[Federal Register Volume 60, Number 140 (Friday, July 21, 1995)]
[Rules and Regulations]
[Pages 37590-37596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17980]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[BPD-409-F]
RIN 0938-AD02


Medicare Program; Optional Payment System for Low Medicare Volume 
Skilled Nursing Facilities

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule allows skilled nursing facilities (SNFs) that 
provide fewer than 1,500 days of care to Medicare beneficiaries in a 
cost reporting period to have the option of receiving prospectively 
determined payment rates in the following cost reporting period. The 
prospectively determined payment rates are based on components of SNF 
costs such as routine operating costs, capital-related costs, and a 
return on equity for proprietary facilities for routine services 
furnished before October 1, 1993. This rule also specifies that the 
return on equity provision for proprietary SNFs is eliminated for 
services furnished on or after October 1, 1993.

EFFECTIVE DATE: These regulations are effective on August 21, 1995.

FOR FURTHER INFORMATION CONTACT: David Goldberg--Simplified Cost 
Reporting, (410) 966-4512; Robert Kuhl--All Other Issues, (410) 966-
4597.

SUPPLEMENTARY INFORMATION:

I. Background

    The Social Security Act (the Act) authorizes the Secretary to set 
limits on the allowable costs incurred by a skilled nursing facility 
(SNF) in furnishing care to Medicare beneficiaries. The limits are 
based on estimates of the costs necessary for the efficient delivery of 
needed health services. Section 1888 of the Act sets forth the 
statutory provisions that specifically deal with SNF payments. 
Implementing regulations appear at 42 CFR 413.30.
    Section 1888(d) of the Act (as added by the Consolidated Omnibus 
Budget Reconciliation Act of 1985 (Public Law 99-272)) requires the 
establishment of prospectively determined payment rates for routine 
services furnished by low Medicare volume SNFs choosing to be paid on a 
prospective basis. The rates paid to proprietary SNFs choosing this 
method of payment included a component for return on equity related to 
routine service costs, which was subsequently eliminated for services 
furnished on or after October 1, 1993 (see below).
    Specifically, section 1888(d) of the Act--
     Specifies that SNFs with fewer than 1,500 Medicare 
inpatient days in one cost reporting period have the option of being 
paid on the basis of a prospectively determined payment rate in the 
following cost reporting period.
     Requires that the amount of payment under the SNF 
prospectively determined payment rate system be determined on a per 
diem basis. However, that amount may not exceed the limit on routine 
service costs set forth in section 1888(a) of the Act with respect to 
the facility, adjusted to take into account average capital-related 
costs with respect to the type and location of the facility. The limit 
used for this purpose is the applicable routine service cost limit in 
effect when the provider elects to be paid under prospectively 
determined payment rates.
    For SNFs located in an urban area, the prospectively determined 
payment amount is equal to 105 percent of the mean of the per diem 
reasonable routine service and routine capital-related costs of 
services for SNFs in urban areas within the same census region. The 
mean per diem is determined without regard to the limitations of 
section 1888(a) of the Act and is adjusted for different area wage 
levels.
    For SNFs located in a rural area, the prospectively determined 
payment amount is equal to 105 percent of the mean of the per diem 
reasonable routine service and routine capital-related costs of covered 
services for SNFs in rural areas within the same census region. The 
mean per diem is determined without regard to the limitations of 
section 1888(a) of the Act and is adjusted for different area wage 
levels.
     Requires the Secretary to establish the prospectively 
determined payment rates for each Federal fiscal year at least 90 days 
prior to the beginning of that fiscal year. The law also requires an 
SNF to notify the Secretary of its intention to be paid a prospectively 
determined payment rate no later than 30 days before the beginning of 
the cost reporting period for which the request is made.
     Requires the Secretary to provide for a simplified cost 
report to be filed by SNFs being paid under prospectively determined 
payment rates.
     Provides that, in the case of an SNF receiving 
prospectively determined payment rates, the Secretary may pay for 
ancillary services on a reasonable charge basis, rather than on a cost 
basis, if the Secretary determines that a reasonable charge basis 
provides an equitable level of payment and eases the SNF's reporting 
burden.
    Section 13503(c) of the Omnibus Budget Reconciliation Act of 1993 
(OBRA '93) (Public Law 103-66) amended section 1861(v)(1)(B) of the Act 
to eliminate the provision for payment for a return on equity for 
services furnished by proprietary SNFs on or after October 1, 1993. 
Also, we note that section 13503(b) states that the Secretary may not 
change the amount of any prospectively determined payment rate paid to 
an SNF under section 1888(d) of the Act for services furnished during 
cost reporting periods beginning during fiscal years (FYs) 1994 and 
1995, except as necessary to take into account the elimination of the 
return on equity provision.
    In order to provide the public with information on the optional 
prospectively determined payment rate system for SNF routine services 
as soon as possible, and to implement the prospectively determined 
rates provided for under section 1888(d) of the Act, as amended, we 
initially issued guidelines in sections 2820 through 2822 of Chapter 28 
of the Provider Reimbursement Manual (HCFA Pub. 15-1) in August 1986.
    The rates were effective for cost reporting periods beginning on or 
after October 1, 1986, but before October 1, 1987. Additional 
transmittals were issued providing rates for subsequent cost reporting 
periods. As described below, the guidelines in the Provider 
Reimbursement Manual closely adhere to the requirements of section 
1888(d) of the Act. In calculating the prospectively determined payment 
rates announced in the manual transmittals, we used the most recent 
data available at that time.
    In the guidelines issued under Chapter 28 of the Provider 
Reimbursement Manual--
     We stipulated that an SNF may choose to be paid a 
prospectively determined payment rate for general inpatient routine 
services if the facility met the statutory criteria that, in its 
immediately preceding cost reporting period, it had fewer than 1,500

[[Page 37591]]
Medicare patient days and it made a timely election.
     For prospectively determined payment rate purposes, we 
grouped SNFs by census region, and by urban area or rural area 
designation within the region. The term ``urban area'' means an area 
within a Metropolitan Statistical Area (MSA) (as defined by the Office 
of Management and Budget (OMB)). The term ``rural area'' means any area 
outside an urban area.
     We adjusted the labor portion of the prospectively 
determined payment rate to account for area wage differences through 
the application of an appropriate wage index.
     We based the prospectively determined payment rate on 
reported costs, adjusted for actual and projected cost increases by 
applying the SNF market basket index.
     For SNFs electing to receive payment under prospectively 
determined payment rates, we specified that ancillary services are paid 
on the basis of reasonable cost with retroactive adjustment based on an 
annual cost report.

II. Provisions of the Proposed Regulations

    On June 8, 1994, we published in the Federal Register a proposed 
rule (59 FR 29578) that generally would codify the statutory provisions 
concerning prospectively determined payment rates for SNFs, as now 
explained in chapter 28 of the Provider Reimbursement Manual. The 
proposed rule also specified that the return on equity provision for 
proprietary SNFs would be eliminated for services furnished on or after 
October 1, 1993. The major provisions of the proposed regulations are 
set forth below:

A. General Provisions

     We proposed to add new Sec. 413.300 to introduce the 
contents of Subpart I and to summarize the conditions and procedures 
for making prospectively determined payments to qualifying SNFs. In 
this section, we proposed to define the terms ``area wage level'', 
``census region'', ``routine operating costs'', ``routine capital-
related costs'', and ``urban'' and ``rural'' areas, as we had defined 
these terms in the manual.

B. Eligibility Criteria

     In new Sec. 413.304, we proposed that SNFs that furnished 
fewer than 1,500 Medicare covered inpatient days in a cost reporting 
period as reported on the Medicare cost report would be allowed the 
option of being paid on the basis of prospectively determined payment 
rates during the next cost reporting period. If an SNF's preceding 
Medicare cost reporting period was shorter than a full twelve months, 
the SNF must have had an average daily Medicare census for the period 
of not greater than 4.1 to qualify for prospectively determined 
payment. This figure was determined by dividing 1,499 (that is, the 
largest number of Medicare inpatient days fewer than 1,500) by the 
number of days in a cost reporting year. If there was no preceding cost 
reporting period for which an SNF was approved for Medicare 
participation, we proposed that the SNF would automatically qualify for 
prospectively determined payment for the first cost reporting period.

C. Approval Process

     In new Sec. 413.308, we proposed to establish rules to 
govern the process by which SNFs may request and be approved for 
payment under the prospectively determined payment rate option. Under 
section 1888(d) of the Act, we are required to establish the 
prospectively determined payment rates at least 90 days before the 
beginning of each Federal fiscal year. We proposed that an SNF request 
to receive prospectively determined payments by notifying its fiscal 
intermediary of its intention at least 30 days before the beginning of 
the cost reporting period for which the request is made. The 
intermediary would tentatively notify the SNF of whether the SNF 
qualifies for the option.
    In most cases, a final count of Medicare inpatient days cannot be 
made for a cost reporting period before the beginning of the next cost 
reporting period. Therefore, the intermediary's initial determination 
of provider eligibility would be a tentative approval or disapproval. 
The final determination would be made once a count of the total 
Medicare inpatient days in the preceding cost reporting period is 
available. We proposed that the intermediary would notify the SNF of 
the final determination within 10 working days after the data necessary 
to make the determination are available. If tentative approval were 
given and the final determination was that the SNF did not qualify to 
be paid on the basis of the prospectively determined payment rate, the 
intermediary would adjust payments to reflect payment on a reasonable 
cost basis.
    We proposed that for a newly participating SNF with no preceding 
cost reporting period, the election must be made within 30 days of its 
notification of approval to participate in Medicare.
    The election by the SNF and any approval by the intermediary would 
be effective for only one cost reporting period at a time. We also 
specified that once an election has been made and approved and the cost 
reporting period has begun, the SNF may not revoke its election for 
that period. Each SNF electing to receive a prospectively determined 
payment rate would agree to accept that rate prior to the start of the 
cost reporting period, regardless of what its final costs for the 
period would be.

D. Basis of Payment

     We proposed to add new Sec. 413.310 to set forth the basis 
of payment to be used for routine service costs, capital-related costs, 
and return on equity (for services furnished before October 1, 1993), 
as well as for ancillary service costs, as specified in sections 
1888(d)(2) and (d)(6) of the Act. We specified the following:

--Prospectively determined payment would be in lieu of payment on a 
reasonable cost basis for routine services.
--Prospectively determined payment would also be in lieu of payment for 
routine capital costs.
--The routine operating component of the prospectively determined 
payment rate, excluding capital cost and excluding return on equity (if 
applicable), would not exceed the amount of the provider's routine 
service cost limit determined under Sec. 413.30 that is in effect when 
the provider elects to be paid a prospectively determined payment rate.

E. Methodology for Calculating Rates

     We proposed to add new Sec. 413.312 to establish the 
methodology for determining the prospectively determined payment rates 
as specified in sections 1888 (d)(2) and (d)(6) of the Act. Under these 
sections of the Act, mean per diem routine operating costs, capital-
related costs, and, for proprietary SNFs, return on equity for services 
furnished before October 1, 1993, are determined separately for SNFs 
located in urban areas and those in rural areas for the nine census 
regions.

F. Determining Routine Per Diem Rate

     In Sec. 413.314, we described the proposed methodology for 
determining the routine per diem rate for an SNF. We explained that the 
per diem rate would be composed of a routine operating portion, a 
capital-related cost portion applicable to routine services, and, for 
proprietary SNFs, a return on equity portion for services furnished 
before October 1, 1993. The labor-related costs of the routine 
operating

[[Page 37592]]
portion would be adjusted to reflect area wage differences. The total 
rate would be adjusted by using a factor based on the projected 
increase in the market basket index to reflect a different cost 
reporting period if an SNF's cost reporting period is other than 
October 1 through September 30.
    We also provided that the prospectively determined payment rate, 
excluding capital costs and excluding return on equity (if applicable), 
may not exceed the amount of an SNF's routine service cost limit that 
is in effect when the provider elects to be paid a prospective payment 
rate.
    We proposed basing the prospectively determined payment rates on 
combined freestanding and hospital-based SNF cost data, and we 
solicited public comments on the proposed methodology.

G. Determining Payment Amount for Ancillary Services

     In Sec. 413.316, we proposed that ancillary services 
continue to be paid on the basis of reasonable cost. We described in 
detail in the proposed rule (59 FR 29582) a number of alternative 
methodologies that we are considering as we continue to search for a 
way to implement section 1888(d)(6) of the Act and bring ancillary 
services under the prospectively determined payment rate system. We 
solicited comments on those methodologies, and indicated that we would 
consider other methodologies that commenters might suggest.

H. Publication of Rates

     In new Sec. 413.320, we proposed that HCFA would update 
the routine prospectively determined payment rates in a Federal 
Register notice published no later than July 1 of each year. In the 
notices, we would establish the rates for routine services under the 
prospectively determined payment rate system.

I. Simplified Cost Report

     All Medicare providers with low Medicare utilization have 
had, at the intermediary's discretion, the option of filing less than a 
full Medicare cost report. We indicated that this option would continue 
to be available to those SNFs that qualify for it. In addition, in new 
Sec. 413.321, we proposed that a simplified cost report would be filed 
by certain SNFs receiving a prospectively determined rate. At this 
time, a simplified form is available only for freestanding SNFs. The 
simplified form is not applicable to hospital-based SNFs or SNFs that 
are a part of a health care complex. We are in the process of 
developing a simplified form to be used by those facilities.
    The new simplified cost report requires inputting only the cost 
information necessary for determining prospective payment rates. The 
report employs a simplified method of cost finding to be used in lieu 
of the cost finding methods described in Sec. 413.24(d). We also 
proposed changing Sec. 413.24(d) to clarify that the cost finding 
provisions of that regulation do not apply to those SNFs that qualify 
for the simplified method of cost finding. In addition, we proposed to 
revise Sec. 413.24(h) to clarify that the waiver of full cost reporting 
for low program utilization also applies to providers filing a 
simplified cost report.

III. Analysis of and Responses to Public Comments

    We received three items of correspondence commenting on the June 8, 
1994 proposed rule. Following are comments from these letters, and our 
responses to them.
    Comment: One commenter requested that, for purposes of determining 
eligibility to receive a prospectively determined rate, the qualifying 
number of Medicare days in the preceding year be increased from fewer 
than 1,500 days to perhaps as many as 2,500 days. Another commenter 
recommended that we recognize some level of fluctuation in volume and 
allow a provider to continue receiving the prospective payment rate 
even if the number of days fluctuates to 2,000 days in a subsequent 
year, for no more than 2 years.
    Response: Section 1888(d)(1) of the Act specifies that SNFs with 
fewer than 1,500 Medicare inpatient days in one cost reporting period 
have the option of being paid on the basis of a prospectively 
determined payment rate in the following cost reporting period. Absent 
legislative change, we have no discretion to change this threshold.
    Comment: With regard to our proposal that an SNF with no prior cost 
reporting period would automatically qualify for being paid a 
prospectively determined payment rate, one commenter requested that the 
automatic qualification be a ``final'' determination of eligibility.
    Response: Section 1888(d)(4) of the Act requires an SNF to notify 
the Secretary of its intention to be paid a prospectively determined 
payment rate for a cost reporting period no later than 30 days before 
the beginning of that period. For a newly participating SNF, the 
notification date is often the beginning date of the cost reporting 
period. Thus, we believe it is equitable to allow an SNF 30 days after 
its notification of approval to participate in Medicare to submit a 
request to be paid a prospectively determined rate, as established 
under Sec. 413.308(a) of this final rule. Accordingly, a final 
determination of eligibility for that cost reporting period depends on 
the SNF meeting this filing requirement.
    Comment: One commenter suggested that once an SNF is paid a 
prospectively determined payment rate, the prospective payment status 
should continue until the SNF no longer qualifies or elects to revoke 
this status.
    Response: As stated above, section 1888(d)(4) of the Act requires 
an SNF to notify the Secretary of its intention to be paid a 
prospectively determined payment rate for a cost reporting period no 
later than 30 days before the beginning of that period. The Secretary 
is required to establish the prospective payment amounts for each 
fiscal year based on the most recent data available for a 12-month 
period. Accordingly, we believe that the intent of the statute is that 
a separate request be made for each annual cost reporting period for 
which an SNF wishes to receive a prospectively determined payment rate. 
Therefore, we have not adopted this proposal.
    Comment: One commenter stated that we should define the data source 
for making a final determination regarding the number of Medicare days 
in a cost reporting period. The commenter also asked that we clarify 
when the 10 working-day window referred to in Sec. 413.308(b) begins.
    Response: The settled cost report is the source for making the 
final determination of the number of Medicare days. Under Sec. 413.308, 
the intermediary notifies an SNF of its initial determination within 10 
days of receiving all data necessary to make the determination. The 10-
day period for notification of a final determination begins with the 
issuance of the Notice of Program Reimbursement. We do not believe we 
need to include this information in the regulations.
    Comment: One commenter indicated it is inequitable to combine 
freestanding and hospital-based SNF data in computing the prospectively 
determined payment rates. The commenter stated that freestanding SNFs 
will be overpaid and that hospital-based SNFs will not receive adequate 
payment.
    Response: Section 1888(d) of the Act does not provide for different 
payment rates for freestanding and hospital-based SNFS. We believe that 
if the congressional intent had been for different rates, the statute 
would have been worded in a manner similar to section 1888(a) of the 
Act, which establishes the bases for determining

[[Page 37593]]
cost limits for freestanding and hospital-based SNFs in urban and rural 
areas. If an SNF believes that it will not receive adequate payment 
under this optional system, it is not required to elect this payment 
system. Instead, it could continue to be reimbursed for its reasonable 
costs up to its cost limit with the possibility of obtaining an 
exception under the provisions of Sec. 413.30 for its costs in excess 
of the limit.
    Comment: Several commenters responded to our request for comments 
on alternative methodologies for determining payment amounts for 
ancillary services. One commenter stated that the best method for 
computing an ancillary payment rate system would be by developing 
reasonable charge payment screens, or, as an alternative, using an 
average per diem rate weighted on the basis of ancillary services 
provided. Another commenter urged the Secretary not to adopt a system 
of reasonable charges for the purpose of paying for ancillary services 
because such a system could not serve to reasonably cover the cost of 
providing services. Two commenters urged the Secretary to continue 
payment for ancillary services on a cost basis, until such time as 
another method could be developed.
    Response: While we agree that the reasonable charge payment screen 
method would meet the statutory requirement for determining payment 
rates on the basis of reasonable charges, the data to establish such 
payment screens are unavailable. At the same time, we do not believe 
that using an average per diem rate weighted on the basis of ancillary 
services provided complies with the statutory requirement for 
determining a rate for ancillary services based on reasonable charges. 
We do not intend to adopt a reasonable charge system unless it can 
provide an equitable level of reimbursement. To date, we have not been 
able to develop a methodology that meets this requirement. Until we 
develop an equitable system based on reasonable charges, payment for 
ancillary services will continue on a cost basis. We have gathered data 
for certain ancillary therapies and are in the process of evaluating 
this information to determine if it would be appropriate for 
establishing a rate for ancillary services based on reasonable charges.

IV. Provisions of the Final Regulations

    After careful consideration of public comments, no substantive 
changes have been made to the regulations. Thus, this final rule 
basically adopts the provisions of the proposed rule, with several 
minor clarifications that are discussed below.
    In Sec. 413.304(a), (b), and (c), we have changed ``may'' receive 
to ``is eligible to'' receive, in order to more clearly differentiate 
between the eligibility criteria and the rules governing election to be 
paid a prospectively determined payment rate under Sec. 413.308.
    We have amended Sec. 413.308(b) by adding ``and the timely election 
requirements under 413.308(a)'' to clarify that the SNF must meet 
election, as well as eligibility, requirements. We have also changed 
``determination'' to ``initial and final determinations'' for 
clarification.
    We have amended Sec. 413.308(c) by prohibiting an SNF from revoking 
its request once the intermediary has given initial determination of 
eligibility (as opposed to final determination, as stated in the 
proposed rule (59 FR 29578)). The time needed to make a final 
determination of the number of Medicare covered days in a cost 
reporting period can extend for many months due to various factors. 
Thus, we believe allowing an SNF to revoke its election until it 
receives a final approval would not conform with the intent of the 
statute.
    We have added Sec. 413.308(d), which clarifies the intermediary's 
authority to revoke the prospectively determined payment rate option if 
the intermediary determines that the SNF did not meet the eligibility 
criteria.
    We have amended Sec. 413.310(b) by adding the term ``for routine 
capital costs'' for clarification.
    We have amended Sec. 413.314 by adding the term ``and qualifies for 
such payment'' to clarify that in order to be paid a prospectively 
determined rate, an SNF must not only elect to be paid prospectively, 
but must qualify to do so.

V. Impact Statement

    Unless we certify that a final rule will not have a significant 
economic impact on a substantial number of small entities, we generally 
prepare a regulatory flexibility analysis that is consistent with the 
Regulatory Flexibility Act (RFA) (5 U.S.C. 601 through 612). For 
purposes of the RFA, we consider SNFs as small entities.
    In our analysis of the impact of the June 8, 1994 proposed rule, we 
noted that Medicare payments to SNFs comprise only about 5.3 percent of 
total SNF revenues and this rule will only have a small impact on those 
revenues. Moreover, the purpose of this rule is to ease the compliance 
burden for small entities, and we believe the rule will have a positive 
impact on small entities. We received no comments on these issues.
    Also, section 1102(b) of the Act requires the Administrator to 
prepare a regulatory impact statement if a final rule has a significant 
economic impact on the operations of a substantial number of small 
rural hospitals. Such an analysis must conform to the provisions of 
section 603 of the RFA. With the exception of hospitals located in 
certain rural counties adjacent to urban areas, for purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital with 
fewer than 50 beds.
    We have determined, and the Administrator certified, that this 
final rule will not have a significant effect on the operations of a 
substantial number of small entities or on small rural hospitals. 
Therefore, we have not prepared a regulatory flexibility analysis or an 
analysis of the effects of this rule on small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was not reviewed by the Office of Management and Budget.

VI. Collection of Information Requirements

    Sections 413.308 and 413.321 of this document contain information 
collection and recordkeeping requirements that are subject to review by 
the Office of Management and Budget (OMB) under the Paperwork Reduction 
Act of 1980 (44 U.S.C. 3501 et seq.). When OMB approves these 
provisions, we will publish a notice to that effect. The information 
collection requirements in Sec. 413.321 concern the collection of 
financial data of skilled nursing facilities needed to prepare the 
applicable Medicare cost reports. The respondents who will provide the 
information include an estimated 1,250 SNFs. Public reporting burden 
for this collection of information is estimated to be 123,750 hours 
during the first 12-month period that the rule will be in effect.
    The information collection requirements in Sec. 413.308 concern 
notification of election of prospectively determined payment rates by 
each SNF to its intermediary for each cost reporting period and review 
by the SNF of the intermediary's determination. The respondents who 
will provide the information include the electing SNFs and their 
intermediaries. Public reporting burden for these requirements is 
estimated to be one half hour total for each request and review. The 
total for 1,250 SNFs and their intermediaries would be approximately 
625 hours.

[[Page 37594]]


List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and recordkeeping requirements.
    42 CFR chapter IV is amended as set forth below:
    A. The title of part 413 is amended to read as follows:

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

    B. Part 413 is amended as follows:
    1. The authority citation for part 413 continues to read as 
follows:

    Authority: Secs. 1102, 1814(b), 1815, 1833(a), (i), and (n), 
1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act (42 
U.S.C. 1302, 1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 
1395hh, 1395rr, 1395tt, and 1395ww); sec. 104(c) of Public Law 100-
360 as amended by sec. 608(d)(3) of Public Law 100-485 (42 U.S.C. 
1395ww (note)); sec. 101(c) of Public Law 101-234 (42 U.S.C. 1395ww 
(note)); and sec. 13503 of Public Law 103-66 (42 U.S.C. 1395ww 
(note)).

Subpart A--Introduction and General Rules

    2. In Sec. 413.1, a new paragraph (g) is added to read as follows:


Sec. 413.1  Introduction.

* * * * *
    (g) Prospectively determined payment rates for low Medicare volume 
SNFs. Rules governing requests by SNFs for prospectively determined 
payment rates under section 1888(d) of the Act are set forth in subpart 
I of this part.

Subpart B--Accounting Records and Reports

    3. In Sec. 413.24 the introductory text of paragraph (d), and 
paragraph (h), are revised to read as follows:


Sec. 413.24  Adequate cost data and cost finding.

* * * * *
    (d) Cost finding methods. After the close of the accounting period, 
providers must use one of the following methods of cost finding to 
determine the actual costs of services furnished during that period. 
(These provisions do not apply to SNFs that elect and qualify for 
prospectively determined payment rates under subpart I of this part for 
cost reporting periods beginning on or after October 1, 1986. For the 
special rules that are applicable to those SNFs, see Sec. 413.321.) For 
cost reporting periods beginning after December 31, 1971, providers 
using the departmental method of cost apportionment must use the step-
down method described in paragraph (d)(1) of this section or an ``other 
method'' described in paragraph (d)(2) of this section. For cost 
reporting periods beginning after December 31, 1971, providers using 
the combination method of cost apportionment must use the modified cost 
finding method described in paragraph (d)(3) of this section. Effective 
for cost reporting periods beginning on or after October 1, 1980, HHAs 
not based in hospitals or SNFs must use the step-down method described 
in paragraph (d)(1) of this section. (HHAs based in hospitals or SNFs 
must use the method applicable to the parent institution.) However, an 
HHA not based in a hospital or SNF that received less than $35,000 in 
Medicare payment for the immediately preceding cost reporting period, 
and for whom this payment represented less than 50 percent of the total 
operating cost of the agency, may use a simplified version of the step-
down method, as specified in instructions for the cost report issued by 
HCFA.
* * * * *
    (h) Waiver of full or simplified cost reporting for low program 
utilization. (1) If the provider has had low utilization of covered 
services by Medicare beneficiaries (as determined by the intermediary) 
and has received correspondingly low interim payments for the cost 
reporting period, the intermediary may waive a full cost report or the 
simplified cost report described in Sec. 413.321 if it decides that it 
can determine, without a full or simplified report, the reasonable cost 
of covered services provided during that period.
    (2) If a full or simplified cost report is waived, the provider 
must submit within the same time period required for full or simplified 
cost reports:
    (i) The cost reporting forms prescribed by HCFA for this situation; 
and
    (ii) Any other financial and statistical data the intermediary 
requires.
    4. A new subpart I is added to read as follows:

Subpart I--Prospectively Determined Payment Rates for Skilled 
Nursing Facilities

Sec.
413.300  Basis and scope.
413.302  Definitions.
413.304  Eligibility for prospectively determined payment rates.
413.308  Rules governing election of prospectively determined 
payment rates.
413.310  Basis of payment.
413.312  Methodology for calculating rates.
413.314  Determining payment amounts: Routine per diem rate.
413.316  Determining payment amounts: Ancillary services.
413.320  Publication of prospectively determined payment rates or 
amounts.
413.321  Simplified cost reports for SNFs.

Subpart I--Prospectively Determined Payment Rates for Skilled 
Nursing Facilities


Sec. 413.300  Basis and scope.

    (a) Basis. This subpart implements section 1888(d) of the Act, 
which provides for optional prospectively determined payment rates for 
qualified SNFs.
    (b) Scope. This subpart sets forth the eligibility criteria an SNF 
must meet to qualify, the process governing election of prospectively 
determined payment rates, and the basis and methodology for determining 
prospectively determined payment rates.


Sec. 413.302  Definitions.

    For purposes of this subpart--
    Area wage level means the average wage per hour for all 
classifications of employees as reported by health care facilities 
within a specified area.
    Census region means one of the 9 census divisions, comprising the 
50 States and the District of Columbia, established by the Bureau of 
the Census for statistical and reporting purposes.
    Routine capital-related costs means the capital-related costs, 
allowable for Medicare purposes (as described in Subpart G of this 
Part), that are allocated to the SNF participating inpatient routine 
service cost center as reported on the Medicare cost report.
    Routine operating costs means the cost of regular room, dietary, 
and nursing services, and minor medical and surgical supplies for which 
a separate charge is not customarily made. It does not include the 
costs of ancillary services, capital-related costs, or, where 
appropriate, return on equity.
    Rural area means any area outside an urban area in a census region.
    Urban area means a Metropolitan Statistical Area (MSA) or New 
England County Metropolitan Area (NECMA), as defined by the Office of 
Management and Budget, or a New England county deemed to be an urban 
area, as listed in Sec. 412.62(f)(1)(ii)(B) of this chapter.


Sec. 413.304  Eligibility for prospectively determined payment rates.

    (a) General rule. An SNF is eligible to receive a prospectively 
determined payment rate for a cost reporting period if it had fewer 
than 1,500 Medicare covered inpatient days as reported on a Medicare 
cost report in its immediately

[[Page 37595]]
preceding cost reporting period. This criterion applies even if the SNF 
received a prospectively determined payment rate during the preceding 
cost reporting period.
    (b) Less than a full cost reporting period. If the cost reporting 
period that precedes an SNF's request for prospectively determined 
payment is not a full cost reporting period, the SNF is eligible to 
receive prospectively determined payment rates only if the average 
daily Medicare census for the period (Medicare inpatient days divided 
by the total number of days in the cost reporting period) is not 
greater than 4.1.
    (c) Newly-participating SNFs. An SNF is eligible to receive 
prospectively determined payment rates for its first cost reporting 
period for which it is approved to participate in Medicare.


Sec. 413.308  Rules governing election of prospectively determined 
payment rates.

    (a) Requirements. An SNF must notify its intermediary at least 30 
calendar days before the beginning of the cost reporting period for 
which it requests to receive such payment that it elects prospectively 
determined payment rates. A separate request must be made for each cost 
reporting period for which an SNF seeks prospectively determined 
payment. A newly participating SNF with no preceding cost reporting 
period must make its election within 30 days of its notification of 
approval to participate in Medicare.
    (b) Intermediary notice. After evaluating an SNF's request for 
prospectively determined payment rates, the intermediary notifies the 
SNF in writing as to whether the SNF meets any of the eligibility 
criteria described in Sec. 413.304 and the timely election requirements 
under Sec. 413.308(a). The intermediary must notify the SNF of its 
initial and final determinations within 10 working days after it 
receives all the data necessary to make each determination. The 
intermediary's determination is limited to one cost reporting period.
    (c) Prohibition against revocation. An SNF may not revoke its 
request after it has received the initial determination of eligibility 
from the intermediary and the cost reporting period has begun.
    (d) Revocation by intermediary. If an SNF is given tentative 
approval to receive a prospectively determined payment rate, and, after 
the start of the applicable cost reporting period, the intermediary 
determines that the SNF does not meet the eligibility criteria, the 
intermediary must revoke the prospectively determined payment option.


Sec. 413.310  Basis of payment.

    (a) Method of payment. Under the prospectively determined payment 
rate system, a qualified SNF receives a per diem payment of a 
predetermined rate for inpatient services furnished to Medicare 
beneficiaries. Each SNF's routine per diem payment rate is determined 
according to the methodology described in Sec. 413.312 and is based on 
various components of SNF costs.
    (b) Payment in full. The payment rate represents payment in full 
for routine services as described in Sec. 413.314 (subject to 
applicable coinsurance as described in Subpart G of Part 409 of this 
title), and for routine capital costs. Payment is made in lieu of 
payment on a reasonable cost basis for routine services and for routine 
capital costs.


Sec. 413.312  Methodology for calculating rates.

    (a) Data used. (1) To calculate the prospectively determined 
payment rates, HCFA uses:
    (i) The SNF cost data that were used to develop the applicable 
routine service cost limits;
    (ii) A wage index to adjust for area wage differences; and
    (iii) The most recent projections of increases in the costs from 
the SNF market basket index.
    (2) In the annual schedule of rates published in the Federal 
Register under the authority of Sec. 413.320, HCFA announces the wage 
index and the annual percentage increases in the market basket used in 
the calculation of the rates.
    (b) Calculation of per diem rate. (1) Routine operating component 
of rate--(i) Adjusting cost report data. The SNF market basket index is 
used to adjust the routine operating cost from the SNF cost report to 
reflect cost increases occurring between cost reporting periods 
represented in the data collected and the midpoint of the initial cost 
reporting period to which the payment rates apply.
    (ii) Calculating a per diem cost. For each SNF, an adjusted routine 
operating per diem cost is computed by dividing the adjusted routine 
operating cost (see paragraph (b)(1)(i) of this section) by the SNF's 
total patient days.
    (iii) Adjusting for wage levels.  (A) The SNF's adjusted per diem 
routine operating cost calculated under paragraph (b)(1)(ii) of this 
section is then divided into labor-related and nonlabor-related 
portions.
    (B) The labor-related portion is obtained by multiplying the SNF's 
adjusted per diem routine operating cost by a percentage that 
represents the labor-related portion of cost from the market basket. 
This percentage is published when the revised rates are published as 
described in Sec. 413.320.
    (C) The labor-related portion of each SNF's per diem cost is 
divided by the wage index applicable to the SNF's geographic location 
to arrive at the adjusted labor-related portion of routine cost.
    (iv) Group means. SNFs are grouped by urban or rural location by 
census region. Separate means of adjusted labor-related and nonlabor 
routine operating costs for each SNF group are established in 
accordance with the SNF's region and urban or rural location. For each 
group, the mean labor-related and mean nonlabor-related per diem 
routine operating costs are multiplied by 105 percent.
    (2) Computation of routine capital-related cost.
    (i) The SNF routine capital-related cost for both direct and 
indirect capital costs allocated to routine services, as reported on 
the Medicare cost report, is obtained for each SNF in the data base.
    (ii) For each SNF, the per diem capital-related cost is calculated 
by dividing the SNF's routine capital costs by its inpatient days.
    (iii) SNFs are grouped by urban and rural location by census 
region, and mean per diem routine capital-related cost is determined 
for each group.
    (iv) Each group mean per diem capital-related cost is multiplied by 
105 percent.
    (3) Computation of return on owner's equity for services furnished 
before October 1, 1993.  (i) Each proprietary SNF's Medicare return on 
equity is obtained from its cost report and the portion attributable to 
the routine service cost is determined as described in Sec. 413.157.
    (ii) For each proprietary SNF, per diem return on equity is 
calculated by dividing the routine cost related return on equity 
determined under paragraph (b)(3)(i) of this section by the SNF's total 
Medicare inpatient days.
    (iii) Separate group means are computed for per diem return on 
equity of proprietary SNFs, based on regional and urban or rural 
classification.
    (iv) Each group mean is multiplied by 105 percent.


Sec. 413.314  Determining payment amounts: Routine per diem rate.

    (a) General rule. An SNF that elects to be paid under the 
prospectively determined payment rate system, and qualifies for such 
payment, is paid a per diem rate for inpatient routine services. This 
rate is adjusted to reflect area wage differences and the cost 
reporting period

[[Page 37596]]
beginning date (if necessary) and is subject to the limitation 
specified in paragraph (d) of this section.
    (b) Per diem rate. The prospectively determined payment rate for 
each urban and rural area in each census region is comprised of the 
following:
    (1) A routine operating component, which is divided into:
    (i) A labor-related portion adjusted by the appropriate wage index; 
and
    (ii) A nonlabor-related portion.
    (2) A routine capital-related cost portion.
    (3) For proprietary SNFs only, a portion that is based on the 
return on owner's equity related to routine cost, applicable only for 
services furnished before October 1, 1993.
    (c) Adjustment for cost reporting period. (1) If a facility has a 
cost reporting period beginning after the beginning of the Federal 
fiscal year, the intermediary increases the labor-related and nonlabor-
related portions of the prospective payment rate that would otherwise 
apply to the SNF by an adjustment factor. Each factor represents the 
projected increase in the market basket index for a specific 12-month 
period. The factors are used to account for inflation in costs for cost 
reporting periods beginning after October 1. Adjustment factors are 
published in the annual notice of prospectively determined payment 
rates described in Sec. 413.320.
    (2) If a facility uses a cost reporting period that is not 12 
months in duration, the intermediary must obtain a special adjustment 
factor from HCFA for the specific period.
    (d) Limitation of prospectively determined payment rate. The per 
diem prospectively determined payment rate for an SNF, excluding 
capital-related costs and excluding return on equity for services 
furnished prior to October 1, 1993, may not exceed the individual SNF's 
routine service cost limit. Under Sec. 413.30, the routine service cost 
limit is the limit determined without regard to exemptions, exceptions, 
or retroactive adjustments, and is the actual limit in effect when the 
provider elects to be paid a prospectively determined payment rate.


Sec. 413.316  Determining payment amounts: Ancillary services.

    Ancillary services are paid on the basis of reasonable cost in 
accordance with section 1861(v)(1) of the Act and Sec. 413.53.


Sec. 413.320  Publication of prospectively determined payment rates or 
amounts.

    At least 90 days before the beginning of a Federal fiscal year to 
which revised prospectively determined payment rates are to be applied, 
HCFA publishes a notice in the Federal Register:
    (a) Establishing the prospectively determined payment rates for 
routine services; and
    (b) Explaining the basis on which the prospectively determined 
payment rates are calculated.


Sec. 413.321  Simplified cost report for SNFs.

    SNFs electing to be paid under the prospectively determined payment 
rate system may file a simplified cost report. The cost report contains 
a simplified method of cost finding to be used in lieu of cost methods 
described in Sec. 413.24(d). This method is specified in the 
instructions for Form HCFA-2540S, contained in sections 3000-3027.3 of 
Part 2 of the Provider Reimbursement Manual. This form may not be used 
by hospital-based SNFs or SNFs that are part of a health care complex. 
Those SNFs must file a cost report that reflects the shared services 
and administrative costs of the hospital and any other related 
facilities in the health care complex.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)

    Dated: June 30, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
[FR Doc. 95-17980 Filed 7-20-95; 8:45 am]
BILLING CODE 4120-01-P