth herein reflect the use of the refined to prepare for and ease the transition to other adjustments (wage and case-mix).
RUG–53 that we discussed in detail in the refinements (70 FR 45034). BILLING CODE 4210–01–P
EP04MY07.043</GPH>
EP04MY07.044</GPH>
EP04MY07.045</GPH>
C. Wage Index Adjustment to Federal occupational mix adjustment continues year weights from the SNF market
Rates to be appropriate for SNF payments. basket.
Section 1888(e)(4)(G)(ii) of the Act We would apply the wage index We calculate the labor-related relative
requires that we adjust the Federal rates adjustment to the labor-related portion importance for FY 2008 in four steps.
to account for differences in area wage of the Federal rate, which is 73.757 First, we compute the FY 2008 price
levels, using a wage index that we find percent of the total rate. This percentage index level for the total market basket
appropriate. Since the inception of a reflects the labor-related relative and each cost category of the market
PPS for SNFs, we have used hospital importance for FY 2008, using the basket. Second, we calculate a ratio for
wage data in developing a wage index proposed revised and rebased FY 2004- each cost category by dividing the FY
to be applied to SNFs. We propose to based market basket. The labor-related 2008 price index level for that cost
continue that practice for FY 2008, as relative importance for FY 2007 was category by the total market basket price
we continue to believe that in the 75.839, using the FY 1997-based market index level. Third, we determine the FY
absence of SNF-specific wage data, basket, as shown in Table 11. We 2008 relative importance for each cost
using the hospital inpatient wage data is calculate the labor-related relative category by multiplying this ratio by the
appropriate and reasonable for the SNF importance from the SNF market basket, base year (FY 1997) weight. Finally, we
PPS. As explained in the update notice and it approximates the labor-related
add the FY 2008 relative importance for
for FY 2005 (69 FR 45786, July 30, portion of the total costs after taking
each of the labor-related cost categories
2004), the SNF PPS does not use the into account historical and projected
(wages and salaries, employee benefits,
hospital area wage index’s occupational price changes between the base year and
nonmedical professional fees, labor-
mix adjustment, as this adjustment FY 2008. The price proxies that move
intensive services, and a portion of
serves specifically to define the the different cost categories in the
occupational categories more clearly in market basket do not necessarily change capital-related expenses) to produce the
a hospital setting; moreover, the at the same rate, and the relative FY 2008 labor-related relative
collection of the occupational wage data importance captures these changes. importance. Tables 6 and 7 below show
also excludes any wage data related to Accordingly, the relative importance the Federal rates by labor-related and
SNFs. Therefore, we believe that using figure more closely reflects the cost non-labor-related components.
the updated wage data exclusive of the share weights for FY 2008 than the base BILLING CODE 4210–01–P
EP04MY07.046</GPH>
EP04MY07.047</GPH>
BILLING CODE 4210–01–C from the previous year) to the volume In the SNF PPS final rule for FY 2006
Section 1888(e)(4)(G)(ii) of the Act weighted mean wage adjustment factor, (70 FR 45026, August 4, 2005), we
also requires that we apply this wage using the wage index for the FY adopted the changes discussed in the
index in a manner that does not result beginning October 1, 2006. We use the Office of Management and Budget
in aggregate payments that are greater or same volume weights in both the (OMB) Bulletin No. 03–04 (June 6,
less than would otherwise be made in numerator and denominator, and derive 2003), available online at
the absence of the wage adjustment. For them from the 1997 Medicare Provider www.whitehouse.gov/omb/bulletins/
FY 2008 (Federal rates effective October Analysis and Review File (MEDPAR) b03–04.html, which announced revised
1, 2007), we would apply the most data. We define the wage adjustment definitions for Metropolitan Statistical
recent wage index using the hospital factor used in this calculation as the Areas (MSAs), and the creation of
inpatient wage data, and would also labor share of the rate component Micropolitan Statistical Areas and
apply an adjustment to fulfill the budget Combined Statistical Areas. In addition,
multiplied by the wage index plus the

neutrality requirement. We would meet non-labor share. The proposed budget OMB published subsequent bulletins
this requirement by multiplying each of neutrality factor for this year is 1.0003. regarding CBSA changes, including
the components of the unadjusted changes in CBSA numbers and titles.
The wage index applicable to FY 2008
Federal rates by a factor equal to the We wish to clarify that this and all
appears in Tables 8 and 9 of this
ratio of the volume weighted mean wage subsequent SNF PPS rules and notices
proposed rule.
EP04MY07.048</GPH>
adjustment factor (using the wage index are considered to incorporate the CBSA
changes published in the most recent represent a reasonable proxy for the without specific hospital wage index
OMB bulletin that applies to the rural area. This approach uses pre-floor, data in determining the SNF PPS wage
hospital wage data used to determine pre-reclassified hospital wage data, is index.
the current SNF PPS wage index. The easy to evaluate, is updateable from We propose to continue this approach
OMB bulletins may be accessed online year-to-year, and uses the most local for urban areas without specific hospital
at http://www.whitehouse.gov/omb/ data available. wage index data. Therefore, the wage
bulletins/index.html. In determining an imputed rural wage index for urban CBSA (25980)
In adopting the OMB Core-Based index, we interpret the term Hinesville-Fort Stewart, GA is
Statistical Area (CBSA) geographic ‘‘contiguous’’ to mean sharing a border. calculated as the average wage index of
designations, we provided for a 1-year For example, in the case of all urban areas in Georgia.
transition with a blended wage index for Massachusetts, the entire rural area We solicit comments on these
all providers. For FY 2006, the wage consists of Dukes and Nantucket approaches to calculating the wage
index for each provider consisted of a counties. We have determined that the index values for areas without hospitals
blend of 50 percent of the FY 2006 borders of Dukes and Nantucket for FY 2008 and subsequent years.
MSA-based wage index and 50 percent counties are ‘‘contiguous’’ with D. Updates to the Federal Rates
of the FY 2006 CBSA-based wage index Barnstable and Bristol counties. Under
(both using FY 2002 hospital data). We the proposed methodology, the wage In accordance with section
referred to the blended wage index as indexes for the counties of Barnstable 1888(e)(4)(E) of the Act as amended by
the FY 2006 SNF PPS transition wage (CBSA 12700, Barnstable Town, MA- section 311 of the BIPA, the proposed
index. As discussed in the SNF PPS (1.2539)) and Bristol (CBSA 39300, payment rates in this proposed rule
final rule for FY 2006 (70 FR 45041), Providence-New Bedford-Fall River, RI- reflect an update equal to the full SNF
subsequent to the expiration of this MA-(1.0783)) are averaged, resulting in market basket, estimated at 3.3
1-year transition on September 30, 2006, an imputed rural wage index of 1.1665 percentage points. We will continue to
we used the full CBSA-based wage for rural Massachusetts for FY 2008. disseminate the rates, wage index, and
index values, as now presented in While we believe that this policy could case-mix classification methodology
Tables 8 and 9 of this proposed rule. be readily applied to other rural areas through the Federal Register before the
When adopting OMB’s new labor that lack hospital wage data (possibly August 1 that precedes the start of each
market designations, we identified some due to hospitals converting to a different succeeding fiscal year.
geographic areas where there were no provider type, such as a CAH, that does E. Relationship of RUG–III Classification
hospitals and, thus, no hospital wage not submit the appropriate wage data), System to Existing Skilled Nursing
index data on which to base the should a similar situation arise in the Facility Level-of-Care Criteria
calculation of the SNF PPS wage index future, we may re-examine this policy.
(70 FR 29095, May 19, 2005). As in the However, we do not believe that this As discussed in § 413.345, we include
SNF PPS final rule for FY 2006 (70 FR policy is appropriate for Puerto Rico. in each update of the Federal payment
45041) and in the SNF PPS update There are sufficient economic rates in the Federal Register the
notice for FY 2007 (71 FR 43170, July differences between hospitals in the designation of those specific RUGs
31, 2006), we now address two United States and those in Puerto Rico under the classification system that
situations concerning the wage index. (including the payment of hospitals in represent the required SNF level of care,
The first situation involves rural Puerto Rico using blended Federal/ as provided in § 409.30. This
locations in Massachusetts and Puerto Commonwealth-specific rates) to designation reflects an administrative
Rico. Under the CBSA labor market warrant establishing a separate and presumption under the refined RUG–53
areas, there are no rural hospitals in distinct policy specifically for Puerto that beneficiaries who are correctly
those locations. Because there was no Rico. Consequently, any alternative assigned to one of the upper 35 of the
rural proxy for more recent rural data methodology for imputing a wage index RUG–53 groups on the initial 5-day,
within those areas, we used the FY 2005 for rural Puerto Rico would need to take Medicare-required assessment are
wage index value in both FY 2006 and into account those differences. Our automatically classified as meeting the
FY 2007 for rural Massachusetts and policy of imputing a rural wage index SNF level of care definition up to and
rural Puerto Rico. based on the wage index(es) of CBSAs including the assessment reference date
Because we have used the same wage contiguous to the rural area in question on the 5-day Medicare required
index value (from FY 2005) for these does not recognize the unique assessment.
areas for the previous two fiscal years, circumstances of Puerto Rico. While we A beneficiary assigned to any of the
we believe it is appropriate at this point have not yet identified an alternative lower 18 groups is not automatically
to consider alternatives in our methodology for imputing a wage index classified as either meeting or not
methodology to update the wage index for rural Puerto Rico, we will continue meeting the definition, but instead
for rural areas without hospital wage to evaluate the feasibility of using receives an individual level of care
index data. We believe that the best existing hospital wage data and, determination using the existing
imputed proxy would (1) use pre-floor, possibly, wage data from other sources. administrative criteria. This
pre-reclassified hospital data, (2) use the Accordingly, we propose to continue presumption recognizes the strong
most local data available, (3) be easy to using the most recent wage index likelihood that beneficiaries assigned to
evaluate, and (4) be easily updateable previously available for rural Puerto one of the upper 35 groups during the
from year-to-year. Although our current Rico; that is, a wage index of 0.4047. immediate post-hospital period require
methodology uses local, rural pre-floor, The second situation involved the a covered level of care, which would be
pre-reclassified hospital wage data, this urban CBSA (25980) Hinesville-Fort significantly less likely for those
method is not updateable from year-to- Stewart, GA. Again, under CBSA beneficiaries assigned to one of the
year. designations there are no urban lower 18 groups.
Therefore, in cases where there is a hospitals within that CBSA. For FY In this proposed rule, we are
rural area without hospital wage data, 2006 and FY 2007, we used all of the continuing the designation of the upper
we propose using the average wage urban areas within the State to serve as 35 groups for purposes of this
index from all contiguous CBSAs to a reasonable proxy for the urban area administrative presumption, consisting
of the following RUG–53 classifications: Rehabilitation category; all groups adjustments made to the Federal per
All groups within the Rehabilitation within the Extensive Services category; diem rate to compute the provider’s
plus Extensive Services category; all all groups within the Special Care actual per diem PPS payment. SNF
groups within the Ultra High category; and, all groups within the XYZ’s total PPS payment would equal
Rehabilitation category; all groups Clinically Complex category. $29,656. The Labor and Non-labor
within the Very High Rehabilitation columns are derived from Table 6 of this
category; all groups within the High F. Example of Computation of Adjusted
PPS Rates and SNF Payment proposed rule.
Rehabilitation category; all groups
within the Medium Rehabilitation Using the SNF XYZ described in
category; all groups within the Low Table 10 below, the following shows the
TABLE 10.—RUG–53 SNF XYZ: LOCATED IN CEDAR RAPIDS, IA (URBAN CBSA 16300) WAGE INDEX: 0.8853
Medicare
RUG group Labor Wage index Adj. labor Non-labor Adj. rate Percent adj Payment
days
RVX .................................. $336.93 0.8853 $298.28 $119.88 $418.16 $418.16 14 $5,854.00

RLX .................................. 232.12 0.8853 205.50 82.59 288.09 288.09 30 8,643.00
RHA .................................. 233.65 0.8853 206.85 83.13 289.98 289.98 16 4,640.00
CC2 .................................. 198.05 0.8853 175.33 70.47 245.80 *560.43 10 5,604.00
IA2 .................................... 132.02 0.8853 116.88 46.97 163.85 163.85 30 4,915.00
.................... .................... .................... .................... .................... .................... 100 29,656.00

* Reflects a 128 percent adjustment from section 511 of the MMA.
III. The Skilled Nursing Facility Market services included in the SNF PPS. This proposal to revise and rebase the SNF
Basket Index proposed rule incorporates the latest market basket appears in section IV. of
available projections of the SNF market this proposed rule.
[If you choose to comment on issues basket index. We will incorporate into Each year, we calculate a revised
in this section, please include the the SNF final rule updated projections labor-related share based on the relative
caption ‘‘Market Basket Index’’ at the based on the latest available projections importance of labor-related cost
beginning of your comments.] at that time. Accordingly, we have categories in the input price index.
Section 1888(e)(5)(A) of the Act developed a SNF market basket index Table 11 below summarizes the
requires us to establish a SNF market that encompasses the most commonly proposed updated labor-related share
basket index (input price index) that used cost categories for SNF routine for FY 2008, which is based on the
reflects changes over time in the prices services, ancillary services, and capital- proposed rebased and revised SNF
of an appropriate mix of goods and related expenses. A discussion of our market basket.
TABLE 11.—LABOR-RELATED RELATIVE IMPORTANCE, FY 2007 AND FY 2008

Relative Relative
importance, importance,
labor-related, labor-related,
FY 2007 FY 2008
(1997-based (2004-based
index) index)
0:2 forecast 07:41 forecast
Wages and salaries ..................................................................................................................................... 54.231 53.628

Employee benefits ....................................................................................................................................... 11.903 12.299
Nonmedical professional fees ..................................................................................................................... 2.721 1.442
Labor-intensive services .............................................................................................................................. 4.035 3.746
Capital-related (.391) ................................................................................................................................... 2.949 2.642
Total ...................................................................................................................................................... 75.839 73.757
Source: Global Insight, Inc., formerly DRI–WEFA.
A. Use of the Skilled Nursing Facility 2008. We use the Global Insight, Inc. specific to full Federal rates that started
Market Basket Percentage (formerly DRI–WEFA), 1st quarter 2007 with cost reporting periods beginning in
forecasted percentage increase in the FY July 1998 has expired.
Section 1888(e)(5)(B) of the Act
defines the SNF market basket 2004-based SNF market basket index for
B. Market Basket Forecast Error
percentage as the percentage change in routine, ancillary, and capital-related
Adjustment
the SNF market basket index, as expenses, described in the previous
described in the previous section, from section, to compute the update factor in As discussed in the June 10, 2003,
the average of the prior fiscal year to the this proposed rule. Finally, as discussed supplemental proposed rule (68 FR
average of the current fiscal year. For in section I.A. of this proposed rule, we 34768) and finalized in the August 4,
the Federal rates established in this no longer compute update factors to 2003, final rule (68 FR 46067), the
proposed rule, we use the percentage adjust a facility-specific portion of the regulations at 42 CFR 413.337(d)(2)
increase in the SNF market basket index SNF PPS rates, because the initial three- currently provide for an adjustment to
to compute the update factor for FY phase transition period from facility- account for market basket forecast error.
The initial adjustment applied to the revised and rebased our 1977 routine would cost, at a later time, to purchase
update of the FY 2003 rate for FY 2004, costs input price index and adopted a the same mix of goods and services that
and took into account the cumulative total expenses SNF input price index was purchased in the base period. The
forecast error for the period from FY using FY 1992 as the base year. In 2001 effects on total expenditures resulting
2000 through FY 2002. Subsequent we rebased and revised the market from changes in the quantity or mix of
adjustments in succeeding FYs take into basket to a base year of FY 1997. This goods and services purchased
account the forecast error from the most year, in 2007, we propose to revise and subsequent or prior to the base period
recently available fiscal year for which rebase the SNF market basket to a base are, by design, not considered.
there is final data, and apply whenever year of FY 2004. As discussed in the May 12, 1998
the difference between the forecasted The term ‘‘market basket’’ technically interim final rule (63 FR 26252) and in
and actual change in the market basket describes the mix of goods and services the July 31, 2001 final rule (66 FR
exceeds a 0.25 percentage point needed to produce SNF care, and is also 39582), to implement section
threshold. As also discussed previously commonly used to denote the input 1888(e)(5)(A) of the Act we propose to
in section I.F.2. of this proposed rule, price index that includes both weights revise and rebase the market basket so
we are proposing to raise the 0.25 (mix of goods and services) and price the cost weights and price proxies
percentage point threshold for forecast factors. The term ‘‘market basket’’ used reflect the mix of goods and services
error adjustments under the SNF PPS to in this proposed rule refers to the SNF that SNFs purchased for all costs
0.5 percentage point effective with FY input price index. (routine, ancillary, and capital-related)
2008, and we invite comments on The proposed FY 2004-based SNF included in the SNF PPS for FY 2004.
increasing the forecast error adjustment market basket represents routine costs,
costs of ancillary services, and capital- B. Rebasing and Revising the Skilled
threshold and its effective date, as well Nursing Facility Market Basket
as other aspects of this proposed rule. related costs. The percentage change in
As also discussed in that section, the the market basket reflects the average The terms ‘‘rebasing’’ and ‘‘revising’’,
payment rates for FY 2008 do not change in the price of a fixed set of while often used interchangeably,
include a forecast error adjustment, as goods and services purchased by SNFs actually denote different activities.
the difference between the estimated in order to furnish all services. For Rebasing means shifting the base year
and actual amounts of increase in the further background information, see the for the structure of costs of the input
market basket index for FY 2006 (the May 12, 1998 interim final rule (63 FR price index (for example, for this
most recently available fiscal year for 26289) and the July 31, 2001 final rule proposed rule, we propose to shift the
which there is final data) does not (66 FR 39582). base year cost structure from fiscal year
exceed the proposed 0.5 percentage For purposes of the SNF PPS, the SNF 1997 to fiscal year 2004). Revising
point threshold. market basket is a fixed-weight means changing data sources, cost
(Laspeyres-type) price index. A categories, price proxies, and/or
C. Federal Rate Update Factor Laspeyres-type index compares the cost methodology used in developing the
Section 1888(e)(4)(E)(ii)(IV) of the Act of purchasing a specified mix of goods input price index.
requires that the update factor used to and services in a selected base period to We are proposing both to rebase and
establish the FY 2008 Federal rates be the cost of purchasing that same group revise the SNF market basket to reflect
at a level equal to the full market basket of goods and services at current prices. 2004 Medicare allowable total cost data
percentage change. Accordingly, to We construct the market basket in (routine, ancillary, and capital-related).
establish the update factor, we three steps. The first step is to select a Medicare allowable costs are costs that
determined the total growth from the base period and estimate total base could be reimbursed under the SNF
average market basket level for the period expenditure shares for mutually PPS. For example, the SNF market
period of October 1, 2006 through exclusive and exhaustive spending basket excludes home health aide costs
September 30, 2007 to the average categories. We use total costs for routine as these costs would be reimbursed
market basket level for the period of services, ancillary services, and capital. under the HHA PPS and, therefore,
October 1, 2007 through September 30, These shares are called ‘‘cost’’ or these costs are not SNF Medicare
2008. Using this process, the proposed ‘‘expenditure’’ weights. The second step allowable costs.
market basket update factor for FY 2008 is to match each expenditure category to The 1997-based SNF market basket is
SNF Federal rates is 3.3 percent. We a price/wage variable, called a price based on total facility costs, which
used this revised proposed update factor proxy. We draw these price proxy includes costs not reimbursed under the
to compute the Federal portion of the variables from publicly available SNF PPS (such as nursing facility, long-
SNF PPS rate shown in Tables 2 and 3. statistical series published on a term care, HHA, and intermediate care
consistent schedule, preferably at least facility costs). Due to insufficient data,
IV. Revising and Rebasing the Skilled quarterly. The final step involves we were unable to separate Medicare
Nursing Facility Market Basket Index multiplying the price level for each allowable costs from total facility costs
[If you choose to comment on issues spending category by the cost weight for during the 1997-based SNF market
in this section, please include the that category. The sum of these products basket rebasing and other previous
caption ‘‘Revising and Rebasing’’ at the (that is, weights multiplied by proxy rebasings. For this current rebasing
beginning of your comments.] index levels) for all cost categories analysis, we compared a 2004-based
yields the composite index level of the SNF market basket based on Medicare
A. Background market basket for a given quarter or allowable costs to one based on total
Section 1888(e)(5)(A) of the Social year. Repeating the third step for other facility cost methodologies and found
Security Act requires the Secretary to quarters and years produces a time the cost weights to be similar. We
establish a market basket index that series of market basket index levels, believe that using only Medicare
reflects the changes over time in the from which we can calculate rates of allowable costs better reflects the cost
prices of an appropriate mix of goods growth. structure of SNFs serving Medicare
and services included in the SNF PPS. The market basket represents a fixed- beneficiaries, and permits us to apply
Effective for cost reporting periods weight index because it answers the the same methodology used to calculate
beginning on or after July 1, 1998, we question of how much more or less it the Inpatient Prospective Payment
System (IPPS), Rehabilitation, and up-to-date data source for nursing benefits from Worksheet S–3, part II,
Psychiatric, and Long-term Care (RPL), home expenditure data. minus excluded (non-Medicare
and Home Health Agency (HHA) market The capital-related portion of the allowable) benefits. Non-Medicare
baskets. proposed rebased and revised SNF PPS allowable benefits are equal to the non-
We selected FY 2004 as the new base market basket employs the same overall Medicare allowable salaries times the
year because 2004 is the most recent methodology used to develop the ratio of total benefit costs for the SNF to
year for which relatively complete capital-related portion of the 1992-based the total wage costs for the SNF.
Medicare cost report data are available. SNF market basket, described in the Contract Labor: We determined the
In developing the proposed market May 12, 1998 interim final rule (63 FR weight for contract labor using 2004
basket, we reviewed SNF expenditure 26289) and the 1997-based SNF market SNF Medicare Cost Reports. We derived
data from Medicare cost reports for FY basket, described in the July 31, 2001 the share using Medicare allowable
2004 for each freestanding SNF that final rule (66 FR 39582). It is also the wage-related costs from Worksheet S–3,
reported Medicare expenses and same methodology used for the part II line 17 minus Nursing Facility
payments. The FY 2004 cost reports are inpatient hospital capital input price (NF) contract labor costs and Medicare
those with cost reporting periods index described in the May 31, 1996 allowable total costs from Worksheet B,
beginning after September 30, 2003 and proposed rule (61 FR 27466), the August part I. (Worksheet S–3, part II line 17
before October 1, 2004. We maintained 30, 1996 final rule (61 FR 46196), and only includes direct patient care
our policy of using data from the August 12, 2005 final rule (70 FR contract labor attributable to SNF and
freestanding SNFs because freestanding 47407). The strength of this NF services.) NF contract labor costs
SNF data reflect the actual cost structure methodology is that it reflects the (which are not reimbursable under
faced by the SNF itself. In contrast, vintage nature of capital, which Medicare) are equal to total contract
expense data for a hospital-based SNF represents the acquisition and use of labor costs multiplied by the ratio of NF
reflect the allocation of overhead over capital over time. We explain this wages and salaries to the sum of NF and
the entire institution. Due to this methodology in more detail below. SNF wages and salaries.
method of allocation, total expenses will Our proposed rebasing and revising of We then distributed contract labor
be correct, but the individual the market basket index resulted in 23 costs between the wages and salaries
components’ expenses may be skewed. cost weights, a change from the current and employee benefits cost categories,
If data from hospital-based SNFs were market basket. We are adding cost under the assumption that contract costs
included, the resultant cost structure categories for postage and professional should move at the same rate as direct
might be unrepresentative of the costs liability insurance (PLI), and have labor costs even though unit labor cost
that a typical SNF experiences. We changed price proxies in several of the levels may be different.
show in table 16 a comparison of the categories. We describe below the Pharmaceuticals: We derived the cost
proposed 2004-based Medicare sources of the main category weights weight for pharmaceuticals from the
allowable and total facility SNF market and their subcategories in the proposed 2004 SNF Medicare Cost Reports. We
baskets. 2004-based SNF market basket. The calculated this share using non-salary
We developed cost category weights proposed market basket contains 23 costs from the Pharmacy cost center and
for the proposed 2004-based market detailed cost weights, two more cost the Drugs Charged to Patients’ cost
basket in two stages. First, we derived weights than the 1997-based index. center, both found on Worksheet B.
base weights for seven major categories Wages and Salaries: We derived the Since these drug costs were attributable
(wages and salaries, employee benefits, wages and salaries cost category using to the entire SNF and not limited to
contract labor, pharmaceuticals, the 2004 SNF Medicare Cost Reports. Medicare allowable services, we
professional liability insurance, capital- We determined the share using adjusted the drug costs by the ratio of
related, and a residual ‘‘all other’’) using Medicare allowable wages and salaries Medicare allowable pharmacy total
edited SNF Medicare cost reports. We from Worksheet S–3, part II and total costs to total pharmacy costs from
edited the Medicare costs reports to expenses from Worksheet B, part I. Worksheet B, part I, column 11.
remove reports where the data were Medicare allowable wages and salaries Worksheet B, part I allocates the general
deemed unreliable (for example, when are equal to total wages and salaries service cost centers, which are often
total costs were not greater than zero). minus excluded salaries from referred to as ‘‘overhead costs’’ (in
We divided the residual ‘‘all other’’ cost Worksheet S–3, part II, as well as which pharmacy costs are included), to
category into subcategories, using U.S. nursing facility and non-reimbursable the Medicare allowable and non-
Department of Commerce Bureau of salaries from Worksheet A, lines 18, 34 Medicare allowable cost centers. This
Economic Analysis’ 1997 Benchmark through 36, and 58 through 63. resulted in a drug cost weight (3.2
Input-Output (I–O) tables for the Medicare allowable total expenses are percent) that was slightly higher than
nursing home industry aged forward equal to total expenses from Worksheet the drug cost weight would have been
using price changes. (The methodology B, lines 16, 21 through 30, 32, 33, 48, (2.7 percent) if no adjustment for
we used to age the data involves and 52 through 54. This share Medicare allowable services had been
applying the annual changes from the represents the wage and salary share of made. We are proposing to use this
price proxies to the appropriate cost costs for employees for the SNF, and methodology to derive the
categories. We repeat this practice for does not include the wages and salaries pharmaceutical cost weight.
each year.) The 1997-based SNF market from contract labor, which are allocated In addition to the Medicare allowable
basket used the U.S. Department of to wages and salaries in a later step. methodology, we also explored
Commerce Bureau of Economic Employee Benefits: We determined alternative methods for calculating the
Analysis’ 1997 Annual Input-Output the weight for employee benefits using SNF market basket drug cost weight.
tables and the 1997 Business 2004 SNF Medicare Cost Reports. We Specifically, we researched the viability
Expenditures Survey. The 1997 Annual derived the share using Medicare of calculating a Medicare-specific drug
I–O is an update of the 1992 Benchmark allowable wage-related costs from cost weight based on Medicare drug
I–O data, while the 1997 Benchmark I– Worksheet S–3, part II and total costs as a percent of Medicare total
O is based on a completely new set of expenses from Worksheet B. Medicare costs. Because these expenses are not
data and, thus, is a more comprehensive allowable benefits are equal to total reported directly, we were required to
estimate them using cost-to-charge average cost-to-charge ratio for all was inappropriate to use in developing
ratios. Medicare drug costs can be ancillary cost centers is 0.65. the proposed drug cost weight in the
calculated as the product of non-salary, Furthermore, the Medicare Drugs proposed 2004-based SNF market
non-overhead costs from the Drugs Charged to Patients cost-to-charge ratios basket. In addition, as part of our
Charged to Patients cost center for freestanding SNFs differ greatly from sensitivity analysis, we estimated the
(including allocated costs from the those of hospital-based SNFs. Hospital- impact that this alternative methodology
Pharmacy cost center) from Worksheet based SNFs report an average cost-to- would have on our proposed FY 2008
B, part I and the cost-to-charge ratio charge ratio for the Drugs Charged to update, and found that it was minimal.
from Worksheet D, part 1. We excluded Patients cost center of 0.22. For However, we are soliciting comments on
salary and facility overhead costs from sensitivity analysis we used the this methodology. We also welcome any
this weight, as these costs would be hospital-based ratio of 0.22 to estimate input, data, or documentation from the
included in the other cost weights. a freestanding SNF Medicare drug cost public that would help to clarify the
Medicare total costs can be calculated as weight. The resulting weight was 3.3 discrepancies between freestanding and
the sum of Medicare inpatient costs and percent, which is close to the 3.2 hospital-based facilities’ Medicare drug
Medicare ancillary costs, including percent weight that was determined cost weights. Based on further internal
Medicare drug costs. using the Medicare allowable analyses and any external data or
methodology. Contrary to freestanding
This methodology produced a cost documentation that we receive from the
SNFs, the cost-to-charge ratio for the
weight that was nearly three times industry, we may still consider adoption
Drugs Charged to Patients cost center for
higher than the Medicare allowable drug of this Medicare drug cost weight
hospital-based SNFs is below the
cost weight. This considerably higher methodology to derive the SNF market
average cost-to-charge ratio for all
drug cost weight is primarily driven by basket drug cost weight.
ancillary cost centers, which is 0.29.
the cost-to-charge ratio for the Drugs The large inconsistencies between Table 12 below shows the similarity
Charged to Patients cost center, which is freestanding and hospital-based SNFs, between the SNF market basket percent
0.8 on average based on the 2004 SNF including the substantial difference in changes using the drug cost weight
Medicare cost reports. This ratio has the drug cost-to-charge ratios, as well as calculated with the Medicare allowable
been relatively consistent over the last the dissimilarity in the relationships of methodology for drugs and the market
five years. The Drugs Charged to Patient those ratios to the cost-to-charge ratios basket percent changes using the
cost center is one of the ancillary cost from all ancillary cost centers by SNF alternative drug methodology described
centers on the Medicare cost report. The type, led us to believe this methodology above.
Malpractice: Unlike the 1997-based Medicare cost reports include PLI as an Benchmark Input-Output table
SNF market basket, the proposed 2004- entry, while in 1997 very few SNFs indicated that the general category for
based SNF market basket includes a reported data for malpractice premiums, insurance carriers (which includes PLI
separate cost category for professional paid losses, or self-insurance on as a subset) was a very small share of
liability insurance (PLI). The 2004 SNF Worksheet S–2. In addition, the 1997 total SNF costs in 1997. In the past, it
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has been our policy not to provide separately in the 1997-based SNF distribution of long-term debt
detailed breakouts of cost categories market basket. outstanding by type of SNF (for-profit or
unless they represent a significant Capital-Related: We derived the not-for-profit) from the 2004 SNF
portion of providers’ costs. Recent weight for overall capital-related Medicare cost reports. We estimated the
indications are that PLI costs for SNFs expenses using the 2004 SNF Medicare interest expense (that is, interest
are rising. cost reports. We calculated the Medicare expenses excluding leasing costs) to be
We calculated the share using allowable capital-related cost weight 34 percent of total capital-related
malpractice costs from Worksheet S–2 from Worksheet B, part II. In expenditures in 2004.
of the Medicare Cost reports to develop determining the subcategory weights for
a SNF total facility cost weight. Since capital, we used information from the Because the data were not available in
these malpractice costs are attributable 2004 SNF Medicare Cost Reports and the Medicare cost reports, we used the
to the entire SNF and not just Medicare the 2002 Bureau of Census’ Business most recent 2002 BES data to derive the
allowable services, we adjusted the Expenditure Survey (BES). We capital-related expenses attributable to
malpractice costs by the ratio of calculated the depreciation cost weight leasing and other capital-related
Medicare allowable beds to total facility using depreciation costs from expenses. We determined the leasing
beds. We believe this is an appropriate Worksheet S–2. Unlike the cost weights costs to be 21 percent of capital-related
adjustment as malpractice costs are described above, we did not calculate expenses in 2002, while we determined
often based on the number of facility the depreciation cost weight using the other capital-related costs
beds. The proposed malpractice cost Medicare allowable total costs. Rather, (insurance, taxes, licenses, other) to be
weight is slightly higher than the 2004- we used total facility costs under the 13 percent of capital-related expenses.
based SNF total facility market basket assumption that the depreciation of an Lease expenses are not broken out as
malpractice cost weight. asset is not dependent upon whether the a separate cost category, but are
In addition to the proposed asset was used for Medicare or non- distributed among the cost categories of
adjustment, we also considered Medicare patients. depreciation, interest, and other,
adjusting the total facility malpractice We determined the distribution reflecting the assumption that the
costs by the ratio of SNF inpatient days between building and fixed equipment underlying cost structure of leases is
to total facility days and by the ratio of and movable equipment from the 2004 similar to capital costs in general. As
Medicare allowable costs to total facility SNF Medicare Cost Reports. From these was done in previous rebasings, we
costs. We note that these latter calculations, we estimated the assumed 10 percent of lease expenses
adjustment methodologies produced depreciation expenses (that is,
are overhead and assigned them to the
malpractice cost weights that were less depreciation expenses excluding leasing
other capital expenses cost category as
than one-tenth of a percentage point costs) to be 32 percent of total capital-
overhead. We distributed the remaining
different than the Medicare allowable related expenditures in 2004.
We also derived the interest expense lease expenses to the three cost
cost weight determined using our
share of capital-related expenses from categories based on the proportion of
proposed adjustment of Medicare
allowable beds to total beds. Again, we Worksheet A for the same edited 2004 depreciation, interest, and other capital
believe using Medicare allowable beds SNF Medicare cost reports. Similar to expenses to total capital costs,
to total beds is an appropriate the depreciation cost weight, we excluding lease expenses.
adjustment to total facility malpractice calculated the interest cost weight using Table 13 shows the capital-related
costs as malpractice costs are often total facility costs. For the current expense distribution (including
based on the number of facility beds. market basket, we determined the split expenses from leases) in the proposed
Due to a lack of data, the malpractice of interest expense between for-profit 2004-based SNF market basket and the
cost weight was not broken out and not-for-profit facilities based on the 1997-based SNF market basket.
TABLE 13.—COMPARISON OF THE CAPITAL-RELATED EXPENSE DISTRIBUTION OF THE 2004-BASED SNF MARKET BASKET
AND THE 1997-BASED SNF MARKET BASKET
Proposed 2004- 1997-based SNF

Cost category based SNF market basket
market basket
Capital-related Expenses ............................................................................................................................. 7.518 8.602

Total Depreciation ........................................................................................................................................ 2.981 5.266
Total Interest ................................................................................................................................................ 3.168 3.852
Other Capital-related Expenses .................................................................................................................. 1.369 0.760
Our methodology for determining the of expenditures within a cost category Estimates of useful lives for movable
price change of capital-related expenses that is attributable to each individual and fixed assets are 9 and 22 years,
accounts for the vintage nature of year over the useful life of the relevant respectively. These estimates are based
capital, which is the acquisition and use capital assets, or the vintage weights. on data from the BEA which publishes
of capital over time. In order to capture The data source that we previously used various useful life-related statistics,
this vintage nature, the price proxies to develop the useful lives of capital is including asset service lives and average
must be vintage-weighted. The no longer available. We researched ages. We note, however, that these data
determination of these vintage weights alternative data sources and found that in their published form are not directly
occurs in two steps. First, we must the Bureau of Economic Analysis (BEA) applicable to SNFs. However, we can
determine the expected useful life of provided enough data for us to derive use the BEA data to produce our own
capital and debt instruments in SNFs. the useful lives of both fixed and useful life estimates for SNFs.
Second, we must identify the proportion movable capital.
BEA service life data are published at this industry classification encompasses have assumed these results would
a detailed asset level and not at an far more than SNFs (that is, hospitals remain the same for 2004. Further, as
aggregate level, such as movable and and other health-related facilities, averages are measures of central
fixed assets. There are 43 detailed physician and dental services, medical tendency, we multiplied each of these
movable assets in the BEA estimates. laboratories, home health services, estimates by two to produce estimates of
Some examples include computer kidney dialysis centers, and more). In useful lives of 8.6 and 22.4 years for
software (34 months service life), 2003, BEA changed their industry movable and fixed assets, which we
electromedical equipment (9 years), classification system to a North would round to 9 and 22 years,
medical instruments and related American Industrial Classification respectively.
equipment (12 years), communication System (NAICS) basis. SNFs are now We are proposing to use this
equipment (15 years), and office included in ‘‘nursing and residential methodology to develop the vintage
equipment (8 years). There are 23 care services,’’ a more relevant industry. weights in the proposed 2004-based
detailed fixed assets in the BEA Unfortunately, at the time of this SNF market basket. We are proposing an
estimates. Some examples of detailed analysis, BEA had not published interest vintage weight time span of 20
fixed assets are medical office buildings average ages based on these new years, obtained by weighting the
(36 years), hospitals and special care industry classifications. movable and fixed vintage weights (9
buildings (48 years), lodging (32 years), Nonetheless, we have approximated years and 22 years, respectively) by the
and so on (Bureau of Economic average movable and fixed asset ages for moveable and fixed split (14 percent
Analysis, Fixed Assets and Consumer nursing and residential care services and 86 percent, respectively). We
Durable Goods in the United States, using other published BEA numbers calculated the split between moveable
1925–97, September 2003; Carol E. such as those noted previously. At the and fixed capital expenses from
Moylan and Brooks B. Robinson, time of our analysis, 2001 was the latest Worksheet G of the 2004 SNF Medicare
‘‘Preview of the 2003 Comprehensive year of age estimates data. We took cost reports.
Revision of the National Income and average ages for each asset and weighted Below is a table comparing the market
Product Accounts: Statistical Changes,’’ them using stock levels for each of these basket percent changes using the
Survey of Current Business, Volume 83, assets in the nursing and residential proposed useful lives of 9 years for
No. 9 (September 2003), pp. 17–32). care services industry. The stocks for movable assets, 22 years for fixed assets,
However, BEA also publishes average each specific asset come from BEA’s and 20 years for interest with the 1997-
asset age estimates. Data are available Detailed Fixed Asset Tables (http:// based useful lives of 10 years for
(1) by detailed and aggregate asset levels www.bea.gov/national/FA2004/Details/ movable assets, 23 years for fixed assets,
and (2) by industry, and were last xls/detailnonres_stk1.xls). This and 23 years for interest. For both the
published in 2002. In these estimates, produced average age data for movable historical and forecasted periods
SNFs are included in the Standard and fixed assets of 4.3 and 11.2 years. between FY 2002 and FY 2010, the
Industrial Classification (SIC) ‘‘health As average asset ages stay relatively difference between the two market
services.’’ We recognize, though, that constant from one year to the next, we baskets is minor.
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In addition to the proposed We then used the change in the stock of welcome any comments and/or
methodology, we also researched beds each year to approximate building equipment purchase data that would
alternative data sources, including the and fixed equipment purchases for that help enhance this review. Depending
Medicare cost reports. An asset’s useful year. This procedure assumes that bed upon whether the latter methodology is
life can be determined by taking the growth reflects the growth in capital- appropriate and feasible, we may adopt
current year’s depreciation costs related costs in SNFs for building and the use of this ratio of total ancillary
divided by the depreciable assets. This fixed equipment. We believe that this costs to total routine costs as the proxy
methodology is used to derive the useful assumption is reasonable because the for changes in intensity of SNF services
lives of fixed and movable assets in the number of beds reflects the size of a that would cause SNFs to purchase
2002-based Capital Input Price Index. SNF, and as a SNF adds beds, it also movable equipment. The resulting two
However, unlike the hospital Medicare adds fixed capital. time series, determined from beds and
cost reports, the SNF Medicare cost For movable equipment, we used the ratio of non-therapy ancillary to
reports do not provide depreciation available SNF data to capture the routine costs, would reflect real capital
costs for fixed and movable assets changes in intensity of SNF services that purchases of building and fixed
separately. We attempted to calculate would cause SNFs to purchase movable equipment and movable equipment over
the 2004 depreciation costs for fixed equipment. We estimated the change in time, respectively.
and movable equipment separately intensity as the change in the ratio of
non-therapy ancillary costs to routine To obtain nominal purchases, which
using the SNF Medicare cost reports.
costs from 1989 through 2004 using are used to determine the vintage
Specifically, we subtracted the
Medicare cost reports. We estimated this weights for interest, we converted the
accumulated depreciation for fixed and
ratio for 1962 through 1988 using two real capital purchase series from
moveable assets separately for 2003 and
regression analysis. The time series of 1963 through 2004 determined above to
2002, as reported in the balance sheet
the ratio of non-therapy ancillary costs nominal capital purchase series using
(Worksheet G), using a matched sample
to routine costs for SNFs measures their respective price proxies (the
of SNFs with consecutive cost reporting
periods. However, we were unable to changes in intensity in SNF services, Boeckh Institutional Construction Index
use this methodology as less than 1,000 which are assumed to be associated and the PPI for Machinery and
SNF providers reported these data, with movable equipment purchase Equipment). We then combined the two
while approximately 9,000 SNFs patterns. The assumption here is that as nominal series into one nominal capital
reported salary, benefit, and contract non-therapy ancillary costs increase purchase series for 1963 through 2004.
labor data. We are hopeful that at our compared to routine costs, the SNF Nominal capital purchases are needed
next rebasing of the SNF market basket, caseload becomes more complex and for interest vintage weights to capture
there will be sufficient balance sheet would require more movable the value of debt instruments.
data to calculate the useful lives of fixed equipment. Again, the lack of movable Once we created these capital
and movable equipment. equipment purchase data for SNFs over purchase time series for 1963 through
Given the expected useful life of time required us to use alternative SNF 2004, we averaged different periods to
capital and debt instruments, we must data sources. Although we are obtain an average capital purchase
determine the proportion of capital proposing to use the ratio of non- pattern over time. For building and
expenditures attributable to each year of therapy ancillary costs to routine costs fixed equipment we averaged twenty-
the expected useful life by cost category. as the proxy for changes in the intensity one 22-year periods, for movable
These proportions represent the vintage of SNF services, we are also reviewing equipment we averaged thirty-four 9-
weights. We were not able to find a the possibility (and feasibility) of using year periods, and for interest we
historical time series of capital the ratio of total ancillary costs averaged twenty-four 20-year periods.
expenditures by SNFs. Therefore, we (including therapy and non-therapy We calculate the vintage weight for a
approximated the capital expenditure costs) to routine costs such as a proxy. given year by dividing the capital
patterns of SNFs over time using We recognize that therapy utilization in purchase amount in any given year by
alternative SNF data sources. For SNFs has increased over the last decade the total amount of purchases during the
building and fixed equipment, we used and, therefore, the therapy equipment expected useful life of the equipment or
the stock of beds in nursing homes from purchases have also likely increased, debt instrument. We described this
the CMS National Health Accounts for although perhaps at a different rate than methodology in the May 12, 1998
1962 through 1999. Due to a lack of data those of non-therapy ancillary interim final rule (63 FR 26252). Table
for 2000 through 2003, we extrapolated equipment. We plan to review this 15 shows the resulting vintage weights
the 1999 bed data forward to 2004 using methodology between the publication of for each of these cost categories.
a 10-year moving average of bed growth. the proposed and final rules. We BILLING CODE 4210–01–P
We divided the residual ‘‘all other’’ proxies to the appropriate cost Below is a table comparing the
cost category into subcategories, using categories. We repeat this practice for proposed 2004-based SNF market basket
the BEA’s Benchmark Input-Output each year.) Therefore, we derive using the proposed Medicare allowable
Tables for the nursing home industry approximately 80 percent of the 2004- methodology and the proposed 2004-
aged to 2004 using relative price based SNF market basket from FY 2004 based SNF market basket using the total
changes. (The methodology we used to Medicare cost report data for facility methodology.
age the data involves applying the freestanding SNFs.
annual price changes from the price
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Using the Medicare allowable higher than that calculated using the (including, but not limited to gift,
methodology does affect the individual total facility methodology. This is flower, coffee, barber shops and
cost weights of the SNF market basket. primarily due to the exclusion of long physician private offices) from the
The compensation cost weight using the term care hospital (LTCH) and Medicare allowable cost weight. In
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Medicare allowable methodology is nonreimbursable inpatient costs addition, LTCH and nonreimbursable
services tend to be less labor intensive; The capital cost weight using the Below is a table comparing the
therefore, the exclusion of these costs Medicare allowable methodology is proposed 2004-based SNF market basket
from the Medicare allowable market slightly lower than the total facility with the currently used 1997-based SNF
basket results in a higher compensation methodology. This is also primarily due market basket.
weight than the compensation weight in to the exclusion of LTCH and
the total facility market basket. nonreimbursable inpatient costs.
C. Price Proxies Used To Measure Cost most appropriate wage and price wage and price proxies on Bureau of
Category Growth proxies currently available to monitor Labor Statistics (BLS) data, and group
the rate of change for each expenditure them into one of the following BLS
After developing the 23 cost weights category. With four exceptions (three for categories:
for the proposed revised and rebased the capital-related expenses cost • Employment Cost Indexes.
SNF market basket, we selected the
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categories and one for PLI), we base the Employment Cost Indexes (ECIs)
measure the rate of change in are as transparent to the public as approximately 75 percent of the
employment wage rates and employer possible. In addition, this enables the employment. Therefore, the SIC based
costs for employee benefits per hour public to be able to obtain the price ECI is more representative of Medicare-
worked. These indexes are fixed-weight proxy data on a regular basis. Finally, certified skilled nursing facilities than
indexes and strictly measure the change relevance means that the proxy is the NAICS based ECI.
in wage rates and employee benefits per applicable and representative of the cost BLS began publishing ECI data for the
hour. ECIs are superior to Average category weight to which it is applied. more detailed nursing care facilities
Hourly Earnings (AHE) as price proxies The CPIs, PPIs, and ECIs that we have (NAICS 623100) beginning with 2006,
for input price indexes because they are selected to propose in this regulation first quarter. However, given the lack of
not affected by shifts in occupation or meet these criteria. Therefore, we historical data, Global Insight Inc., the
industry mix, and because they measure believe that they continue to be the best economic forecasting firm used to
pure price change and are available by measure of price changes for the cost forecast the price proxies of the market
both occupational group and by categories to which they would be basket, is unable to develop a
industry. ECIs were based on NAICS applied. forecasting model for this detailed
(North American Industrial Table 19 lists all price proxies for the NAICS ECI. In the future, when
Classification System) rather than SIC proposed revised and rebased SNF sufficient data are available to forecast
(Standard Industrial Classification) in market basket. Below is a detailed the ECI for NAICS 623100, we will
April 2006 with the publication of explanation of the price proxies used for evaluate the use of this price proxy in
March 2006 data. each cost category weight. the SNF market basket. For now, we
• Producer Price Indexes. Producer have researched and developed several
1. Wages and Salaries
Price Indexes (PPIs) measure price alternative wage and salary price
changes for goods sold in markets other For measuring price growth in the proxies, which we describe in detail
than retail markets. PPIs are used when wages and salaries cost component of below. All of the five alternative wage
the purchases of goods or services are the proposed 2004-based SNF market and salary price proxies use the
made at the wholesale level. basket, we propose using the percentage Occupational Employment Statistics
• Consumer Price Indexes. Consumer change of a blended index based on 50 (OES) survey published by BLS to
Price Indexes (CPIs) measure changes in percent of the ECI for wages and salaries develop occupational weights. The first
the prices of final goods and services for nursing and residential care facilities four options use the OES data to create
bought by consumers. CPIs are only (NAICS 623) and 50 percent of the ECI economy-wide occupational groups
used when the purchases are similar to for wages and salaries for hospital while the fifth option uses OES data to
those of retail consumers rather than workers (NAICS 622). measure healthcare specific
purchases at the wholesale level, or if The 1997-based SNF market basket occupational groups.
no appropriate PPI were available. uses the ECI for nursing and residential The first proxy (option 1) is a blended
We evaluated the price proxies using care facilities as a proxy, which is based wage index composed of four
the criteria of reliability, timeliness, on the Standard Industrial Code (SIC) occupational groups that appear in
availability, and relevance. Reliability 805. Beginning in April 2006 with the NAICS. The weights of the four
indicates that the index is based on publication of March 2006 data, ECIs economy-wide occupational groups
valid statistical methods and has low were converted from an SIC basis to an (professional and technical, services,
sampling variability. Widely accepted NAICS basis. The ECI for wages and clerical, and managers) are equal to the
statistical methods ensure that the data salaries for nursing and residential care shares of total payroll for NAICS 6231
were collected and aggregated in a way facilities was replaced with an index that each occupational group
that can be replicated. Low sampling that was less representative of skilled constitutes. We proxied each
variability is desirable because it nursing facilities, NAICS 623. NAICS occupational group by a representative
indicates that the sample reflects the 623 represents facilities that provide ECI to create a blended wage index.
typical members of the population. residential care combined with nursing, Therefore, the professional and
(Sampling variability is variation that supervisory, or other types of care. The technical (P&T) occupational group is a
occurs by chance because only a sample care provided is a mix of health and proxy to the ECI for professional and
was surveyed rather than the entire social services with the health services technical workers. The services
population.) Timeliness implies that the being largely some level of nursing occupational group is a proxy to the ECI
proxy is published regularly, preferably services. Within NAICS 623 is NAICS for service workers. The clerical
at least once a quarter. The market 623100, nursing care facilities primarily occupational group is a proxy to the ECI
baskets are updated quarterly and, engaged in providing inpatient nursing for clerical workers. The managers
therefore, it is important for the and rehabilitative services. These occupational group is a proxy to the ECI
underlying price proxies to be up-to- facilities, which are most comparable to for executive, administrative, and
date, reflecting the most recent data Medicare-certified SNFs, provide skilled managerial occupations.
available. We believe that using proxies nursing and continuous personal care The second alternative index (option
that are published regularly (at least services for an extended period of time 2) uses the same methodology as the
quarterly, whenever possible) helps to and therefore, have a permanent core option 1 wage proxy, except that we
ensure that we are using the most recent staff of registered or licensed practical would base the occupational group
data available to update the market nurses. weights on employment data rather than
basket. We strive to use publications Employment in nursing care facilities payroll data from the BLS OES.
that are disseminated frequently, (NAICS 623100) represents The third alternative index (option 3)
because we believe that this is an approximately 56 percent of 2003 and again uses a methodology similar to
optimal way to stay abreast of the most 2004 employment in nursing and options 1 and 2, but would increase the
current data available. Availability residential care (NAICS 623). The SIC- weight for P&T workers by one-half of
means that the proxy is publicly based wage proxy, the ECI for nursing the difference between the hospital P&T
available. We prefer that our proxies are and personal care facilities based on SIC employment share and the nursing care
publicly available because this will help 805, includes skilled nursing care facility P&T employment share. As the
ensure that our market basket updates facilities (SIC 8051), which accounts for P&T share increases, the other weights
would be normalized and would hospital workers gives more weight to (options 1 through 4). For the historical
decrease slightly so the weights for all the percent changes of wages and period between FY 2002 and FY 2006,
occupational groups add to 1.0. salaries for these skilled healthcare the difference between the proposed
The fourth alternative index (option workers, who are also employed at market basket and the market baskets
4) increases the weight of P&T workers hospitals. As the data indicate, the using the alternative compensation
by one-third of the difference between hospital industry occupational mix is price proxies is significant. This is the
the hospital P&T employment share and more skilled than that of a Medicare- result of the healthcare professional and
the nursing care facility P&T certified SNF, so we believe that a blend technical occupations’ compensation
employment share. Again, as the P&T of the two indexes would be the best increasing faster than overall
share increases, the weights of the other alternative given the data limitations. professional and technical occupations.
4 occupational groups would decrease We believe the major drawback of The largest difference occurred in FY
through the normalization. options 1 through 4 is that while these 2002, when the proposed market basket
The last proposed alternative index indexes may reflect the use of more increased 3.7 percent compared to an
(option 5) is a blended wage index skilled healthcare staff, the types of P&T increase in the alternative compensation
based on 50 percent of the ECI for workers represented in the ECI for P&T market baskets of 2.5 percent.
hospital workers (NAICS 622) and 50 workers are not heavily weighted
toward healthcare professional and For the forecasted time period (FY
percent of the ECI nursing and 2007 to FY 2010), the difference
technical workers.
residential care facility (NAICS 623). We between the proposed market basket
estimate the weights of 50 percent from 2. Employee Benefits and the alternative compensation
BLS OES data, which show that the For measuring price growth in the market baskets is less than the historical
share of payroll attributable to registered benefit cost component of the 2004- difference. This is a result of the
nurses, licensed practical and licensed based SNF market basket, we propose expectation that compensation
vocational nurses, and health care using the percentage change of a inflationary pressures in the healthcare
practitioners and technical occupations blended index based on 50 percent of industry will lessen and the price
for nursing care facilities (NAICS 623) is the ECI for benefits for nursing and changes associated with healthcare
50 percent of the share of payroll for the residential care facilities (NAICS 623) professional and technical
same occupations as for hospitals. and 50 percent of the ECI for benefits for compensation will be comparable to the
We propose to use the option 5 index, hospital workers (NAICS 622). For the price changes associated with overall
because we believe that the new ECI for same reasons noted above for the wages professional and technical
nursing and residential care facilities and salaries cost category, we believe compensation. As stated previously, we
based on NAICS 623 will no longer this blended index is the best proxy for believe the blended index of the ECI for
accurately represent the skilled nursing employee benefit price growth. nursing and residential care and the ECI
and healthcare staff employed at Below is a table comparing the market for hospital workers best reflects the
Medicare-certified SNFs. Using a basket percent changes using the occupational mix (specifically, skilled
blended index of the ECI for nursing proposed wage and benefit proxies and healthcare workers) of SNFs serving
and residential care and the ECI for the alternative wage and benefit proxies Medicare patients.
EP04my07.054</GPH>
3. All Other Expenses • Fuels, nonhighway: For measuring Both food and energy are already
• Nonmedical professional fees: We price change in the Fuels, Nonhighway adequately represented in separate cost
are proposing to use the ECI for cost category, we are proposing to use categories and should not also be
compensation for Private Industry the PPI for Commercial Natural Gas. We reflected in this cost category. We used
Professional, Technical, and Specialty used the same index in the 1997-based the same index in the 1997-based SNF
Workers to measure price changes in SNF market basket. market basket.
• Water and Sewerage: For measuring • Telephone Services: For measuring
nonmedical professional fees. We used
price change in the Water and Sewerage the price change in the telephone
the same index in the 1997-based SNF
cost category, we are proposing to use services, we are proposing to use the
market basket.
the CPI-U (Consumer Price Index for All CPI-U applied to this component. We
• Professional liability insurance: We
Urban Consumers) for Water and used the same index in the 1997-based
were unable to find a price proxy that
Sewerage. We used the same index in SNF market basket.
directly tracks the prices associated
the 1997-based SNF market basket. • Postage: For measuring the price
with SNF malpractice costs. Our desired • Food-wholesale purchases: For change in postage costs, we are
price proxy would calculate the price measuring price change in the Food- proposing to use the CPI for postage.
changes for a fixed coverage of SNF wholesale purchases cost category, we The 1997-based index did not have a
general liability insurance (for example, are proposing to use the PPI for separate cost category for postage.
$1 million/$3 million liability Processed Foods. We used the same • Labor-Intensive Services: For
coverage). It would not, by definition of index in the 1997-based SNF market measuring price change in the Labor-
a fixed weight index, reflect the increase basket. Intensive Services cost category, we are
in costs associated with increases in • Food-retail purchases: For proposing to use the ECI for
coverage, because that is found in the measuring price change in the Food- Compensation for Private Service
malpractice cost weight. retail purchases cost category, we are Occupations. We used the same index
We have met with representatives for proposing to use the CPI-U for Food in the 1997-based SNF market basket.
the SNF industry on this subject. We Away From Home. This reflects the use • Non Labor-Intensive Services: For
have also reviewed several studies on of contract food service by some SNFs. measuring price change in the Non
nursing home and long-term care We used the same index in the 1997- Labor-Intensive Services cost category,
liability insurance, all of which state based SNF market basket. we are proposing to use the CPI–U for
that the cost of malpractice insurance • Pharmaceuticals: For measuring All Items. We used the same index in
has increased significantly over the last price change in the Pharmaceuticals the 1997-based SNF market basket.
five years. Our own analysis of SNF cost category, we are proposing to use
malpractice costs, as reported on the the PPI for Prescription Drugs. We used 4. Capital-Related
Medicare cost reports, shows that from the same index in the 1997-based SNF All capital-related expense categories
1999 to 2003, malpractice costs per bed market basket. have the same price proxies as those
have increased over 300 percent. This • Chemicals: For measuring price used in the 1992-based SNF PPS market
increase in costs is also seen in the change in the Chemicals cost category, basket described in the May 12, 1998
malpractice cost weight, which has we are proposing to use a blended PPI interim final rule (63 FR 26252) and the
more than doubled over the same time composed of the PPIs for soap and other 1997-based SNF PPS market basket
period. detergent manufacturing (NAICS described in the July 31, 2001 final rule
The difficulties associated with 325611), polish and other sanitation (66 FR 39581). We describe the price
pricing malpractice costs are good manufacturing (NAICS 325612), proxies for the SNF capital-related
experienced in all healthcare sectors, and all other miscellaneous chemical expenses below:
including hospitals and physicians. In product manufacturing (NAICS 325998). • Depreciation—Building and Fixed
addition to the lack of comprehensive Using the 1997 Benchmark I-O data, we Equipment: For measuring price change
data, the questions of how to proxy self- found that the latter NAICS industries in this cost category, we are proposing
insurance, how to allocate paid losses accounted for approximately 65 percent to use the Boeckh Institutional
over time, and how to account for those of SNF chemical expenses. Therefore, Construction Index.
providers who are unable to purchase we are proposing to use this index • Depreciation—Movable Equipment:
the insurance, make the process of because we believe it better reflects For measuring price change in this cost
measuring price changes associated purchasing patterns of SNFs than PPI category, we are proposing to use the
with malpractice insurance extremely for Industrial Chemicals, the proxy used PPI for Machinery and Equipment.
difficult. We are currently researching in the 1997-based market basket. • Interest—Government and
alternative data sources, such as • Rubber and Plastics: For measuring Nonprofit SNFs: For measuring price
obtaining the data directly from the price change in the Rubber and Plastics change in this cost category, we are
individual states’ Departments of cost category, we are proposing to use proposing to use the Average Yield for
Insurance. Given the lack of SNF- the PPI for Rubber and Plastic Products. Municipal Bonds from the Bond Buyer
specific data, we are proposing to use We used the same index in the 1997- Index of 20 bonds. CMS input price
the CMS Hospital Professional Liability based SNF market basket. indexes, including this rebased and
Index, which tracks price changes for • Paper Products: For measuring revised SNF market basket,
commercial insurance premiums for a price change in the Paper Products cost appropriately reflect the rate of change
fixed level of coverage, holding non- category, we are proposing to use the in the price proxy and not the level of
price factors constant (such as a change PPI for Converted Paper and the price proxy. While SNFs may face
in the level of coverage). Paperboard. We used the same index in different interest rate levels than those
• Electricity: For measuring price the 1997-based SNF market basket. included in the Bond Buyer Index, the
change in the electricity cost category, • Miscellaneous Products: For rate of change between the two is not
we are proposing to use the PPI for measuring price change in the significantly different.
Commercial Electric Power. We used Miscellaneous Products cost category, • Interest—For-profit SNFs: For
the same index in the 1997-based SNF we are proposing to use the PPI for measuring price change in this cost
market basket. Finished Goods less Food and Energy. category, we are proposing to use the
Average Yield for Moody’s AAA • Other Capital-related Expenses: For Below is a table showing the proposed
Corporate Bonds. Again, the proposed measuring price change in this cost price proxies for the FY 2004-based SNF
rebased SNF index focuses on the rate category, we are proposing the CPI–U Market Basket.
of change in this interest rate, not on the for Residential Rent. BILLING CODE 4210–01–P
level of the interest rate.
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BILLING CODE 4210–01–C percent. Global Insight, Inc. is a the average difference between the two
D. Proposed Market Basket Estimate for nationally recognized economic and market baskets is 0.3 percentage points.
the FY 2008 SNF Update financial forecasting firm that contracts This is primarily the result of a higher
with CMS to forecast the components of compensation cost weight and higher
As discussed previously in this CMS’s market baskets. Based on Global compensation price increases in the
proposed rule, beginning with the FY Insight’s 1st quarter 2007 forecast with 2004-based market basket compared to
2008 SNF PPS update, we are proposing historical data through the 4th quarter of the 1997-based SNF market basket. Also
to adopt the FY 2004-based SNF market 2006, the estimate of the current 1997-
basket as the appropriate market basket contributing is the separate cost
based SNF market basket for FY 2008 is category weight for malpractice in the
of goods and services for the SNF PPS. 3.5 percent.
Based on Global Insight’s 1st quarter 2004-based SNF market basket and the
Table 20 compares the proposed FY
2007 forecast with history through the 2004-based SNF market basket and the relatively higher price increases. For the
4th quarter of 2006, the most recent FY 1997-based SNF market basket forecasted period between FY 2007 and
estimate of the proposed 2004-based percent changes. For the historical FY 2010, the average difference in the
SNF market basket for FY 2008 is 3.3 period between FY 2002 and FY 2006, market basket forecasts is minor.
V. Consolidated Billing excluding a number of individual ‘‘high- Section 313 of the BIPA further
[If you choose to comment on issues cost, low-probability’’ services, amended this provision by repealing its
in this section, please include the identified by the Healthcare Common Part B aspect; that is, its applicability to
caption ‘‘Consolidated Billing’’ at the Procedure Coding System (HCPCS) Part B services furnished to a resident
beginning of your comments.] codes, within several broader categories during an SNF stay that Medicare Part
Section 4432(b) of the BBA (chemotherapy and its administration, A does not cover. However, physical,
established a consolidated billing radioisotope services, and customized occupational, and speech-language
requirement that places with the SNF prosthetic devices) that otherwise therapy remain subject to consolidated
the Medicare billing responsibility for remained subject to the provision. We billing, regardless of whether the
virtually all of the services that the discuss this BBRA amendment in resident who receives these services is
SNF’s residents receive, except for a greater detail in the proposed and final in a covered Part A stay. We discuss this
small number of services that the statute rules for FY 2001 (65 FR 19231–19232, BIPA amendment in greater detail in the
specifically identifies as being excluded proposed and final rules for FY 2002 (66
April 10, 2000, and 65 FR 46790–46795,
from this provision. As noted previously FR 24020–24021, May 10, 2001, and 66
July 31, 2000), as well as in Program

in section I. of this proposed rule, FR 39587–39588, July 31, 2001).
Memorandum AB–00–18 (Change
subsequent legislation enacted a number Request #1070), issued March 2000, In addition, section 410 of the MMA
of modifications in the consolidated which is available online at amended this provision by excluding
billing provision. www.cms.hhs.gov/transmittals/ certain practitioner and other services
Specifically, section 103 of the BBRA downloads/ab001860.pdf. furnished to SNF residents by RHCs and
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amended this provision by further FQHCs. We discuss this MMA
amendment in greater detail in the significance that may occur over time the SNF PPS by the end of the SNF
update notice for FY 2005 (69 FR (for example, the development of new transition period, June 30, 2002.
45818–45819, July 30, 2004), as well as medical technologies or other advances Accordingly, all non-CAH swing-bed
in Program Transmittal #390 (Change in the state of medical practice)’’ (65 FR rural hospitals have come under the
Request #3575), issued December 10, 46791). In view of the time that has SNF PPS as of June 30, 2003. Therefore,
2004, which is available online at elapsed since we last invited comments all rates and wage indexes outlined in
www.cms.hhs.gov/transmittals/ on this issue, we believe it is earlier sections of this proposed rule for
downloads/r390cp.pdf. appropriate at this point once again to the SNF PPS also apply to all non-CAH
To date, the Congress has enacted no invite public comments that identify swing-bed rural hospitals. A complete
further legislation affecting the codes in any of these four service discussion of assessment schedules, the
consolidated billing provision. categories representing recent medical MDS and the transmission software
However, as noted above and explained advances that might meet our criteria for (Raven-SB for Swing Beds) appears in
in the proposed rule for FY 2001 (65 FR exclusion from SNF consolidated the final rule for FY 2002 (66 FR 39562,
19232, April 10, 2000), the amendments billing. July 31, 2001). The latest changes in the
enacted in section 103 of the BBRA not We note that the original BBRA MDS for non-CAH swing-bed rural
only identified for exclusion from this legislation (as well as the implementing hospitals appear on our SNF PPS
provision a number of particular service regulations) identified a set of excluded website, www.cms.hhs.gov/snfpps.
codes within four specified categories services by means of specifying HCPCS
(that is, chemotherapy items, VII. Provisions of the Proposed Rule
codes that were in effect as of a
chemotherapy administration services, particular date (in that case, as of July [If you choose to comment on issues
radioisotope services, and customized 1, 1999). Identifying the excluded in this section, please include the
prosthetic devices), but also gave the services in this manner made it possible caption ‘‘Provisions of the Proposed
Secretary ‘‘ * * * the authority to for us to utilize program issuances as Rule’’ at the beginning of your
designate additional, individual services the vehicle for accomplishing routine comments.]
for exclusion within each of the updates of the excluded codes, in order We propose to update the payment
specified service categories.’’ In the to reflect any minor revisions that might rates used under the prospective
proposed rule for FY 2001, we also subsequently occur in the coding system payment system for SNFs for FY 2008.
noted that the BBRA Conference report itself (for example, the assignment of a In addition, we propose to rebase the
(H.R. Rep. No. 106–479 at 854 (1999) different code number to the same market basket to a base year of 2004 and
(Conf. Rep.)) characterizes the
service). Accordingly, in the event that propose the following market basket
individual services that this legislation
we identify through the current revisions: using Medicare allowable
targets for exclusion as ‘‘ * * * high-
rulemaking cycle any new services that total cost data instead of facility total
cost, low probability events that could
would actually represent a substantive cost data to derive the SNF market
have devastating financial impacts
change in the scope of the exclusions basket cost weights; using new wage
because their costs far exceed the
from SNF consolidated billing, we and salary, benefits and chemical price
payment [SNFs] receive under the
would identify these additional proxies; using new data to estimate
prospective payment system * * *’’
excluded services by means of the useful lives for fixed and moveable
According to the conferees, section
HCPCS codes that are in effect as of a equipment; and adding new cost
103(a) ‘‘is an attempt to exclude from
the PPS certain services and costly specific date (in this case, as of October categories for professional liability
items that are provided infrequently in 1, 2007). By making any new exclusions insurance and postage. Also, as
SNFs * * *’’ By contrast, we noted that in this manner, we could similarly discussed previously in sections I.F.2
the Congress declined to designate for accomplish routine future updates of and III.B of this proposed rule, we are
exclusion any of the remaining services these additional codes through the proposing to raise the current 0.25
within those four categories (thus issuance of program instructions. percentage point threshold for the
leaving all of those services subject to VI. Application of the SNF PPS to SNF forecast error adjustment under the SNF
SNF consolidated billing), because they Services Furnished by Swing-Bed PPS to 0.5 percentage point, effective
are relatively inexpensive and are Hospitals with FY 2008.
furnished routinely in SNFs. VIII. Collection of Information
As we further explained in the final [If you choose to comment on issues
in this section, please include the Requirements
rule for FY 2001 (65 FR 46790, July 31,
2000), and as our longstanding policy, caption ‘‘Swing-Bed Hospitals’’ at the [If you choose to comment on issues
any additional service codes that we beginning of your comments.] in this section, please include the
might designate for exclusion under our In accordance with section 1888(e)(7) caption ‘‘Collection of Information’’ at
discretionary authority must meet the of the Act as amended by section 203 of the beginning of your comments.]
same criteria that the Congress used in the BIPA, Part A pays CAHs on a This document does not impose any
identifying the original codes excluded reasonable cost basis for SNF services information collection and
from consolidated billing under section furnished under a swing-bed agreement, recordkeeping requirements.
103(a) of the BBRA: they must fall as previously indicated in sections I.A. Consequently, it need not be reviewed
within one of the four service categories and I.D. of this proposed rule. However, by the Office of Management and
specified in the BBRA, and they also effective with cost reporting periods Budget under the authority of the
must meet the same standards of high beginning on or after July 1, 2002, the Paperwork Reduction Act of 1995 (44
cost and low probability in the SNF swing-bed services of non-CAH rural U.S.C. 3501).
setting. Accordingly, we characterized hospitals are paid under the SNF PPS.
IX. Regulatory Impact Analysis
this statutory authority to identify As explained in the final rule for FY
additional service codes for exclusion 2002 (66 FR 39562, July 31, 2001), we [If you choose to comment on issues
‘‘* * * as essentially affording the selected this effective date consistent in this section, please include the
flexibility to revise the list of excluded with the statutory provision to integrate caption ‘‘Impact Analysis’’ at the
codes in response to changes of major non-CAH swing-bed rural hospitals into beginning of your comments.]
A. Overall Impact notice (71 FR 57519, September 29, 57519, September 29, 2006). Based on
We have examined the impacts of this 2006), thereby increasing aggregate the above, we estimate the FY 2008
proposed rule as required by Executive payments by an estimated $690 million. impact will be a net increase of $690
Order 12866 (September 1993, As indicated in Table 20, the effect on million in payments to SNF providers.
Regulatory Planning and Review), the facilities will be an aggregate positive The impact analysis of this proposed
Regulatory Flexibility Act (RFA, Pub. L. impact of 3.3 percent. We note that rule represents the projected effects of
96–354, September 16, 1980), section some individual providers may the changes in the SNF PPS from FY
1102(b) of the Social Security Act (the experience larger increases in payments 2007 to FY 2008. We estimate the effects
Act), the Unfunded Mandates Reform than others due to the distributional by estimating payments while holding
impact of the FY 2008 wage indexes and all other payment variables constant.
Act of 1995 (UMRA, Pub. L. 104–4), and
the degree of Medicare utilization. We use the best data available, but we
Executive Order 13132.
Executive Order 12866 (as amended While this proposed rule is considered do not attempt to predict behavioral
by Executive Order 13258, which only major, its overall impact is extremely responses to these changes, and we do
small; that is, less than 3 percent of total not make adjustments for future changes
reassigns responsibility of duties)
SNF revenues from all payor sources. As in such variables as days or case-mix.
directs agencies to assess all costs and
the overall impact is positive on the We note that certain events may
benefits of available regulatory combine to limit the scope or accuracy
industry as a whole, and on small
alternatives and, if regulation is of our impact analysis, because such an
entities specifically, it is not necessary
necessary, to select regulatory analysis is future-oriented and, thus,
to consider regulatory alternatives.
approaches that maximize net benefits In addition, section 1102(b) of the Act very susceptible to forecasting errors
(including potential economic, requires us to prepare a regulatory due to other changes in the forecasted
environmental, public health and safety impact analysis if a rule may have a impact time period. Some examples of
effects, distributive impacts, and significant impact on the operations of such possible events include new
equity). A regulatory impact analysis a substantial number of small rural legislation requiring funding changes to
(RIA) must be prepared for major rules hospitals. This analysis must conform to the Medicare, or legislative changes that
with economically significant effects the provisions of section 603 of the specifically affect SNFs. In addition,
($100 million or more in any one year). RFA. For purposes of section 1102(b) of changes to the Medicare program may
This proposed rule is major, as defined the Act, we define a small rural hospital continue to be made as a result of the
in Title 5, United States Code, section as a hospital that is located outside of BBA, the BBRA, the BIPA, the MMA, or
804(2), because we estimate the impact a Metropolitan Statistical Area and has new statutory provisions. Although
of the standard update will be to fewer than 100 beds. Because the these changes may not be specific to the
increase payments to SNFs by proposed increase in SNF payment rates SNF PPS, the nature of the Medicare
approximately $690 million. set forth in this proposed rule also program is such that the changes may
The proposed update set forth in this applies to rural non-CAH hospital interact, and the complexity of the
proposed rule would apply to payments swing-bed services, we believe that this interaction of these changes could make
in FY 2008. Accordingly, the analysis proposed rule would have a positive it difficult to predict accurately the full
that follows describes the impact of this fiscal impact on non-CAH swing-bed scope of the impact upon SNFs.
one year only. In accordance with the rural hospitals. In accordance with section
requirements of the Act, we will publish Section 202 of the Unfunded 1888(e)(4)(E) of the Act, we update the
a notice for each subsequent FY that Mandates Reform Act of 1995 also payment rates for FY 2008 by a factor
will provide for an update to the requires that agencies assess anticipated equal to the full market basket index
payment rates and include an associated costs and benefits before issuing any percentage increase to determine the
impact analysis. rule whose mandates require spending payment rates for FY 2008. The special
The RFA requires agencies to analyze in any 1 year of $100 million in 1995 AIDS add-on established by section 511
options for regulatory relief of small dollars, updated annually for inflation. of the MMA remains in effect until
businesses. For purposes of the RFA, That threshold level is currently ‘‘* * * such date as the Secretary
small entities include small businesses, approximately $120 million. This certifies that there is an appropriate
nonprofit organizations, and proposed rule would not have a adjustment in the case mix * * *.’’ We
government agencies. Most SNFs and substantial effect on State, local, or have not provided a separate impact
most other providers and suppliers are tribal governments, or on private sector analysis for the MMA provision. Our
small entities, either by their nonprofit costs. latest estimates indicate that there are
status or by having revenues of $11.5 Executive Order 13132 establishes less than 2,000 beneficiaries who
million or less in any one year. For certain requirements that an agency qualify for the AIDS add-on payment.
purposes of the RFA, approximately 53 must meet when it promulgates The impact to Medicare is included in
percent of SNFs are considered small regulations that impose substantial the ‘‘total’’ column of Table 21. In
businesses according to the Small direct requirement costs on State and proposing to update the rates for FY
Business Administration’s latest size local governments, preempts State law, 2008, we made a number of standard
standards, with total revenues of $11.5 or otherwise has Federalism annual revisions and clarifications
million or less in any one year (for implications. As stated above, this mentioned elsewhere in this proposed
further information, see 65 FR 69432, proposed rule would have no rule (for example, the update to the
November 17, 2000). Individuals and substantial effect on State and local wage and market basket indexes used
States are not included in the definition governments. for adjusting the Federal rates). These
of a small entity. In addition,
revisions would increase payments to

approximately 29 percent of SNFs are B. Anticipated Effects
SNFs by approximately $690 million.
nonprofit organizations. This proposed rule sets forth The impacts are shown in Table 21.
This proposed rule would update the proposed updates of the SNF PPS rates The breakdown of the various categories
SNF PPS rates published in the update contained in the update notice for FY of data in the table follows.
notice for FY 2007 (71 FR 43158, July 2007 (71 FR 43158, July 31, 2006) and The first column shows the
31, 2006) and the associated correction the associated correction notice (71 FR breakdown of all SNFs by urban or rural
status, hospital-based or freestanding The third column of the table shows their care delivery and billing practices
status, and census region. the effect of the annual update to the in response.
The first row of figures in the first wage index. This represents the effect of As can be seen from this table, the
column describes the estimated effects using the most recent wage data combined effects of all of the changes
of the various changes on all facilities. available. The total impact of this
The next six rows show the effects on vary by specific types of providers and
change is zero percent; however, there by location. For example, though
facilities split by hospital-based, are distributional effects of the change.
freestanding, urban, and rural facilities in the rural Outlying region
categories. The urban and rural The fourth column shows the effect of experience a payment decrease of 0.5
designations are based on the location of all of the changes on the FY 2008 percent, some providers (such as those
the facility under the CBSA designation. payments. The market basket increase of in the urban Outlying region) show a
The next twenty-two rows show the 3.3 percentage points is constant for all significant increase of 5.7 percent.
effects on urban versus rural status by providers and, though not shown Payment increases for facilities in the
census region. individually, is included in the total urban Outlying area of the country are
The second column in the table shows column. It is projected that aggregate the highest for any provider category.
the number of facilities in the impact payments will increase by 3.3 percent in BILLING CODE 4210–01–P
database. total, assuming facilities do not change
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BILLING CODE 4210–01–C

below, we have prepared an accounting SNF PPS as a result of the policies in
C. Accounting Statement statement showing the classification of this proposed rule based on the data for
the expenditures associated with the 15,271 SNFs in our database. All
As required by OMB Circular A–4 provisions of this proposed rule. This expenditures are classified as transfers
(available at www.whitehouse.gov/omb/ table provides our best estimate of the to Medicare providers (that is, SNFs).
circulars/a004/a-4.pdf), in Table 22 change in Medicare payments under the
TABLE 22.—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE 2007 SNF PPS RATE
YEAR TO THE 2008 SNF PPS RATE YEAR
[In millions]
Category Transfers
Annualized Monetized Transfers .............................................................. $690 million.

From Whom To Whom? ........................................................................... Federal Government to SNF Medicare Providers.
D. Alternatives Considered the payment methodology as discussed operations of a substantial number of

above. small rural hospitals. Also, an analysis
Section 1888(e) of the Act establishes The proposed rule would raise the as outlined in section 202 of the UMRA
the SNF PPS for the payment of threshold for triggering a forecast error has not been completed because this
Medicare SNF services for cost reporting adjustment under the SNF PPS from the proposed rule would not have a
periods beginning on or after July 1, current 0.25 percentage point to 0.5 substantial effect on the governments
1998. This section of the statute percentage point, effective with FY mentioned, or on private sector costs.
prescribes a detailed formula for 2008. However, as discussed in sections Finally, in accordance with the
calculating payment rates under the I.F.2 and III.B of this proposed rule, we provisions of Executive Order 12866,
SNF PPS, and does not provide for the are considering a higher threshold for this regulation was reviewed by the
use of any alternative methodology. It the forecast error adjustment, up to 1.0 Office of Management and Budget.
specifies that the base year cost data to percentage point. We are also (Catalog of Federal Domestic Assistance
be used for computing the SNF PPS considering delaying implementation of Program No. 93.773, Medicare-Hospital
payment rates must be from FY 1995 this change until FY 2009. We Insurance Program; and No. 93.774,
(October 1, 1994 through September 30, specifically invite comments on Medicare-Supplementary Medical Insurance
1995.) In accordance with the statute, increasing the forecast error adjustment Program)
we also incorporated a number of threshold and the effective date. Dated: March 8, 2007.
elements into the SNF PPS, such as Leslie V. Norwalk,
case-mix classification methodology, the E. Conclusion
Acting Administrator, Centers for Medicare
MDS assessment schedule, a market This proposed rule does not propose & Medicaid Services.
basket index, a wage index, and the to initiate any policy changes with Dated: March 28, 2007.
urban and rural distinction used in the regard to the SNF PPS; rather, it simply Michael O. Leavitt,
development or adjustment of the proposes an update to the rates for FY
Secretary.
Federal rates. Further, section 2008. Therefore, for the reasons set forth
1888(e)(4)(H) of the Act specifically in the preceding discussion, we are not [Note: The following Addendum will not
requires us to disseminate the payment preparing analyses for either the RFA or appear in the Code of Federal Regulations]
rates for each new fiscal year through section 1102(b) of the Act, because we Addendum—FY 2008 CBSA Wage Index
the Federal Register, and to do so before have determined that this proposed rule Tables
the August 1 that precedes the start of would not have a significant economic In this addendum, we provide Tables 8 and
the new fiscal year. Accordingly, we are impact on a substantial number of small 9 which indicate the CBSA-based wage index
not pursuing alternatives with respect to entities or a significant impact on the values for urban and rural providers.
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[FR Doc. 07–2180 Filed 4–30–07; 4:00 pm]

BILLING CODE 4120–01–C
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Proposed Rule: Medicare: Skilled Nursing Facilities Prospective Payment System and Consolidated Billing (2008 FY)

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Proposed Rule: Medicare: Skilled Nursing Facilities Prospective Payment System and Consolidated Billing (2008 FY)

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42 CFR Part 413

Forecasted Actual FY 2006

SNF 3.1 3.4 0.3

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

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

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

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

multiplied by the wage index plus the

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

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

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

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

Proposed 2004- 1997-based SNF

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

July 31, 2000), as well as in Program

amended this provision by further FQHCs. We discuss this MMA

revisions would increase payments to

BILLING CODE 4210–01–C

Annualized Monetized Transfers .............................................................. $690 million.

D. Alternatives Considered the payment methodology as discussed operations of a substantial number of

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

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