[Federal Register Volume 63, Number 20 (Friday, January 30, 1998)]
[Rules and Regulations]
[Pages 5106-5139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2154]



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_______________________________________________________________________

Part IV





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



_______________________________________________________________________



42 CFR Part 413



Medicare and Medicaid Programs; Salary Equivalency Guidelines for 
Physical Therapy, Respiratory Therapy, Speech Language Pathology, and 
Occupational Therapy Services; Final Rule

  Federal Register / Vol. 63, No. 20 / Friday, January 30, 1998 / Rules 
and Regulations  

[[Page 5106]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1808-F]
RIN 0938-AG70


Medicare and Medicaid Programs; Salary Equivalency Guidelines for 
Physical Therapy, Respiratory Therapy, Speech Language Pathology, and 
Occupational Therapy Services

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

ACTION: Final rule.

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

SUMMARY: This final rule sets forth revisions to the salary equivalency 
guidelines for Medicare payment for the reasonable costs of physical 
therapy and respiratory therapy services furnished under arrangements 
by an outside contractor. This final rule also sets forth new salary 
equivalency guidelines for Medicare payment for the reasonable costs of 
speech language pathology and occupational therapy services furnished 
under arrangements by an outside contractor. The guidelines do not 
apply to inpatient hospital services and hospice services. The 
guidelines will be used by Medicare fiscal intermediaries to determine 
the maximum allowable cost of those services.

EFFECTIVE DATE: This rule is effective April 1, 1998. The rule is 
applicable for services furnished on or after April 1, 1998. This rule 
is a major rule as defined in Title 5, United States Code, section 
804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we have submitted a 
report to Congress on this rule.

ADDRESSES: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
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Register.

FOR FURTHER INFORMATION CONTACT: Jackie Gordon, (410) 786-4517.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1861(v)(5) of the Social Security Act (the Act) requires 
the Secretary to determine the reasonable cost of services furnished to 
Medicare beneficiaries ``under an arrangement'' with a provider of 
services, by therapists or other health-related personnel. The Health 
Care Financing Administration (HCFA) pays the provider directly for 
these services, rather than paying the therapist or supplying 
organization. Under section 1861(w)(1) of the Act, this payment 
discharges the beneficiary from liability to pay for the services. 
Section 1861(v)(5) of the Act also specifies that the reasonable costs 
for these services may not exceed an amount equal to the salary that 
would reasonably have been paid for the services (together with any 
additional costs that would have been incurred by the provider or other 
organization) to the person performing them if they had been performed 
in an employment relationship with a provider or other organization 
(rather than under such arrangement), plus allowances for certain 
expenses that may be incurred by the contracting therapy organization 
in furnishing the services as the Secretary in regulations determines 
to be appropriate.
    These statutory requirements are implemented in existing 
regulations at 42 CFR 413.106. The regulations apply to the services of 
physical, occupational, speech language pathologists, and other 
therapists and services of other health specialists (other than 
physicians) furnished under arrangements with a provider of services, a 
clinic, a rehabilitation agency, or a public health agency. The 
regulations provide for:
     Hourly salary equivalency amounts comprised of:

--A prevailing hourly salary rate based on the 75th percentile of the 
range of salaries paid to full-time employee therapists by providers in 
the geographic area, by type of therapy.
--Fringe benefit and expense factors to take into account fringe 
benefits generally received by an employee therapist, as well as 
expenses (such as maintaining an office, insurance, etc.) that a 
therapist or therapist organization might incur in furnishing services 
under arrangements.

     A standard travel allowance to recognize time spent in 
traveling to the provider's site or the patient's home.
     As provided for in existing regulations at Sec. 413.106(e) 
and explained in section 1412 of the Provider Reimbursement Manual, the 
following are additional allowances for costs incurred for services 
furnished by an outside supplier. In addition to the guidelines 
established for the adjusted hourly salary equivalency amount and the 
travel allowance, the following costs incurred for services furnished 
by an outside supplier are recognized, provided the services are 
properly documented as having been received by the provider.

--Overtime, if an outside supplier utilizes the services of its 
employees (including the services of aides and assistants) at an 
individual provider in excess of the provider's standard workweek. 
Several commenters stated that there should be no limits on overtime 
compensation. The proposed rule did not specifically introduce new 
limits on payment for overtime. The proposed rule provided that a 
provider would receive payment for overtime but if the therapist worked 
over 40 hours it would not receive the expense factor portion of the 
hourly salary equivalency guideline amount.
--Administrative and supervisory duties, if an outside supplier 
provides more than one therapist and at least one therapist spends more 
than 20 percent of his or her time supervising other therapists and 
performing administrative duties.
--Depreciable or leased equipment, including maintenance costs of 
equipment remaining at the provider's site, that the outside supplier 
uses in furnishing direct services to the provider's patients (may also 
include equipment that is transported from one provider site to another 
but excludes equipment owned by the provider).
--Supplies furnished by the supplier for direct patient care (e.g., 
gases and sprays for respiratory therapy), excluding items such as 
envelopes, stamps, and typewriters that are reimbursed as overhead 
expenses and included in the fringe benefit and expense factor.
--Travel expenses, based on 10 times the General Services 
Administration mileage rate for each day an outside supplier travels to 
a provider site.
--Aides, who are paid as an add-on. Several commenters requested that 
we pay aides as a function of the hourly salary equivalency amount at 
50 percent of these amounts.
--Assistants, who are paid as a function of the hourly salary 
equivalency amount at 75 percent of these amounts. (All therapy types 
use assistants except respiratory therapists.)

    The provider must supply the intermediary with documentation that

[[Page 5107]]

supports these additional costs to the intermediary's satisfaction. 
These are the only additional costs that will be recognized.
    The regulations at 42 CFR 431.106 (b)(5) and (c) also provide for 
an exemption for limited part-time or intermittent services if the 
provider required the services of an outside supplier for a particular 
type of therapy service and the total hours of services performed for 
the provider, by type of service, average less than 15 hours per week 
for those weeks in the cost reporting period during which services were 
furnished by nonemployee therapists. (Travel time is not counted in the 
computation, even if the actual time is used.) If a provider qualifies 
for this exemption, the reasonable cost of such services is evaluated 
on a reasonable rate per unit of service basis, except that payment for 
these services in the aggregate, during the cost reporting period, may 
not exceed the amount that would be allowable had the provider 
purchased these services on a regular part-time basis for an average of 
15 hours per week for the number of weeks in which services were 
furnished. Where the contract provides for a method of payment other 
than rate per unit of service (e.g., hourly rate or percentage of 
charges), payment cannot exceed the guideline adjusted hourly amounts 
plus other allowable costs, even though the services are performed on a 
limited or intermittent part-time basis.
    In addition, the existing regulations at Sec. 413.106(f)(1) have 
provided for an exception because of binding contract. An exception was 
granted to a provider that entered into a written binding contract with 
a therapist or contracting organization prior to the date the initial 
guidelines are published for a particular type of therapy. Before the 
exception was granted, however, the provider was required to submit the 
contract to its intermediary, subject to review and approval by the 
HCFA regional office. This exception may be granted for the contract 
period, but no longer than 1 year from the date that the guidelines for 
the particular therapy are published. During the period in which a 
binding contract exception was in effect, the cost of the services was 
evaluated under the prudent buyer concept. (Section 1414.1 of the 
Provider Reimbursement Manual contains instructions on this exception.) 
This exception did not apply to providers who entered into a 
contingency contract with a therapist or contracting organization or 
another provider. In a contingency contract, the provider and 
contractor agree that if Medicare does not reimburse the provider for 
the rate at which the contract is set, the provider and contractor 
agree that the contractor will make up the difference. We do not 
consider a contingency contract a binding contract. (We are eliminating 
this exception in this final rule. See Section II. On responses to 
public comments on proposed rule for further discussion.)
    Also, the existing regulations at Sec. 413.106(f)(2) provide for an 
exception for unique circumstances or special labor market conditions. 
An exception may be granted when a provider demonstrates that the costs 
for therapy services established by the guidelines are inappropriate to 
a particular provider because of some unique circumstances or special 
labor market conditions in the area. As explained in section 1414.2 of 
the Provider Reimbursement Manual, exceptions will be granted only in 
extraordinary circumstances. Before the exception may be granted, the 
provider must submit appropriate evidence to its intermediary to 
substantiate its claim. The provider's request for an exception, 
together with substantiating documentation, must be submitted to the 
intermediary each year, no later than 150 days after the close of the 
provider's cost reporting period. Because providers had been required 
to submit cost reports to intermediaries no later than 90 days after 
the close of their cost reporting periods, we had required that the 
provider's request for an exception, together with substantiating 
documentation, also be submitted to the intermediary no later than 90 
days after the close of its cost reporting period. On June 27, 1995 (60 
FR 33137), we changed the due date for submission of cost reports to 
150 days after the close of the provider's cost reporting period. 
Accordingly, as explained under Section II.F. of this preamble, we are 
revising the time period for a provider's request for an exception, 
together with substantiating documentation, to 150 days after the close 
of its cost reporting period. If the circumstances giving rise to the 
exception remain unchanged from a prior cost reporting period, however, 
the provider need only submit evidence to the intermediary 150 days 
after the close of its cost reporting period to establish that fact.
    In order to establish an exception for unique circumstances, the 
provider must submit evidence to establish that it has some unique 
method of delivering therapy or other services, which affects its 
costs, that is different from the other providers in the area. The 
exception will be effective no earlier than the onset of the unique 
circumstances.
    In order to substantiate an exception for special labor market 
conditions, the provider must submit evidence enabling the intermediary 
to establish that the going rate in the area for a particular type of 
service is higher than the guideline limit and that such services are 
unavailable at the guideline amounts. It is the duty of the provider to 
prove to the satisfaction of the intermediary that it has reasonably 
exhausted all possible sources of this service without success.
    The intermediary collects information on the rates that other 
providers in the area generally pay therapists or other health care 
specialists. Once this information is collected, the intermediary will 
determine whether other providers in the area, in comparison to the 
provider requesting the exception, generally pay therapists or other 
health care specialists higher rates than the guideline amounts.
    Under existing Sec. 413.106(b)(6), HCFA issues guidelines 
establishing the hourly salary equivalency amounts in geographical 
areas for therapy services furnished to Medicare beneficiaries under 
arrangements. These guidelines apply only to the amount of payment the 
Medicare program makes to a provider for therapy services obtained 
under arrangements. The guidelines are not intended to dictate or 
otherwise interfere in the terms of a contract that a provider may wish 
to enter into with a therapist or therapist organization. The 
guidelines do not apply to services furnished by employees of a 
hospital or employees of other providers. There is also an exception to 
the guidelines for inpatient hospital services provided by hospitals 
paid under the prospective payment system or subject to rate-of-
increase limits (Sec. 413.106(f)(4)), in which case the services are 
evaluated under the Medicare program's reasonable cost provisions as 
described at Sec. 413.5). The salary equivalency guidelines also will 
not be applied to skilled nursing facilities (SNFs) that are paid under 
the prospective payment system for therapy services provided under 
arrangements for cost reporting periods beginning on or after July 1, 
1998. (This includes low volume SNFs currently electing prospective 
payment under section 1888(d) of the Act.) In addition, the salary 
equivalency guidelines will not be applied to HHAs who are paid under 
the prospective payment system for therapy services provided under 
arrangements for cost reporting periods beginning on or after October 
1, 1999. The salary equivalency guidelines also will not apply for 
outpatient therapy services provided by a SNF or an outpatient 
rehabilitation

[[Page 5108]]

provider for services provided to SNF patients on or after July 1, 1998 
when payment for those services is made on a fee schedule basis. 
(Providers of Part B outpatient therapy services provided to Medicare 
beneficiaries whose nursing home stays are not paid by Medicare will be 
paid on a fee schedule basis for services furnished on or after July 1, 
1998.) The guidelines also will not apply to an outpatient 
rehabilitation provider, a comprehensive outpatient rehabilitation 
facility (CORF), an HHA providing outpatient rehabilitation services to 
patients who are not homebound, or the outpatient department of a 
hospital when payment for those services is made on a fee schedule 
basis beginning on January 1, 1999. Shown below is a chart outlining 
the provisions of the Balanced Budget Act of 1997. The salary 
equivalency guidelines will cease to apply to the enumerated provider 
types once the Balanced Budget Act provisions become effective.

----------------------------------------------------------------------------------------------------------------
               Provider type                           BBA provision                     Effective date         
----------------------------------------------------------------------------------------------------------------
Hospital Outpatient Therapy Services.......  Payment on a fee schedule basis..  Calendar year 1999.             
SNF Inpatient Services (Includes therapy     Payment on a Prospective Payment   Cost reporting periods beginning
 services and applies to free-standing and    System basis.                      on or after July 1, 1998.      
 hospital-based providers).                                                                                     
SNF Outpatient Therapy Services............  Fee Schedule.....................  For services beginning July 1,  
                                                                                 1998.                          
CORFs (applies to free-standing and          Fee schedule.....................  Calendar year 1999.             
 hospital-based providers).                                                                                     
Outpatient Rehabilitation Providers........  Fee schedule.....................  Calendar year 1999.             
CMHCs......................................  Payment under the outpatient       Calendar year 1999.             
                                              hospital Prospective System                                       
                                              Payment basis.                                                    
Outpatient Therapy Services Provided by HHA  Fee Schedule.....................  Calendar year 1999.             
 But Not Under HHA benefit.                                                                                     
HHA Services (Includes therapy services and  Payment on a Prospective System    Cost reporting periods beginning
 applies to free-standing and hospital-       Payment basis.                     on or after October 1, 1999.   
 based providers).                                                                                              
----------------------------------------------------------------------------------------------------------------
* A $1500 annual limitation on services provided to Medicare beneficiaries will be applied beginning January 1, 
  1999 where therapy services are provided by providers under the outpatient physical therapy benefit (which    
  includes speech language pathology services) and occupational therapy benefit.                                

    However, we are establishing regulations that provide that the 
salary equivalency guidelines will apply in situations where 
compensation, at least in part, to a therapist employed by the provider 
is based on a fee-for-service or on a percentage of income (or 
commission). The entire compensation will be subject to the guidelines 
in cases where the nature of the arrangements are most like an under 
``arrangement'' situation, although technically the provider may treat 
the therapists as employees. The guidelines will be applied in this 
situation so that an employment relationship is not being used to 
circumvent the guidelines.
    The guidelines apply to SNFs providing therapy services under 
arrangements that elect prospective payment under section 1888(d) of 
the Act because that prospective payment system (PPS) only applies to 
routine and capital services and does not apply to ancillary services 
which include therapy services.
    Section 413.106(d) provides that, prior to the beginning of a 
period to which a guideline will be applied, HCFA will publish a notice 
in the Federal Register establishing the guideline amounts to be 
applied to each geographical area by type of therapy. We have issued 
schedules of salary equivalency guidelines for the reasonable costs of 
physical therapy services since 1975, and for respiratory therapy 
services since 1978. On September 30, 1983, we published a final notice 
(48 FR 44922) that revised the methodology used to establish the 
schedules, as well as the guidelines themselves. The guidelines 
continue to apply to physical therapy and respiratory therapy services 
provided under arrangements, as set forth in Sec. 413.106, with 
hospitals, home health agencies (HHAs), SNFs, hospital-based HHAs, 
hospital-based SNFs, CORFs, and outpatient rehabilitation providers 
(ORPs). (Since we are issuing guidelines for occupational therapists, 
the guidelines also will apply to community mental health centers 
(CMHCs) that provide occupational therapy services furnished under 
arrangements. However, because CMHC therapy services will be paid under 
the outpatient hospital prospective payment system beginning with 
services furnished during calendar year 1999, at that time the 
guidelines will no longer apply to those occupational therapy 
services).
    The September 30, 1983 final notice provided that, for providers 
with cost reporting periods beginning after October 1, 1982, the 
published guidelines would be revised upward by the projected 0.6 
percent monthly inflation rate, not compounded. It also provided that, 
if for any reason we did not publish a new schedule of guidelines to be 
effective for cost reporting periods beginning on or after October 1, 
1983 or did not announce other changes in the existing schedule, the 
existing guidelines would remain in effect, increased by the projected 
0.6 percent monthly inflation rate, not compounded, until a new 
schedule of guidelines was issued. This monthly inflation rate was 
based on a Data Resources Incorporated (DRI) forecast of the annual 
rate of increase in each component of the salary equivalency amounts 
(that is, salary, fringe benefits, rent, and other expenses), with each 
component weighted to form a composite rate of increase for the 12-
month period ending March 31, 1984.

II. Provisions of the March 28, 1997 Proposed Rule

    On March 28, 1997 we published in the Federal Register a notice of 
proposed rulemaking (62 FR 14851) that proposed changes in the 
methodology used to establish the salary equivalency guidelines. We 
proposed to establish salary equivalency guidelines for occupational 
therapy and speech-language pathology services that are contracted by 
providers. We also proposed to revise the guidelines that were 
currently in place for contracted physical therapy and respiratory 
therapy services. In the proposed rule:
     The prevailing hourly salary rates were derived:

--From the 75th percentile of hourly therapist salaries of blended data 
from several sources of hospital and SNF wage rate data (weighted by 
relative employment levels in hospitals and nursing homes) to develop a 
national ``best estimate'' of prevailing salary levels as a basis for 
the guidelines.

[[Page 5109]]

--We calculated guideline levels for fourth quarter 1995 and trended 
forward to April 1998.

     We computed fringe benefits as a percent of total 
compensation using fiscal year 1994 Medicare cost reports for hospitals 
under the prospective payment system.
     The expense component was based on an estimate of the 
costs of maintaining a therapy services office.
     The standard travel allowance was set at 50 percent of the 
hourly salary equivalency amount.
     The published amounts were to be adjusted to take into 
account projected rates of inflation that occurred after the initial 
effective date.
    The proposal provided for a 60-day period for public comment. The 
proposed rule also provided that the guidelines would not be effective 
until at least 60 days after the date of publication of the final rule.
    We received 409 pieces of correspondence on the proposed 
guidelines. A significant number of comments focused on major aspects 
of the proposed methodology that required us to perform an extensive 
evaluation of the methodology before revised guidelines could be 
issued. A summary of the public comments and our responses follow.

III. Summary of Public Comments and Departmental Responses

A. Data Sources for Salary Equivalency Guidelines

    We proposed to use the latest available Bureau of Labor Statistics 
(BLS) hospital occupational/industry wage survey data along with data 
from several other sources of hospital and nursing home data to develop 
the salary equivalency guidelines. This was the first time that we had 
proposed using data sources in addition to the BLS data in issuing the 
salary equivalency guidelines. We based this decision on the following:
    First, BLS carried out its last hospital occupational/industry wage 
surveys in 1989 and 1991 and for budgetary reasons has discontinued 
conducting this survey. Accordingly, even if we had chosen to use BLS 
survey data as our primary source for the proposed rule, we would have 
needed to investigate other rehabilitation therapy survey data sources 
for projecting the 1989 and 1991 data to a current base period such as 
1995 and for use in future guidelines. In addition, although the 1989 
and 1991 BLS survey data continue to meet the rigorous publication 
standards of BLS and provide the only statistically reliable national/
regional data for wages by occupation of which we are aware, questions 
have been raised as to whether the BLS data meet the Senate Committee 
on Finance's recommendation on timeliness. We took this concern into 
consideration explicitly in the proposed rule. Furthermore, the BLS 
hospital occupational/industry wage surveys of 1989 and 1991 include 
only hospital data. The last BLS nursing home occupational/industry 
wage survey was conducted in 1985. We believed it was reasonable to use 
combined hospital and SNF wages in the determination of the guidelines 
as was done previously because therapist wage levels are primarily 
determined in occupational labor markets, not in separate or isolated 
industry labor markets. We also needed to review the SNF therapist data 
so that we could determine the wage levels in SNFs holding all other 
factors constant (including local labor market conditions, and working 
conditions).
    Comment: We received numerous comments regarding the strengths and 
weaknesses of the various data sources that we proposed to use to 
determine the guidelines.
    Response: We intend to utilize five additional data sources for 
hospital wages and two additional data sources for freestanding SNF 
wages, each of which we discuss in detail below. We acknowledge the 
commenters observations of strengths and weaknesses present in several 
of the data sources. However, to delete any one data source would give 
more weight to the remaining data sources, which have their own 
strengths and weaknesses. To delete any data source with any weakness 
relating to statistical reliability would leave only the BLS data which 
are not as timely as we would have preferred. Although we received many 
comments about the strengths and weaknesses of the various data sources 
that we did use, we did not receive compelling evidence to either add 
or delete any data source or change the equal weight given to each data 
source.
    A summary of the different data sources appears below the summaries 
of the public comments we received and our responses to those comments.
1. BLS Data--General
    BLS collected average hourly earnings (AHE) data for all four types 
of therapists in 1989. However, the January 1991 BLS survey included 
only the average hourly earnings for full-time physical and respiratory 
therapists (BLS January 1991 average hourly earnings for full-time 
physical and respiratory therapists were found in the BLS Occupational 
Wage Survey: Hospitals, January 1991, pp. 36-119). The hospitals in 
this survey employed 50 or more workers. We therefore needed to 
estimate 1991 average hourly wages for speech language pathologists and 
occupational therapists at the full labor market rate. To do so, we 
started with the BLS 1989 survey of all four types of therapists as a 
baseline (BLS Industry Wage Survey: Hospitals, March 1989 (the latest 
previous survey), pp. 33-118). The hospitals in the 1989 survey 
employed 100 or more workers. Our analysis of the University of Texas 
survey data for U.S. hospitals indicated that the wages for speech 
language pathologists and respiratory therapists increased at similar 
rates between 1989 and 1993. Wages for occupational therapists also 
increased at rates similar to that for physical therapists during that 
period. Therefore, we determined that we could employ the 1991 to 1989 
growth rates of respiratory therapist wages and of physical therapist 
wages in order to estimate 1991 wage levels for speech language 
pathologists and occupational therapists, respectively.
    To update the data for the four therapist types from 1991 to later 
periods, we derived rates of increase for the period from January 1991 
through January 1994 (the period which predates the additional data 
sources that HCFA used) and based 50 percent on American Hospital 
Association Panel wage data and 50 percent on the average hourly 
earnings for hospital workers published by the BLS Current Employment 
Statistics Survey, SIC Code 806 (Hospitals). The additional industry 
data sources, detailed below, that HCFA used were surveyed in 1994-
1995.
    For the period from January 1994 through October 1995, we updated 
the BLS occupational industry wage data for the four therapy types 
using the BLS Current Employment Statistics Survey for hospital worker 
hourly earnings. By incorporating the American Hospital Association 
data, which had a higher rate of increase than the BLS data during the 
January 1991-January 1994 period, HCFA captured the relatively faster 
growth in therapist wages during the period, resulting in wage levels 
that reflected current market conditions in January 1994. As mentioned 
above, we used the BLS Current Employment Statistics Survey to trend 
therapist wage increases from 1994 to 1995.
    Comment: One commenter stated that most data sources that HCFA 
used, especially BLS and Mutual of Omaha, were not statistically valid. 
Specifically, the commenter argued that the BLS data were biased and 
the extrapolation of the BLS survey to non-surveyed areas was

[[Page 5110]]

not a valid statistical procedure, especially since there was no known 
relationship between surveyed areas and non-surveyed areas. Several 
commenters noted that the National Association for the Support of Long-
Term Care (NASL) and the American Health Care Association (AHCA) 
surveys provide timely and accurate data and should be the only data 
sources used for the salary equivalency guidelines in SNFs. One 
commenter concluded that the BLS survey had a ``high response rate'' 
and the data were reliable.
    Response: We agree that no available data source is ideally suited 
for all purposes. The data sources used may contain biases that we were 
unable to remove using standard statistical editing routines. We 
believe that the biases go in both directions and tend to offset each 
other. Given that the mean hourly wages of therapists generally cluster 
in rather small ranges, we believe that an average of the various 
sources, including any inherent biases, fairly represents the national 
wage rate for each of the four therapist types. We agree that the NASL 
and AHCA databases are timely, but each has shortcomings regarding 
representativeness. We address specific comments concerning the Mutual 
of Omaha data and the issue of separate salary equivalency guidelines 
for each setting later.
    Comment: One commenter stated that Congress does not want HCFA to 
use the BLS data because Congress discontinued funding for these 
surveys in 1992.
    Response: Congress discontinued funding for these surveys for 
reasons unrelated to the salary equivalency guidelines. The BLS surveys 
were replaced by the Occupational Compensation Survey (OCS). We could 
not use the OCS because it did not contain the level of detail by 
occupation required for use in establishing salary equivalency 
guidelines.
2. National Association for the Support of Long-Term Care (NASL)
    In March 1996, NASL, representing a portion of the rehabilitation 
therapy industry, submitted an October 1995 sample survey of salaried 
therapists in hospitals and nursing homes to HCFA, as allowed under our 
regulations. This survey did not meet the requirements of the 
regulations at Sec. 413.106(b)(6), since the survey design, 
questionnaires, and instructions were not approved by HCFA prior to the 
start of the survey. The survey did provide data that were current in 
SNFs and hospitals, and some documentation was furnished. We, 
therefore, conducted a special analysis of this NASL survey data, 
including a limited audit of the survey records. Based on this analysis 
and limited audit, we determined that the survey was not adequate as a 
sole or primary source of data in determining the guidelines, but could 
be useful in combination with other data sources. There were several 
reasons for this determination:
     The data were not audited or certified by an independent 
party. We were permitted to conduct an audit of the survey records only 
under stringent restrictions designed to protect the confidentiality of 
the survey respondents. Those restrictions made it impossible for us to 
verify the survey results. For example, we were unable to compare 
submitted survey data with data from other sources.
     The verification survey, conducted to determine the 
reliability of data submitted by mail, did not appear to be adequate. 
Only five providers were included in the verification survey. 
Specifically, we were not satisfied that the verification sample was 
either sufficiently large or adequately representative.
     The survey is not sufficiently representative. There were 
variable response rates for hospitals and SNFs. The response rate for 
hospitals was 10.8 percent and the response rate for SNFs was 29.9 
percent. In addition, the sample seemed to include an 
overrepresentation of large hospitals and chain-affiliated SNFs.
    Because there is an underrepresentation of small hospitals and non-
chain SNFs in the NASL survey, we cannot be assured with this small 
response rate that the large hospitals and chain-affiliated SNFs will 
adequately represent the small hospitals and non-chain SNFs not 
included in the survey. (The GAO stated in its report, ``Medicare Early 
Resolution of Overcharges for Therapy in Nursing Homes is Unlikely'', 
August 16, 1996, p. 7, regarding the NASL survey data, ``However, the 
survey response rate was low (10 percent for hospitals and 30 percent 
for SNFs), which raises questions about how representative the data 
are.'' In a footnote on that page, GAO points out, ``Official 
government surveys generate a much higher response rate. The BLS White 
Collar Pay Survey (one component of which was the hospital salary data 
survey on which the draft guidelines were based) has an overall 
response rate of 82 percent. Typically, BLS response rates exceed 80 
percent).''
     Despite requests for the raw unedited data file, the file 
was not provided to us.
     We have questions about the validity of certain edits.
     We were also concerned that supervisory time and 
compensation in lieu of benefits were not consistently reported. 
Additionally, we were concerned that the supervisory time included in 
the NASL survey was above a certain threshold that we use in developing 
the guidelines.
    Comment: Some commenters challenged HCFA's characterization of the 
NASL data and felt that HCFA should give greater weight to the NASL 
data for a variety of reasons.
    Response: In general, the mean wages from the various data sources 
we used were rather tightly clustered. None of the commenters offered 
compelling evidence that NASL data should be weighted preferentially. 
Therefore, we did not change the weighting of any of the data sources 
used.
    Comment: One commenter stated that the NASL data have response 
rates comparable to those achieved in unspecified BLS studies, hospital 
industry studies, and long-term care studies. The same commenter 
pointed out that the NASL data consisted of responses from 711 
institutions while the BLS data were from 628 institutions. Another 
commenter stated that the NASL survey suffered from a low response 
rate.
    Response: The NASL surveyed hospitals, hospital-based SNFs, and 
freestanding SNFs while the BLS surveyed hospitals only. The response 
rate of the BLS survey was 84 percent, in contrast to the response rate 
of the NASL survey, which was 20 percent in the aggregate (10 percent 
for hospitals and 29 percent for SNFs). We agree with the comment that 
the response rate for the NASL data was low with respect to statistical 
sampling theory. While, the validity and reliability of a sample survey 
depends primarily upon the representativeness of the sample, not on the 
number of responses (assuming an adequate sample size), we have 
concerns about the representativeness of the NASL survey. These 
concerns, along with the low response rate to the survey, lead us to 
believe that the NASL data should be given no greater weight than the 
data from other sources.
    Comment: One commenter asserted that the NASL survey followed a 
rigorous statistical design in consultation with HCFA and that the NASL 
data were as good as the data HCFA used.
    Response: HCFA did comment and make suggestions on some aspects of 
the

[[Page 5111]]

statistical design. NASL did not, however, implement all of the 
suggestions that HCFA felt were necessary for a valid statistical 
design. Nevertheless, we are using the NASL data in conjunction with 
data from several other sources, giving it the same weight as all other 
data sources.
    Comment: One commenter defended the quality of the NASL data by 
stating that HCFA performed an audit of the data, although limited by 
conditions set by NASL.
    Response: The restrictions set by NASL were such that essentially 
all that HCFA was able to perform during its on-site visit to NASL was 
a review. The data were not audited or certified by an independent 
party. We were permitted to review the survey records only under 
stringent restrictions designed to protect the confidentiality of the 
survey respondents. Those restrictions made it impossible for us to 
verify the survey results. For example, we were unable to compare 
submitted survey data with data from other sources.
    Comment: One commenter noted that the NASL survey benefitted from a 
verification survey.
    Response: We concur that verification surveys are beneficial, but 
our review of the NASL survey disclosed that the number of provider 
verifications actually conducted was extremely limited. As stated 
earlier, there were only 5 verifications on 711 responses, a number too 
small to give statistical significance to the result.
    Comment: Several commenters recommended that HCFA use only the NASL 
and/or AHCA data from SNFs to develop rates for SNFs.
    Response: As stated above, HCFA has blended SNF and hospital data 
in our previous notice and we see no valid reason not to do so again. 
In addition, we found a number of shortcomings with the NASL data and 
the AHCA data, which we found to be biased toward SNF chains and to 
include some supervisory data. We edited the data as much as possible 
to improve data quality, but did not use either data source alone to 
develop rates for SNFs. We address the issue of separate salary 
equivalency guidelines for each provider setting later in this final 
rule.
    Comment: Several commenters pointed out that the NASL data were the 
most timely data available.
    Response: We agree that the NASL data were the most timely data 
available, but, as discussed earlier, timeliness alone does not 
sufficiently meet the criterion for validity and reliability.
    Comment: One commenter noted that the NASL data were skewed toward 
larger hospitals.
    Response: We concur that the sample responses were skewed toward 
larger hospitals as well as larger SNF chains but, as stated earlier, 
some of the other data sources are biased in other ways as well. The 
extent of response bias within the reweighted data is not possible to 
quantify without some additional survey work. Again, by combining data 
sources with different biases, we believe that the biases tend to 
offset each other as evidenced by the clustering of means.
3. Texas National Hospital Survey (1994 National Survey of Hospital and 
Medical School Salaries, University of Texas Medical Branch, Galveston, 
TX, 1994, pp. 15-19)
    The University of Texas National Hospital Survey data are from 
October 1994. This annual survey of hospitals is voluntary. The survey 
has been conducted for many years for hospitals in various regions of 
the country to use as a benchmark of regional wage levels for specific 
health professional occupations. While there are data from all regions 
of the United States, the survey was not designed to meet the rigorous 
BLS standards for representativeness or statistical validity at the 
regional level. It does, however, give reasonable levels at the 
national level when compared to other data sources.
    Comment: One commenter stated that it was inappropriate for HCFA to 
use the University of Texas survey of hospitals in the United States 
because the data ``includes medical schools with a low wage bias to 
establish rates of pay for therapists that are working primarily in 
SNFs.''
    Response: The commenter's assertion is incorrect because the mean 
wages from the University of Texas data clustered with the mean wages 
from other data sources. Specifically, the University of Texas mean 
hourly wage ranged from being $0.19 higher to $0.83 lower than the mean 
hourly wage for the four therapy types using all the data sources--a 
range well within reasonable boundaries associated with statistical 
variation. For physical therapists, the University of Texas mean wage 
was $20.29; the mean wage from all sources of hospital wage data was 
$21.00, a difference of 3 percent. For occupational therapists, the 
University of Texas mean wage was $19.28; the mean wage from all 
sources of hospital wage data was $19.73, a difference of 2 percent. 
For speech language pathologists, the University of Texas mean wage was 
$18.58; the mean wage from all sources of hospital wage data was 
$18.67, a difference of less than one percent. For respiratory 
therapists, the University of Texas mean wage was $15.74; the mean wage 
from all sources was $15.58, a difference of negative one percent.
4. American Health Care Association (AHCA) Data
    The AHCA report includes data on both SNFs and hospitals. The SNF 
data for January 1995 are both current and industry-specific. However, 
the data are unevenly edited and appear to include some supervisors and 
additional salary in lieu of benefits. The sample is heavily weighted 
by large chains that are members of the Association. The SNF data, 
unlike BLS data, appear as both employee-weighted and facility-weighted 
averages and, therefore, do not permit computation of a median or 75th 
percentile levels for individual workers.
    Comment: One commenter objected to HCFA's observations concerning 
the 1994 and 1995 AHCA survey data and indicated that HCFA's criticisms 
were unreasonable, given the lack of alternative sources and the 
constant enhancement of the AHCA database since 1987. In particular, 
the commenter objected to HCFA's observations that the AHCA data were 
``unevenly edited and appear to include supervisors and additional 
salary in lieu of benefits,'' stating that HCFA fails to acknowledge 
discussions addressing these issues. The same commenter suggested that 
HCFA give the AHCA data greater weight because they were both timely 
and accurate, noting that: (a) AHCA data are exhaustively and 
consistently screened and cleaned with participants and the database is 
certified by Buck Consultants as being representative; (b) Buck 
Consultants has taken steps to insure that supervisory data are 
excluded from the data; (c) there are no wages or salary in lieu of 
benefits in the data; and (d) this is an annual study, given the same 
scrutiny each year and, therefore, should increase the degree of 
confidence that HCFA has in the data. Other commenters acknowledged the 
bias in the AHCA data toward large chains and indicated that HCFA could 
correct the AHCA survey for large company bias as well as individual 
data point analysis and exclusion of supervisory rates.
    Response: We acknowledge the steps taken to improve the quality of 
the AHCA data over time, and agree that the quality of the data has 
improved. Our analyses of the 1994 and 1995 AHCA survey indicate that 
the survey is still not representative of Medicare-certified 
facilities; it represents primarily large chains that are members of 
AHCA. We

[[Page 5112]]

made the same observations as did some commenters regarding AHCA data 
deficiencies and took steps to exclude supervisory data. HCFA did not 
have the necessary information to correct for large company bias. We 
believe that the biases tend to offset the data as evidenced by the 
clustering of mean wages. Further, individual worker data are not 
available to validate the reasonableness of the means for each 
institution. For these reasons, it would not be appropriate for HCFA to 
modify the weights given to the AHCA data, or to use these data as the 
sole source in developing the salary equivalency guidelines.
    Comment: Another commenter asserted that the NASL and AHCA data 
probably contained more responses from therapists than were contained 
in the BLS studies and that the occupational nature of therapists 
should outweigh the industry focus created by counting numbers of 
institutions.
    Response: The 1989 and 1991 BLS samples had responses from 536 and 
628 hospitals, respectively. The 1989 and 1991 BLS data that we used 
contained responses from 12,672 certified therapists as follows: 3,668 
in physical therapy (1991); 1,742 in occupational therapy (1989); 668 
in speech language pathology (1989); and 6,594 in respiratory therapy 
(1991). The post-edit NASL survey had responses from 191 hospitals, 50 
hospital-based SNFs, and 351 freestanding SNFs. The post-edit NASL 
survey contained responses from 5,741 registered/certified therapists 
as follows: 1,720 in physical therapy; 1,204 in occupational therapy; 
680 in speech language pathology; and 2,137 in respiratory therapy. The 
AHCA data contained responses from 3,515 certified therapists: 1,806 
physical therapists; 1,405 occupational therapists; and 304 speech 
language pathologists. The commenter was apparently seeking to give 
more weight to the NASL and AHCA data because ``the number of 
therapists reported in the NASL and AHCA survey probably exceeds the 
numbers reported in the BLS studies * * *'' implying that the two 
industry data bases are more reliable for that reason. In fact, the BLS 
studies (12,672 therapists) we used contained 37 percent more 
therapists than the NASL and AHCA data combined (5,741 and 3,515, 
respectively).
5. Maryland Health Services Cost Review Commission Data
    The Maryland Health Services Cost Review Commission conducts an 
annual census of occupational wage rates for all Maryland hospitals. We 
analyzed data from the 1995 census. While this is a complete census 
covering over 50 hospitals, it is for Maryland only. In addition, 
speech-language pathologists are not included as a separate 
occupational category.
    Comment: One commenter noted that the Maryland Health Services Cost 
Report Commission's database is not representative of the United States 
because the data are from only one State. Further, the commenter noted 
that speech language pathologists are not separately identified in the 
data.
    Response: Despite its shortcomings, the strengths of the Maryland 
census are that it is timely, accurate, and contains data from 
providers of various sizes in geographically diverse urban and rural 
areas. It is a rich data source for variations in occupational wage 
levels by degree of urbanization. In fact, the mean hourly wage for 
physical therapists in the Maryland data was $20.78; the mean wage from 
all sources of hospital wage data was $21.00, a difference of only 1 
percent. The mean hourly wage for occupational therapists in the 
Maryland data was $20.60; the mean wage from all sources of hospital 
wage data was $19.73, a difference of 4 percent. The mean hourly wage 
for respiratory therapists in the Maryland data was $16.20; the mean 
wage from all sources of hospital wage data was $15.58, a difference of 
four percent. We used the data because we concluded that its strengths 
outweighed its weaknesses for our specific purpose.
6. 1995 American Rehabilitation Association (ARA) Salary Survey
    The ARA collected July 1994 data from its members that are medical 
and residential rehabilitation providers. Among ARA members are CORFs 
that provide physical therapy, respiratory therapy, speech language 
pathology, and occupational therapy services to Medicare and Medicaid 
beneficiaries. The response rate was low and the Association indicated 
in its report that these data cannot be presumed to represent the full 
population of rehabilitation facilities. However, this survey appears 
to give reasonable wage levels at the national level when compared to 
other data sources. Information on SNFs was not reported due to an 
inadequate sample size.
    Comment: One commenter noted that the ARA survey had a low response 
rate and that it could not be assumed to be representative. Another 
commenter noted that despite the low response rate, the results 
appeared to yield reasonable wage levels nationally.
    Response: We agree with the observations of both commenters. 
Although the data could not be assumed to be representative, they were 
reasonable and fairly close to the other data sources we used. In fact, 
the mean hourly wage for physical therapists in the ARA freestanding 
hospital data was $20.82; the mean wage from all sources of hospital 
wage data was $21.00, a difference of less than 1 percent. The mean 
hourly wage for occupational therapists in the ARA freestanding 
hospital data was $18.90; the mean wage from all sources of hospital 
wage data was $19.73, a difference of only 4 percent. Similarly, the 
mean hourly wage for physical therapists in the ARA rehabilitation unit 
data was $21.12; the mean wage from all sources of hospital wage data 
was $21.00, a difference of less than one percent. The mean hourly wage 
for occupational therapists in the ARA rehabilitation unit data was 
$19.82; the mean wage from all sources of hospital wage data was 
$19.73, a difference of less than one percent. As is the case with the 
other data sources, we used the ARA data because we concluded that its 
strengths outweighed its weaknesses.
7. Mutual of Omaha Data
    Mutual of Omaha, an HCFA intermediary, conducted a survey of about 
2,000 Medicare SNF providers in 1995. Data were collected on contract 
therapy prices and salary rates for occupational therapy and speech 
language pathology.
    Comment: Several commenters stated that the Mutual of Omaha survey 
was not statistically valid because of inadequate sample design, no 
analysis of respondents vs. nonrespondents, too small a sample size, 
overrepresentation of hospital-based SNFs and contract therapists, no 
physical therapist or respiratory therapist data, and data that were 
limited to aggregate facility data as opposed to data points for each 
employee. The weight of many comments is reflected in their assertions 
that the average wage rates of occupational therapists and speech 
language pathologists reflected in the Mutual of Omaha data are out of 
line with other data sources.

[[Page 5113]]

    Response: We agree that the Mutual of Omaha survey does not meet 
the rigorous sample design requirements of the BLS survey data included 
in our estimates. However, we did use it in combination with the other 
described data sources. The Mutual of Omaha data are similar to other 
data sources such as AHCA and the American Rehabilitation Association 
(ARA) that reflect universes other than the national. The Mutual of 
Omaha estimate of the mean hourly wage level of occupational therapists 
in SNFs in October 1995 that we used in the salary computation was 
$22.90, compared to the mean wage rate of all SNF data sources of 
$20.33. The Mutual of Omaha mean wage rate for occupational therapy is 
thus 13 percent above the mean wage rate of all data sources. The 
Mutual of Omaha mean wage rate for speech language pathologists in SNFs 
in October 1995 was $20.34 compared to the mean wage rate of $19.26. 
The Mutual of Omaha mean wage rate for speech language pathologists is 
thus 6 percent above the mean wage rate of all SNF data sources.
8. Unused Data Source--``A Study of Respiratory Care Human Resources in 
Hospitals 1992''
    This survey was conducted by the American Association of 
Respiratory Care's (AARC) Task Force on Professional Direction in 
conjunction with consultants from Arthur Andersen & Co. The AARC 
surveyed 2,732 of 4,900 hospitals having respiratory care departments 
and received 858 responses (31 percent response rate), comprising 17 
percent of all hospitals with respiratory care departments.
    Comment: One commenter inquired as to why HCFA did not use this 
study by AARC in conjunction with consultants from Arthur Andersen & 
Co.
    Response: HCFA used data from academic (e.g., University of Texas), 
government and industry-wide surveys for hospitals, SNFs, etc. that 
included occupational specific data. HCFA did not use data sources 
specific to one occupational category from its own professional 
association, e.g., American Occupational Therapy Association data. 
Using specific occupational data from a particular association may have 
biased the results relative to the other occupational categories, given 
the wide discretion used in defining wages, income, and statistical 
design among the four occupational groups.

B. Methodology

    In order to establish the proposed hourly salary equivalency 
amounts, we determined the ``best estimate'' of wages for both 
hospitals and SNFs. We first found mean wage rates for each of the data 
sources listed above.
    BLS surveyed average hourly earnings (AHE) for all four therapies 
in 1989. However, their January 1991 survey included the average hourly 
earnings only for full-time physical and respiratory therapists. (BLS 
January 1991 average hourly earnings for full-time physical and 
respiratory therapists were found in the BLS Occupational Wage Survey: 
Hospitals, January 1991, pp. 36-119. The hospitals in this survey 
employed 50 or more workers.) We, therefore, needed to estimate 1991 
average hourly wages for speech language pathology and occupational 
therapy. To do so, we started with the BLS 1989 survey of all four 
therapies as a baseline (BLS Industry Wage Survey: Hospitals, March 
1989 (the latest previous survey), pp 33-118). The hospitals in the 
1989 survey employed 100 or more workers. Our analysis of the 
University of Texas data for U.S. hospitals indicated that the wages 
for speech language pathology and respiratory therapy increased at a 
similar rate between 1989 and 1993. Wages for occupational therapy and 
physical therapy also increased at a similar rate during that period. 
Therefore, we determined that we could employ the 1989 ratios of speech 
language pathology to respiratory therapy, and of occupational therapy 
to physical therapy, in order to estimate 1991 wage levels for speech 
language pathology and occupational therapy. Specifically, multiplying 
the ratio of 1989 average hourly occupational therapy wages to 1989 
average hourly physical therapy wages by 1991 physical therapy wages 
yielded estimated 1991 occupational therapy wages. The following 
formula summarizes the computation (all values are average hourly 
wages):

[(March 1989 AHE, OT) / (March 1989 AHE, PT)]  x  (January 1991 AHE, 
PT) = (estimated January 1991 AHE, OT).

    Similarly, multiplying the ratio of 1989 average hourly speech 
language pathology wages to 1989 average hourly respiratory therapy 
wages by the 1991 average hourly respiratory therapy wages yielded 
estimated 1991 average hourly speech language pathology wages. Again, 
the following formula summarizes the computation (all values are 
average hourly wages):

[(March 1989 AHE, speech language pathology) / (March 1989 AHE, 
respiratory therapy)] x (January 1991 AHE, respiratory therapy) = 
estimated January 1991 AHE, speech language pathology.

    The American Health Care Association data provided facility-
weighted mean wage rates for SNFs. The Association has estimated that 5 
percent of the SNF wage rates represented supervisors and additional 
wages paid in lieu of fringe benefits. We used that estimate to reduce 
the Association survey wage data to a nonsupervisory, no additional 
salary in lieu of benefits basis.
    We converted annual data in the American Rehabilitation Association 
and University of Texas surveys to hourly wages using a divisor of 2080 
hours, which represents a standard work year.
    The Maryland Health Services Cost Review Commission census data 
provided wage data, paid hours, and numbers of personnel for each 
hospital. We eliminated data for employees who worked less than 35 
hours or more than 40 hours a week to restrict the computation to full-
time employees only. We then determined the average hourly wage for 
each hospital by dividing aggregate wages by the number of paid hours. 
Finally, we computed the average hourly wages across all hospitals, 
weighted by the number of employees in each hospital.
    NASL data were first divided by 52 to arrive at weekly salary, then 
divided by the number of hours worked per week which were also given in 
the survey, to obtain hourly wage rates. As in the case of the Maryland 
census data, we eliminated data for employees who worked less than 35 
hours, or more than 40 hours a week to restrict the computation to 
full-time employees only.
    We trended all data to the 1995 fourth quarter as described in 
detail in the March 1997 proposed rule. We then determined the salary 
equivalency guideline amounts for 1998 in five steps. Those five steps 
were: (1) Determine average wages by therapy type, separately for 
hospitals and nursing homes; (2) blend the hospital and nursing home 
average wages by therapy type, to yield average wages by therapy type 
for the four occupational markets; (3) approximate the 75th percentile 
of wages by therapy type; (4) calculate salary equivalency guideline 
levels for fourth quarter 1995, by adding amounts for fringe benefits, 
rent, etc.; and (5) update these guideline amounts to April 1, 1998, 
the proposed effective date.
    In the first step, we determined the mean wage levels, by therapy 
type, for hospitals in each of the available data sources. (Data 
sources used for hospitals were: BLS, Industry Wage Survey: Hospitals, 
March 1989 and

[[Page 5114]]

Occupational Wage Survey: Hospitals, January 1991; University of Texas 
1994 National Survey of Hospital and Medical School Salaries; American 
Rehabilitation Association's surveys of freestanding hospitals and of 
rehabilitation units, 1995 Salary Survey; Maryland Health Services Cost 
Review Commission's census of hospitals; American Health Care 
Association hospital report's data profile, 1994 AHCA Survey; and NASL 
1995 survey of hospitals). We similarly determined the mean wage 
levels, by therapy type, for nursing homes in each of the available 
data sources. (Data sources used for SNFs were: 1995 NASL survey of 
SNFs; American Health Care Association survey of SNFs, 1995 AHCA 
Survey; and the 1996 survey of SNFs by Mutual of Omaha). We then 
averaged the mean wage levels from the available data sources by 
therapy type, separately for hospitals and nursing homes.
    In the second step, we blended the hospital and nursing home 
average wage levels, by therapy, to yield average wage levels by 
therapist type across the four occupational markets. We employed a 
blending process used in the previous salary equivalency guidelines 
notice (48 FR 44922, September 30, 1983), to weight the occupational 
averages by relative employment levels in hospitals and nursing homes, 
respectively. To establish appropriate weights, we used employment of 
therapists in nursing homes (Standard Industrial Classification (SIC) 
Code 805) and in hospitals (SIC Code 806), as found in the BLS 
Occupational Employment Statistics survey (OES). (The most recent 
available survey of employment in nursing homes is for 1993, while the 
most recent survey data of employment in hospitals is for 1995.) We 
applied these weights to the mean hospital and SNF wage rates by the 
four therapist types as determined in the first step. The BLS 
Occupational Employment Statistics survey shows that the hospital 
industry is a major employer of therapists of all types, while SNFs 
employ fewer salaried therapists. The weights for hospitals and nursing 
homes, respectively, are: for physical therapy, 85 percent and 15 
percent; for occupational therapy, 85 percent and 15 percent; for 
speech language pathology, 82 percent and 18 percent; and for 
respiratory therapy, 99 percent and 1 percent.
    In the third step we approximated the 75th percentile of the 
blended wage rates for each therapy occupation. It was necessary to 
approximate the 75th percentile because, unlike our previous 
computations of the guidelines, in this proposal we could not determine 
percentile values directly from each of the sources. We have observed 
in the BLS data and a regression analysis we performed on NASL data 
that the 75th percentile was approximately 110 percent of the mean. We, 
therefore, proposed to increase each of the four blended wage averages 
by 10 percent to approximate the 75th percentile of wages in each 
discipline across the occupational market. (In response to comments on 
the proposed rule, however, we have increased the factor to estimate 
the 75th percentile from 110 percent of the mean to 112 percent of the 
mean to reflect inherent variations that we were not able to quantify.) 
The inherent variations are due to estimating national rates for each 
of the four rehabilitation therapies, then using the GPCI to 
approximate wage and fringe levels in all geographic areas of the 
United States. Data does not exist to verify that, for each of the four 
therapies, every local labor market in the United States is accurately 
portrayed by the GPCI.
    Salary equivalency guidelines are based on the therapists' time in 
the facility. Adjustments to average hourly earnings data were 
necessary to include a reasonable allowance for vacation, sick leave, 
and administrative time. In order to convert the average hourly 
earnings from an hours paid basis to an hours worked basis, we applied 
a factor of total paid hours divided by hours worked (2,080  
1,808) to the average hourly earnings determined thus far, which is the 
same methodology used in the previous notice. The 1,808 figure was 
computed based on 2,080 hours (40 hours/week  x  52 weeks; a standard 
work year) less 15 vacation days, 10 sick leave days and 9 holidays 
equal to 34 days, or 272 hours. Data on leave benefits come from the 
BLS Employee Benefits Survey. (U.S. Department of Labor, Bureau of 
Labor Statistics: Employee Benefits in Small Private Establishments, 
1992, Bulletin 2441, U.S. Government Printing Office, May 1994, pp. 10-
20.)
    In the fourth step, we added fringe benefit and expense factors to 
the prevailing salary rates determined for each therapy type. The 
fringe benefit and expense factors are intended to recognize fringe 
benefits that are received by an employee therapist, as well as 
overhead expenses that a therapist or therapist organization might 
incur in furnishing services under arrangements. These factors are 
expressed as percentages of the prevailing hourly rate and are applied 
to every hour of service furnished at the provider site. Fringe 
benefits may include vacation and sick pay, insurance premiums, pension 
payments, allowance for job-related training, meals, severance pay, 
bonuses, etc.
    We computed fringe benefits as a percent of total compensation 
using fiscal year 1994 Medicare cost reports for hospitals under the 
prospective payment system. We believe these data are the best proxy 
for therapist fringe benefit information, which is not available for 
SNFs. We used the Medicare cost reports for prospective payment system 
hospitals to obtain fringe benefit information because these data are 
carefully scrutinized; they are used to adjust the labor portion of 
hospital payments under the prospective payment system. Also, the BLS 
Employment Cost Index (ECI) for March 1994 showed that fringe benefits 
for professional and technical workers in hospitals and nursing homes 
were similar. In the proposed rule, the fringe benefit component was 
about 14 percent of the total salary equivalency guideline amount. In 
the final rule, we have, instead, added the amount determined from the 
adjustment to average hourly earnings for vacation, sick leave, and 
administrative time to the fringe benefit amount excluding leave 
determined from the hospital cost reports. By including paid leave in 
fringe benefits rather than in salary, the final weight for fringe 
benefits is about 20 percent of the guideline amount or about 28 
percent of total compensation.
    The expense component takes into account expenses a therapist or 
therapist organization might have, such as maintaining an office, 
purchasing insurance, etc. We based the expense component of the 
guidelines on an estimate of the costs of maintaining a therapy 
services office. The general methodology for computing the expense 
component is similar to that used in the September 30, 1983 notice (48 
FR 44922) but the factors have been revised. This component has rental 
and non-rental portions.
    To determine the rental portion of the expense component, we used 
the 1995 rental rate data compiled by the Building Owners and Managers 
Association International (BOMA) and published in the 1996 BOMA 
Experience Exchange Report for Downtown and Suburban Office Buildings. 
(Building Owners and Managers Association International: 1996 BOMA 
Experience Exchange Report, Washington, DC, 1996, p. 17.) BOMA reported 
a national rent average, excluding utility cost, of $18.37 per square 
foot per year. We applied an occupancy factor of .887 to take into 
account the space used for rental building hallways, elevators, etc., 
that

[[Page 5115]]

are included in the BOMA rent figure, but are not part of the area 
rented for an office. We then added the BOMA utilities cost of $1.82 
per square foot. We determined total rental cost, assuming a rental 
area of 250 square feet, the same rental area used in prior schedules 
of guidelines. The total 1995 rental cost was divided by 1,808 (the 
hours factor applied to average hourly earnings) to compute rental cost 
per hour worked in 1995.
    The expense component includes costs of maintaining an office, such 
as wages and salaries of administrative and clerical help, insurance, 
telephones, etc. Medicare pays for services at their reasonable cost. 
It has been reported to HCFA that an effective and efficient 
rehabilitation therapy firm incurs overhead expenses of about 25 
percent. We estimate this component, including rent, to be within a 
reasonable cost range of 28.2 percent of total expenses in 1995. The 
1995 rent per square foot amount and the other expenses amount were 
constant across the four therapy types, implying that the share of 
these costs vary by therapy type (the share for rent is lowest for 
physical therapy since the physical therapy wage rates are the 
highest).
    As described in detail in the proposed rule, we added the fourth 
quarter 1995 dollar values of the ``blended'' wages, fringe benefits, 
rent, and the remainder of the other expenses factors to obtain salary 
equivalency guideline amounts for fourth quarter 1995. We updated the 
resultant fourth quarter 1995 salary equivalency guideline amounts to 
April 1998, using a Standard & Poor's DRI 1997:4 forecast.
1. Occupational Labor Market
    In calculating the salary equivalency guidelines proposed on March 
28, 1997, HCFA used a blend of hospital and SNF therapist wages. We 
also used a blend of hospital and SNF therapist wages in the 
establishment of salary equivalency guidelines for physical and 
respiratory therapy in the September 30, 1983 notice. The use of a 
blended wage reflects the influence of occupational labor market 
conditions on rehabilitation therapist wages, given the substantial 
degree of mobility between the settings. In the proposed rule, the 
labor market for therapists was characterized as an integrated 
occupational market in which therapists working in hospitals and SNFs 
have the potential to migrate between the two settings with relatively 
little difficulty resulting from differences in job requirements. We 
noted, however, that wage levels across settings for the same 
occupation may differ due to reasonable compensating wage differentials 
associated with working conditions, risk of injury, and geographic 
location. Wage differentials may also be associated with differences in 
worker characteristics, such as experience and skill. When these 
factors are taken into account, the ability to move across settings 
should ensure that the wage levels between these settings bear a 
reasonable relationship over time.
    Comment (general): Many of the comments on the proposed rule have 
focused on the issue of compensating wage differentials, asserting that 
HCFA should not blend wages of hospital and SNF therapists in the 
establishment of salary equivalency guidelines. These comments maintain 
that wage differentials that exist between the two settings can be 
fully explained by a combination of higher skill requirements and a 
less agreeable work setting in SNFs. For this reason, commenters claim 
that the full difference in wages should be recognized by HCFA.
    Response: The assertion that differences in skills and work 
environment fully explain current differences in wage rates rests on 
the assumption that compensating wage differentials between hospitals 
and SNFs are equivalent to the actual wage differentials observed at a 
point in time. However, there are a number of factors which may cause 
actual wage differentials to vary from those associated solely with 
differences in skills or environment. These factors include adjustments 
to short-term shifts in demand, entrance barriers to the therapy 
professions which have slowed adjustment to these shocks, and 
distortions to the operation of markets for therapy services and labor 
within the SNF sector caused by the inflation of prices and wages by 
Rehabilitation Therapy Firms (RTFs) to quickly gain market share as 
well as the lack of sufficient efforts to minimize costs by SNFs.
    HCFA contracted with Standard & Poor's DRI to study this issue. 
Their data indicate that HCFA's proposed salary equivalency rates, 
incorporating the adjustment to the 75th percentile of the wage 
distribution, are more than sufficient to cover legitimate compensating 
wage differentials for skills and work environment in SNFs, as well as 
the wage differential which would result from increases in demand for 
therapy services in SNFs given cost-minimizing behavior by SNFs and 
RTFs.
    Comment: Some commenters stated that there is no legal foundation 
for using a blended wage rate for hospitals and skilled nursing 
facilities to set salary equivalency rates.
    Response: We do not believe that the statute prohibits use of a 
blended wage rate. We used a methodology based on blending wages from 
therapists in hospitals and SNFs in the September 30, 1983 notice which 
revised salary equivalency guidelines for physical and respiratory 
therapists. In that notice, HCFA established the prevailing salary 
component based on a blended hourly wage for hospitals and nursing home 
hourly wage at the 75th percentile of the wage distribution. As 
discussed in more detail in the Statutory Issues section below, we 
believe that this approach comports with Congressional intent as 
expressed in the relevant legislative history.
    Comment: One commenter stated that the growing wage differential 
between therapists in the SNF setting and those in the hospital setting 
implies that the labor markets for therapists in these two settings are 
separate and distinct. According to the commenter, this indicates that 
the concept of an occupational labor market cannot be used as the basis 
for establishing salary equivalency rates based on a blend of hospital 
and SNF wages.
    Response: The key factor involved in determining the extent to 
which an occupational labor market is integrated is the 
substitutability of professional skills across settings. This 
determines the potential for mobility between the two settings. If 
workers can flow relatively freely across industry settings, and 
markets are functioning competitively, this means that wage rates in 
different settings will be influenced by the supply and demand 
conditions for that occupation in all settings. This does not mean that 
wages will be equivalent. Compensating wage differentials for differing 
skills and environments will result in a reasonable relationship of 
wages across all settings.
    The term ``occupational labor market'' implies some range of 
shared, and, therefore, substitutable skills. The question then becomes 
whether the extent to which skills required in the two settings are 
overlapping, whether the educational requirements are similar, and 
whether substantial retraining is required in order for therapists to 
move from one setting to another. An examination of these issues for 
therapists in hospitals versus SNFs indicates that the required 
educational qualifications and skills are extremely similar. All 
therapists complete the same accredited education programs and 
substantive retraining for individuals moving between these two 
settings is not standard. For therapists

[[Page 5116]]

employed in hospitals and SNFs, it is clear that, while not identical, 
the skills needed to perform their jobs are highly substitutable. This 
is evidenced in commenters' observations by the shift in employment of 
roughly a quarter of physical therapists and speech language 
pathologists formerly employed in hospitals who have been moved to SNFs 
or HHAs without substantive retraining. In addition, both hospitals and 
SNFs routinely hire occupational therapists, physical therapists, and 
speech language pathologists directly out of college, indicating that 
the body of required skills is covered by the general educational 
programs completed by all accredited therapists.
    The existence of actual wage differentials between two settings 
does not indicate that an integrated occupational labor market does not 
exist. These differences are not solely those associated with different 
skill requirements or working conditions. Short-term differentials may 
reflect disequilibrium in response to rapid shifts in employment in the 
presence of transaction costs, costs of information, and lags in the 
adjustment of the occupational labor supply. These are reasonable wage 
differentials that are consistent with cost minimizing behavior. 
Differentials may also reflect differences in incentives to minimize 
costs between the two settings.
    The fact that SNFs may have little economic incentive to minimize 
costs, beyond the point where they are subject to risk of audit, will 
likely result in higher relative prices for therapy and higher 
therapist wages in the SNF sector. Rehabilitation therapy firms may 
take advantage of this incentive structure to push prices and wages 
beyond prudent buyer rates. Because SNFs have little incentive to 
switch suppliers unless the price is far above their current rates, 
higher prices will not cause the rehabilitation therapy firm to lose 
market share. There is no market pressure to push prices down and less 
pressure for rehabilitation therapy firms to minimize costs than would 
be the case in competitive cost-minimizing markets.
    Comment: Some commenters were concerned that therapists attracted 
to SNFs and HHA settings are different from those attracted to 
hospitals and, therefore, do not compete in the same labor market. The 
wage differential between hospitals and SNFs is a reasonable 
compensating wage differential associated with these differences in 
skills and work environment. These differences make it harder for SNFs 
to recruit qualified therapists. Specific differences between hospitals 
and SNFs cited by commenters were:
    (a) Therapists in SNFs must work independently with less 
supervision. For this reason, SNFs require a more experienced 
workforce.
    (b) The work environment in SNFs is less appealing than that in 
hospitals.

--There is less variety in the case mix,
--Smaller therapy departments in SNFs mean less collegiality, less 
potential for advancement, and fewer opportunities for training; and
--Patients in SNFs are more difficult to work with.

    Response: We agree that compensating wage differentials potentially 
exist between different work settings for therapists. In using a 
blended hospital/SNF wage rate as the basis for salary equivalency 
rates, the question is the magnitude of these differentials and whether 
they are covered by the use of the blended wage rate at the 75th 
percentile of the wage distribution.
    In response to industry requests for additional statistical 
research on this issue, we contracted with Standard & Poor's DRI to 
estimate the magnitude of justifiable wage differentials for physical 
and occupational therapists, and speech-language pathologists. The 
resulting data presents estimates of compensating wage differentials 
associated with skills and work environment across industry settings 
for 1979-89, wage differentials associated with short-term labor market 
disequilibrium under conditions of cost-minimization, and wage premiums 
resulting from the failure of many SNFs to behave as cost-minimizers.
    The DRI data estimated a net compensating wage differential 
associated with education, experience, and work environment which is 
very small in comparison to the actual disparity in wages between the 
two sectors in 1995. The conclusion of this study was that our proposed 
salary equivalency rates, based on the blended wage approach, were more 
than sufficient to cover reasonable compensating wage differentials 
between hospitals and SNFs and an additional positive short-term 
differential for SNF therapist wages associated with the estimated 
increase in the relative demand for therapists in SNFs under the 
condition that SNFs behave as cost-minimizers.
    The commenters maintained that the current disparity of wages is 
solely reflective of compensating wage differentials associated with 
the underlying fundamentals of skills and work environment. However, 
the actual wage differential will be equal to the compensating wage 
differential only in cases where product and labor markets are 
competitive (i.e. suppliers, providers and consumers are cost 
minimizers) and in equilibrium. Neither of these assumptions are met in 
the case of the labor market for therapists in rehabilitation therapy 
firms and SNFs.
    The nursing home reform requirements of the Omnibus Budget 
Reconciliation Act of 1987 (OBRA '87), which took effect in 1990, 
caused a rapid increase in the relative demand for therapist labor in 
SNFs. The continued shift of employment from hospitals, educational 
institutions, and other settings towards SNFs, which is associated with 
the current observed wage differential, means that the occupational 
labor market has not yet reached equilibrium. This indicates that some 
part of the wage disparity between hospitals and SNFs is reflective of 
continued efforts to sharply increase the share of the pool of 
therapists who are employed in SNFs over a fairly short period of time.
    In the presence of costs associated with changing jobs and costs of 
information about available positions and associated wage rates, these 
efforts can be expected to result in a temporary wage differential even 
with cost minimizing behavior. This effect is heightened by constraints 
on the number of new graduates from accredited therapy programs, since 
job mobility is less costly for new graduates than established 
therapists. Long queues for entry into accredited therapy programs 
indicate that current occupational wages are well above the level 
needed to attract new entrants to the professions. This suggests that 
difficulties in expanding the capacity of educational programs is 
contributing to the cross-sectoral adjustment process. These effects on 
therapist wages in SNFs are beyond the control of the SNFs in 
minimizing costs, and should therefore be covered by salary equivalency 
guidelines.
    DRI also has shown that the market for therapy services in SNFs 
does not function in the normal parameters of a cost minimization 
framework. This analysis relied on a model framework originally 
developed by Joseph Newhouse (1978) 1 for the analysis of 
the behavior of medical cost increases under conditions where cost-
sharing requirements for consumers vary. This model has the implication 
that the

[[Page 5117]]

supply of medical services will exhibit increasing inefficiency as the 
coverage of costs approaches 100 percent, resulting in higher volumes, 
prices, and wages than would otherwise be the case.
---------------------------------------------------------------------------

    \1\ Newhouse, Joseph P. The Erosion of the Medical Marketplace, 
R-2141-1-HEW, The Rand Corporation, Santa Monica, California, 
December 1978.
---------------------------------------------------------------------------

    Therapy services provided under arrangement in SNFs represent a 
service that closely approximates 100 percent coverage. Medicare Part 
A, which accounts for 58 percent of such services, requires zero cost-
sharing for the first 20 days. The daily coinsurance rate that 
beneficiaries must pay for days 21 through 100 for 1998 is $95.50. 
Medicare pays for all costs over this coinsurance rate. However, 
because the daily rate in a SNF is usually higher than the coinsurance 
rate (in 1995, the latest year for which data is available, the average 
daily rate in a nursing home was $127.16), beneficiaries will pay the 
full coinsurance amount whether they receive therapy services or not. 
The extra cost of therapy services is usually paid for by Medicare. 
Medicare Part B coverage, which begins after 100 days and accounts for 
32 percent of therapy services provided in SNFs, requires a 20 percent 
copayment which is primarily covered by Medigap policies.2 
An additional 5 percent of services are covered by Medicaid, again with 
zero cost-sharing. While 5 percent of contract therapy services are 
covered by private insurance (and therefore may be subject to some 
cost-sharing), this fraction of the market is too small to introduce 
any significant sensitivity to price into this market.
---------------------------------------------------------------------------

    \2\ Weiner and Zeid, Comparing Current Cost with Salary 
Equivalency Reimbursement for Physical Therapy, Occupational 
Therapy, and Speech-Language Pathology, Washington DC, April 1995.
---------------------------------------------------------------------------

    In many cases, higher contract therapy costs result in higher 
relative reimbursement from Medicare for allocated overhead as well as 
for the direct costs of contract therapy services. This reimbursement 
methodology and market structure has implications for the behavior of 
firms that supply contract therapy services to SNFs. Cost-effective 
therapy firms will have little advantage in this market and will not 
tend to gain any substantial market share compared to the case of 
freely functioning market. In this situation, Newhouse argues that a 
competitive cost minimizing supply curve for the industry does not 
exist. This invalidates claims that prices, input and output 
quantities, and wages in this setting are at cost-minimizing rates that 
reflect freely functioning markets.
    The Standard & Poor's DRI data produced estimates of hospital/SNF 
wage differentials associated with reasonable compensating wage 
differentials based on worker and job characteristics as well as 
reasonable differentials based on short-term disequilibrium associated 
with increases in demand, given cost-minimization by SNFs. The 
estimated differentials associated with characteristics of the 
workforce and work environment were produced by the estimation of wage 
equations relating the hourly wages of individual employees throughout 
the U.S. economy with human capital variables such as education and 
experience, as well as the systematic differences across occupations 
and industry groups that are associated with work environment. This 
estimation was based on regression analysis using pooled cross-
sectional data from the 5 percent Public Use Microdata Samples from the 
1980 and 1990 decennial census. The census sample incorporates 
information for therapists in all settings with information on salary, 
hours worked, educational attainment, demographic characteristics, and 
location. These data were carefully screened for potential inaccuracies 
associated with self-reporting and reviewed for consistency with 
licensure requirements and consistency with other available data 
sources. The estimation period ended before the implementation of OBRA 
'87 in 1990. This indicates that wage differentials associated with the 
resulting unanticipated increase in demand, and those associated with 
failure to minimize costs in an environment with little restraint on 
volume and prices, will not bias the estimated compensating wage 
differentials.
    DRI data show that in 1989 SNFs were actually able to hire 
similarly qualified therapists for a slightly lower wage than could 
hospitals, holding skills and environment constant. While it is not 
possible to obtain comparable multivariate estimates based on other 
data sources because of the lack of available information on skill 
variables and other occupational groups, we note that several other 
sources from 1989 and surrounding years confirm that actual wage 
differentials for SNFs relative to hospitals were small positives or 
negatives. The American Speech-Language Hearing Association (ASHA) 
reported a negative differential for SNFs relative to hospitals in 
1989, while the American Occupational Therapy Association (AOTA) 
reports a small positive differential for 1990 (1989 is not available). 
The differentials reported by ASHA and AOTA are close to those seen in 
the Census wage data without adjustment for skills and work 
environment.
    Data from the 1990 decennial census indicates that, on average, 
physical and occupational therapists working in SNFs do have more 
experience than physical and occupational therapists in hospitals, 
possibly because some therapists in SNFs need to work more 
independently or with less supervision. The estimated wage differential 
associated with the greater degree of experience, however, was small 
(in both cases less than 5 percent.) The reason for the small 
differential appears to be that the greater degree of experience is 
usually past the point where additional experience results in a 
substantial increase in wages. Rapid increases in wages associated with 
experience occur during the first decade of practice with wage 
increases for additional years of experience adding little in the terms 
of wage gains. Thus, additional years of experience past this point add 
relatively little to the wages these therapists can demand. On the 
other hand, speech language pathologists in the census sample reported 
slightly less experience on average than those employed in hospitals.
    However, since the compensating differential resulting from the 
Census wage equations applies to the year 1989 (1990 Census), it is 
important to analyze how these conditions might have changed between 
1989 and 1995. The principle reason why more experienced therapists 
might be required in the SNF environment, according to comments, was 
the relative lack of supervision for these therapists, when compared to 
hospitals, which have larger, more established therapy departments. The 
key issue becomes the determination of the direction of changes in the 
level of supervision since the year 1989 on which our estimates are 
based.
    Given the rapid expansion in the volume of therapy services 
provided in SNFs, and the larger number of therapists practicing within 
a given SNF, it follows that the opportunity to consult supervisory 
personnel has actually grown over the past 6 years. This suggests that, 
while a gap in the average years of work experience may exist, the size 
of the gap is likely to be smaller than was the case in 1989.
    Comments on the unappealing work environment in SNFs focused on two 
areas: (1) The nature of the work, that is there is less variety in the 
case mix, and (2) the lack of collegiality, potential for career 
advancement, and training opportunities associated with smaller therapy 
departments in SNFs relative to hospitals.

[[Page 5118]]

    To apply these estimates to the later period, we must analyze how 
these conditions that contribute to the less appealing work environment 
would have changed between 1989 and 1995. It would appear that there 
would actually be more variety in case mix in 1995 than in 1989 due to 
the expansion of therapy services in the SNF setting and the trend 
towards discharging hospital patients to SNFs earlier. With the 
significant increases in therapy programs in SNFs, it is likely that 
career advancement, training opportunities, and the opportunity to work 
with other therapists would have grown similar to that of hospitals.
    Given the changes in the SNF and hospital environments over the 
past 6 years, these environments are likely to have grown more similar, 
on average, than otherwise. It, therefore, appears unlikely that the 
relative appeal of the two settings would be far different than in 
1989. DRI's estimates of compensating wage differentials can therefore 
be applied to the later period.
    Comment: Several commenters stated that, by combining hospital and 
SNF wages, HCFA was not recognizing the full compensating wage 
differential for therapists in SNFs.
    Response: Our salary equivalency rates cover the full compensating 
wage differential for therapists in SNFs (which, as explained above, is 
very small), and a reasonable wage differential for the estimated costs 
of the increased demand that would have occurred after OBRA '87, under 
the condition that all SNFs behaved as cost-minimizers.
    The observed relative wages for therapists in SNF settings have 
become distorted by the lack of cost minimization efforts in the 
provision of therapy supply services in SNFs. Blending hospital and SNF 
wage rates, as we have done in the past, provides a methodology that 
covers compensating differentials associated with skills and work 
environment, while avoiding the validation of increases associated with 
the absence of sufficient cost minimization efforts. As hospitals and 
educational institutions adjusted wages upwards at a rate slower than 
rehabilitation therapy firms and SNFs to retain staff, access to 
therapy services in these settings would decrease, while the volume of 
services available in SNFs continued to increase beyond the point where 
the benefits conveyed to patients justified the costs incurred.
2. Trending Old Data To Reflect Current Conditions
    Comment: HCFA should use the percent increases in physical therapy 
wages to update speech language pathology wages from 1989 BLS speech 
language pathology data to 1991 rather than using the percent changes 
in respiratory therapy wages.
    Response: The University of Texas data source was the only source 
that had all four therapy types over time with relatively consistent 
definitions and methodology. The University of Texas data indicated 
that the speech language pathology wage growth from 1989 to 1991 
correlated better with respiratory therapy wage growth than with 
physical therapy wage growth. Therefore, we used the same percentage 
growth for speech language pathology wages as existed for respiratory 
therapy wages from 1989 to 1991.
    Comment: One commenter suggested that the use of 6 -and 8- year-old 
BLS hospital data is inappropriate and does not satisfy the Senate 
Finance Committee's recommendation for timely and accurate data. This 
commenter also suggested that trending forward does not mitigate 
distortions of using old data and does not capture the significant 
changes in the marketplace over the past several years. Other 
commenters stated that because the BLS data were relatively old, HCFA 
should give a lesser weight to the BLS data or not use these data at 
all.
    Response: We believe that our methodology for aging the baseline 
BLS data is consistent with Congressional intent. We used the most 
recent BLS data available on therapists employed in hospitals and 
trended it forward using the best data sources of which we were aware. 
If the commenter's assertion that trending forward does not capture the 
significant changes in the therapy marketplace were correct, then the 
BLS hospital data for therapists trended forward to 1995, would be 
substantially different from the best industry data sources for 1995. 
In fact, the trended BLS data tend to be at the center of the clustered 
industry data sources for 1995. For physical therapists, the trended 
BLS mean wage was $20.90; the mean wage from all sources was $21.00, a 
difference of less than one percent. For occupational therapists, the 
trended BLS mean wage was $19.67; the mean wage from all sources was 
$19.73, a difference of less than one percent. For speech language 
pathologists, the trended BLS mean wage was $19.30; the mean wage from 
all sources was $18.67, a difference of 3 percent. For respiratory 
therapists, the trended BLS mean wage was $15.48; the mean wage from 
all other sources was $15.58, a difference of less than one percent. 
Therefore, we do not think it would be appropriate to give the BLS data 
a smaller weight or remove BLS from the mix of data sources.
3. Blending Hospital and SNF Data for Occupational Labor Market Wage
    Comment: Many commenters believed that use of hospital data in the 
blend was (1) inappropriate because only SNF data should have been 
used; (2) irrelevant because the rule applies exclusively to 
nonhospital settings; (3) flawed because there are problems with the 
sources of hospital data that HCFA used; and (4) incorrect because of 
the large difference in wage levels between hospitals.
    Response: Hospital wage levels by therapy type were used, in part, 
because hospital therapists constitute a large part of the therapist 
labor market. In addition, hospitals are a major source of therapists 
hired by SNFs and rehabilitation therapy firms that contract with SNFs 
to furnish therapy services. Also, the salary equivalency guidelines do 
apply to contracted therapy services provided in the outpatient 
departments of hospitals. Following traditional labor market theory for 
professional services, we believe that there is an occupational labor 
market for therapists, with compensating differentials for workers for 
worker characteristics and job requirements. Had we used only SNF wage 
data, the result would have reflected the relatively higher rates that 
the rehabilitation therapy firm can afford to pay to bid therapists 
away from other sectors that operate in a more financially constrained 
contract environment. With respect to commenters' assertion that 
hospital data are irrelevant in determining wages for therapists that 
work primarily in nonhospital settings, our analyses supports our 
position that an occupational labor market exists. We discussed these 
issues in more detail in Section III.B.1 the Occupational Labor Market 
of this final rule.
    We believe that our ``best estimate'' approach incorporated the BLS 
occupational/industry data in a reasonable way with other data from 
less statistically reliable but more current sources. Each set of data 
has equal weight in developing the ``best estimate'' for therapist 
wages in hospitals and in SNFs. Each of the data sources we used is 
discussed more fully in section III.A, Data Sources for Salary 
Equivalency Guidelines of this final rule.

[[Page 5119]]

    Comment: Many commenters challenged our blending of hospital and 
SNF wage levels, but offered various blending recommendations in the 
event that we use blending in the final rule. Many commenters agreed 
that the employment weights as proposed for respiratory therapy wages 
(99 percent hospital and 1 percent SNF) were correct. These same 
commenters, however, offered a wide range of alternative employment 
weights for use in blending hospital and SNF wages for physical and 
occupational therapists and speech language pathologists. Some of these 
commenters offered alternative employment weights which included HHAs 
as well as SNFs and hospitals.
    Response: We believe that an occupational labor market, with 
compensating differentials, exists and that blending is required to 
achieve equitable wage levels across settings as indicated in the 
discussion above.
    We also believe that the proposed blending method is reasonable. 
When we blended the wages for each type of therapy, we used hospital 
therapist employment and SNF therapist employment to develop the 
relative shares. For SNFs, we used BLS' 1993 Occupational Employment 
Statistics survey data, the latest and most complete employment data 
for SNFs available from a government source. For hospitals, we used 
BLS' 1995 Occupational Employment Statistics survey data, also the 
latest and most complete employment data for hospitals available from a 
government source. Some commenters preferred that employment data for 
both settings be for the same year. We agree. Data on a same-year 
basis, however, are not yet available. Based on industry discussions, 
we believe that, as contract therapy services to SNFs have grown, there 
has been a corresponding drop in the relative share of employed 
therapists in SNFs. Without new data to substantiate this hypothesis, 
we felt that the most appropriate option was to use the 1993 
Occupational Employment Statistics survey for employment of therapists 
in SNFs, by therapy type, as we did in the proposed rule (Occupational 
Employment Statistics SNF data were collected for 1990 and 1993). This 
approach may overstate SNF employment relative to hospitals in 1995, 
and therefore the blended wage may also be slightly overstated.
    One reason for the discrepancy between BLS Occupational Employment 
Statistics and commenters' suggested shares of employment in SNFs and 
hospitals is that commenters have included contract therapists in their 
employment count for SNFs and hospitals. Using employment setting 
(contract and employed) rather than employer to determine the share in 
SNFs and hospitals increases the SNF share and decreases the hospital 
share to use in blending. As rehabilitation therapy firms have hired 
therapists away from SNFs and hospitals to work as contract therapists, 
it is likely that the percentage of employed therapists in SNFs 
relative to employed therapists in hospitals has decreased. As 
indicated earlier, the SNF employment weights that we use may be too 
high.
    Comment: One commenter believed the blend is invalid because SIC 
codes (806 for hospitals, 805 for SNFs) do not differentiate between 
registered therapists, therapy assistants, and therapy aides. In 
addition, a few commenters noted that audiologists are included in the 
OES survey figures for speech language pathologists.
    Response: The BLS Occupational Employment Statistics survey has a 
separate occupational category for registered therapists. Therapy aides 
and assistants are in a separate category and are excluded from 
therapist employment numbers. Regarding the audiologist data included 
with speech language pathology data in the Occupational Employment 
Statistics survey, we believe that including audiologist data will not 
significantly skew the employment shares in hospitals and SNFs for 
speech language pathologists.
    Comment: Another commenter proposed using total wages (wage bill 
share of costs) rather than employment shares in blending hospital and 
SNF wages.
    Response: Using wage bill shares of costs for weights would double 
the weight given to wages. The wage bill share is the number of hours 
of service times the hourly wage for each therapy type in each setting. 
The wage bill approach would, in effect, use SNF and hospital wage 
levels twice in the calculation rather than once as is appropriate.
    Comment: Several commenters were concerned that in the blending 
methods we used we have not shown the difference in wage levels between 
hospital and SNF, and that we have not proven the statistical validity 
of combining these two wage values (hospital and SNF) to arrive at the 
wage portion of the salary equivalency guidelines.
    Response: In this final rule, we followed the same procedure that 
we used in the 1983 rebasing of the salary equivalency guidelines for 
physical and respiratory therapy, as published in the September 30, 
1983 Federal Register (48 FR 44924). The industry requested a 
statistical analysis of our blending therapist wages by relative 
employment. We commissioned a complete statistical analysis of 
therapist wage differentials under contract with Standard & Poor's DRI. 
A full discussion of the results of this study appears in Section 
III.B.1., the Occupational Labor Market of this final rule.
4. 75th Percentile
    Comment: Commenters indicated that HCFA has significantly 
underestimated the 75th percentile differential. Some want therapy-
specific differentials applied to each therapy type and many offered 
alternatives to the 10 percent that HCFA used to approximate the 75th 
percentile differential.
    Response: HCFA estimated the 75th percentile differential using 
several different data sources. We did not use the data sources that 
did not have the 75th percentile available. The 75th percentile 
differential in hospitals varied from 6.9 percent to 14.7 percent 
depending on the data source and therapy type. The 75th percentile 
differential in SNFs varied from 9.7 percent to 26.9 percent depending 
on the data source and therapy type. None of the SNF sample surveys met 
the sample design criterion of the Federal Government, resulting in 
wider variation than would otherwise be the case.
    When we ran regressions on the NASL data for hospitals and SNFs 
with adjustments for region, ownership, and chain or individual 
establishment, the 75th percentile for hospitals ranged from 9 to 11 
percent, depending upon therapy type, while the 75th percentile for 
SNFs ranged from 12 to 14 percent, again depending upon therapy type.
    The 75th percentile differential varies so widely because if two 
samples with the same means are compared, one meeting the BLS sample 
design standard and the other below the BLS standard, the 75th 
percentile differential will tend to be smaller for the BLS-type sample 
than for the other sample. The alternatives offered by commenters come 
from samples that do not meet BLS sample design standards.
    We proposed a 10-percent differential to approximate the 75th 
percentile for all therapy types because we believed that we had 
selected a reasonable estimate for the range of average 75th percentile 
differentials for the various therapy types. We have increased the 
differential from 10 percent to 12 percent to allow for factors that we 
may not have quantified previously. In choosing 12 percent for all 
therapy types, we believe that we have selected

[[Page 5120]]

a reasonable estimate of the 75th percentile differential.
5. Calculations
    Comment: Some commenters suggested that HCFA use BLS' 1991 Employee 
Benefits for Medium and Large Private Establishments rather than its 
1992 Small Establishments survey. As an adjunct to this comment, some 
commenters indicated that the number of productive hours HCFA used was 
too high, and that HCFA should make adjustments for breaks and lunches, 
family leave, jury duty, funeral leave, and military leave.
    Response: The average number of employees per establishment in SIC 
Code 805, Nursing and Personal Care Facilities, calculated from the BLS 
ES-202 survey in 1995, was fewer than 100. The average number of 
employees per facility in the AHCA survey's sample data for 1995 was 
fewer than 100, despite the fact that this data source is skewed toward 
larger SNF chains. These figures support our decision that employee 
benefits for small firms should be used in determining the number of 
productive hours with which to adjust the hourly wage from hours paid 
to hours worked.
    The 1994 Small Private Firms survey reports even fewer paid leave 
days (vacation, sick leave, and holidays) than did the 1992 survey. For 
5-year employees, subtracting paid leave and 2 days for continuing 
education from the standard work year (2,080 hours), still brings the 
number of productive hours very near to our 1,808 productive hours 
figure.
    When data from the BLS Employment Cost Index Employer Costs for 
Employee Compensation for March 1995 or March 1996 are used, only State 
and Local Government Health Services and one of its subcategories, 
State and Local Hospitals, have employees who work fewer productive 
hours than the 1,808 hours used in HCFA's hours adjustment. All other 
white collar, professional and technical occupations, as well as the 
Health Services and Service Producing industries, work more productive 
hours than we used in this calculation. (The calculation to reach 
productive hours is 2,080 hours--272 hours of paid leave = 1,808 
productive hours. Paid leave days numbered 33.7 (rounded to 34 days) 
and multiplied by 8 hours per day to equal 272 hours of paid leave. 
This adjustment equals approximately 15 percent of therapist hourly 
wages.)
    Data from both the recent BLS Employee Benefits Survey and the BLS 
Employer Costs for Employee Compensation Survey support our choice of 
number of productive hours worked per year. It is our policy to limit 
paid leave to vacation, sick leave, and holidays.
    Comment: Many commenters believed that HCFA's estimate of the 
fringe benefit share of compensation is too low. Most commenters 
mentioned about 30-31 percent of salary for a fringe benefits share, 
while another mentioned 27 percent of salary for the standard fringe 
benefit factor. Some commenters indicated that our proposed fringe 
benefit share of 14 percent was too low; others asked that the ECI for 
fringe benefits be used to determine fringe benefit share.
    Response: For our fringe benefits calculation, HCFA used Health 
Care Provider Cost Report Information System (HCRIS) prospective 
payment system hospital cost reports to determine the share of 
compensation other than leave that fringe benefits constitute. The 
amount determined was 19.5 percent of total compensation excluding 
leave, or about 24.2 percent of salary. Adding the fringe benefit of 
paid leave (15 percent of salary associated with the productive hours 
adjustment) to the fringe benefits determined from the cost reports 
results in an overall fringe benefit rate of 39.2 percent of salary. 
Thus, fringe benefits, including paid leave, constitute 28.2 percent of 
total compensation, which is similar to the shares recommended by 
commenters.
    Comment: A few commenters stated that the allowed rental space of 
250 square feet for office space was not sufficient to meet direct and 
indirect space requirements. These commenters suggested that greater 
allowance should be made for human resources management, program 
support, compliance, and general business support.
    Response: Contract therapists work in office space outside of the 
rehabilitation therapy firm for which HCFA pays as part of Medicare 
payments to providers. We believe that the 250 square feet for each 
contract therapist allowed for rehabilitation therapy firm office space 
is more than adequate to allow for human resources management, program 
support, and general business support as well as space for individual 
therapists.
    Comment: Commenters offered what they termed ``technically 
justifiable corrections'' that would have added between $5.20 and 
$13.38 to the proposed guidelines, depending on the therapy type. 
Others suggested salary equivalency guidelines somewhat closer to 
HCFA's proposed guideline amounts. Several commenters stated that 
speech language pathology guidelines should be as high or higher than 
those for physical therapy. The commenters pointed out that speech 
language pathologists have greater education requirements than do the 
other types of therapists for whom salary equivalency guidelines were 
proposed. In addition, commenters indicated that the services speech 
language pathologists perform merit higher guidelines than we proposed.
    Other commenters indicated that if salary equivalency guidelines do 
not reflect accurately contract rates in the RTF industry, SNFs and 
other providers will be unable to obtain medically necessary services 
for Medicare beneficiaries. Some commenters believed that, in addition 
to having difficulty in procuring therapy services, SNFs may find their 
profit margins depressed to the point where some may close.
    Commenters reported that some rehabilitation therapy firms pay 
therapists sign-on bonuses and offer cruises as special incentives.
    Response: We carefully analyzed all the industry ``technically 
justifiable correct'' alternative levels for salary equivalency 
guidelines and made modifications where we believed them to be 
appropriate. We carefully reviewed recommended changes to employment 
weights, fringe benefit shares, rental space, overhead shares, and 75th 
percentile differentials. Modifications were made where they were 
justified by the data, as stated in other sections of this rule. We 
recognize that sign-on bonuses and other incentives such as cruises, 
noted by some commenters, increase the operating costs of 
rehabilitation therapy firms and result in higher wages than cost 
conscious purchasers can afford to pay. This regulation requires HCFA 
to set the salary equivalency guidelines at levels reasonably close to 
costs that providers would incur for their own employees. These bonuses 
and other incentives have contributed to distorting the therapist 
market. We do not believe that Medicare should recognize these 
extraordinary costs, which may not be considered to be related to 
patient care, as part of its salary equivalency guidelines. Finally, we 
believe that the therapist market, including rehabilitation therapy 
firms, will adjust to these new guidelines without disrupting access to 
care. Indeed, because of provisions in the Balanced Budget Act of 1997, 
the new guidelines will not be the only change controlling provider 
behavior.

[[Page 5121]]

C. One Schedule for Respiratory Therapists

    We proposed to use one schedule of guidelines for respiratory 
therapists, in contrast to the three schedules that we issued in the 
September 30, 1983 notice. This decision was based on the fact that 
HCFA does not differentiate in covering respiratory therapists by 
different levels. Therefore, to make coverage conform with payment for 
respiratory therapy services, we proposed one schedule for respiratory 
therapists. Information from fiscal intermediaries and the American 
Association for Respiratory Care indicates that industry practice is to 
use only one schedule. For respiratory therapists in 1991, BLS showed 
two wage classes and a summary wage level. The summary level was the 
consistent category present for all metropolitan statistical areas 
(MSAs) and encompassing all nonsupervisory levels of responsibility. 
This final rule includes one schedule of guidelines for all therapy 
types.
    Comment: One commenter was concerned that the American Hospital 
Association (AHA) and BLS data do not distinguish between wages for a 
Certified Respiratory Therapy Technician and a Registered Respiratory 
Therapist and fail to take the salary differentials of the two levels 
into consideration. The commenter felt this was important for two 
reasons. First, SNFs usually require the more experienced registered 
respiratory therapists. Second, with a single rate, HCFA would 
introduce an incentive for SNFs ``to contract for the less costly, yet 
less experienced and less trained CRTT, rather than the more advanced 
registered respiratory therapist to provide respiratory care services 
to the medically acute SNF patient,'' raising questions about the 
delivery of appropriate quality patient care.
    Response: We used the AHA and BLS data for trending purposes only 
and assumed that certified respiratory therapy technician and 
registered respiratory therapist wages rose at the same rate. This rule 
implements one schedule of guidelines for respiratory therapists, 
regardless of whether services are rendered by a certified respiratory 
therapy technician or a registered respiratory therapist. We developed 
a single respiratory therapy wage rate that includes wages for 
certified respiratory therapy technicians and registered respiratory 
therapists, weighted for the various levels in respiratory therapy. The 
single wage rate for the BLS data aged to 1995 was $15.48 per hour, 
compared to $15.58 per hour for all data sources, a difference of less 
than one percent.
    Regarding the commenter's concern of introducing an incentive to 
SNFs to use ``less experienced and less trained'' certified respiratory 
therapy technicians rather than registered respiratory therapists, we 
believe that as long as the therapist is qualified to provide 
respiratory therapy services, then the provider will furnish quality 
care. Therefore, both a certified respiratory therapy technician or a 
registered respiratory therapist should be qualified to provide 
respiratory therapy services.

D. Geographic Adjustment Factors

1. Use of Urban Portions of the Prospective Payment System Hospital 
Area Wage Index for Geographic Adjustment
    We proposed using the urban portion of the prospective payment 
system hospital area wage index to adjust the guideline amounts for 
local labor-related cost variations. We chose the urban portions of the 
prospective payment system hospital area wage index because we felt 
that SNFs compete in the same labor markets as hospitals, HHAs, and 
other health care providers. There was also precedent for using the 
hospital area wage index since two other long-term care Medicare 
benefit programs, SNF and HHA care, use it to adjust for local labor 
cost variation.
    Comment: Several commenters stated that using the hospital area 
wage index to adjust the salary equivalency guidelines for geographic 
variation exaggerates the market variances both within and across 
States. The commenters suggested that the geographic wage variation in 
rehabilitation therapist labor markets is less than the geographic 
variation in hospital industry labor markets. Therefore, they concluded 
that using the hospital area wage index creates variations among 
localities that are much too large. The commenters offered suggestions 
that they believed would more adequately reflect the actual geographic 
variations in therapist wages. One of these suggestions was the 
Geographic Practice Cost Index (GPCI) used under the Resource-Based 
Relative Value Scale (RBRVS) of the Physician Fee Schedule. Other 
suggestions included aggregating data into State or regional rates 
similar to those under the existing guidelines, or creating State 
guideline amounts close to the national average with exceptions for 
markets that have extreme variations. Commenters also suggested using 
the hospital area wage index, but applying it to a smaller portion of 
the labor-related costs to reduce distortions within and across states. 
Another commenter suggested using the reclassified prospective payment 
system hospital area wage index, instead of the pre-reclassified area 
wage index. That would give SNFs and therapy suppliers the same 
advantages that prospective payment system hospitals receive since SNFs 
compete in the same labor markets as hospitals.
    Response: As recommended by commenters, we are using the GPCI 
contained in the Physician Fee Schedule (62 FR 59052, October 31, 1997) 
instead of the hospital area wage index. We will use the Work, Practice 
Expense, and Malpractice GPCIs, and apply them to therapist 
compensation and overhead shares. Therapist compensation and overhead 
shares come from the therapy-specific input price indexes as developed 
by HCFA. There was no direct source of data on therapist malpractice 
cost shares. To estimate a malpractice share, we analyzed the 
malpractice shares from relevant rehabilitation therapy Current 
Procedural Terminology (CPT) codes under the Physician Fee Schedule. We 
determined that, on average, malpractice represents roughly 3.0 percent 
of total expenses for these therapy CPT codes. We used 3.0 percent for 
the malpractice share of the GPCI and subtracted 3.0 percentage points 
from the overhead share of the GPCI to avoid accounting for malpractice 
twice. The shares for these therapy-specific input price indexes are 
presented in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                Cost shares from therapy-specific input price   
                                                                                   indexes                      
                                                            ----------------------------------------------------
      Therapist cost category                 GPCI                                         Speech               
                                                               Physical   Occupational    language   Respiratory
                                                              therapist     therapist   pathologist   therapist 
----------------------------------------------------------------------------------------------------------------
Therapist Compensation.............  Work..................         0.74          0.72         0.71         0.67
Therapist Practice Expense.........  Practice Expense......         0.23          0.25         0.26         0.30

[[Page 5122]]

                                                                                                                
Therapist Malpractice..............  Malpractice...........         0.03          0.03         0.03         0.03
                                                            ----------------------------------------------------
    Total..........................  ......................         1.00          1.00         1.00         1.00
----------------------------------------------------------------------------------------------------------------

    The guideline amounts are calculated by the following equation:

Locality SEG amount
    =
National SEG amount
     x 
[(Work GPCI  x  Therapy-Specific Compensation share)
    +
(Practice Expense GPCI  x  Therapy-specific Overhead share)
    +
(Malpractice GPCI  x  Therapy-specific Malpractice share)]

The GPCIs and guideline amounts for each therapy type for each GPCI 
locality are in Table I under section V of this final rule.
    We decided to use the GPCI for several reasons. The Balanced Budget 
Act of 1997 mandates that many therapy services that are now reimbursed 
based on the salary equivalency guidelines will be shifted to the 
physician fee schedule, and, thus, therapist wages will be indexed by 
the GPCI as early as July 1, 1998. We, therefore, saw that using the 
GPCI was the direction for future therapy wage adjustments. We assessed 
the appropriateness of using the GPCI and found that, of the available 
indexes, the GPCI most accurately reflects the local labor costs of 
therapists. Using the GPCI produces a less widespread geographic 
distribution of guideline amounts. Also, many commenters asked us to 
provide statewide rates as opposed to MSA rates provided in prior 
salary equivalency guideline notices.
    We decided to apply the GPCI to the therapist compensation share as 
determined by the therapy-specific input price index. We then used the 
practice expense GPCI to approximate the relative cost differences by 
geographic area of practice expenses (clerical and managerial 
compensation, office costs, and other costs) used to provide therapy 
services. In addition, we use the malpractice expense GPCI to 
approximate the relative cost differences by geographic area for 
malpractice expenses incurred in providing therapy services. The 
application of these GPCIs is analogous to the methods used under the 
Physician Fee Schedule.
    As mandated by section 4541 of the Balanced Budget Act of 1997, 
many services presently covered under the therapy guidelines will be 
paid under the physician fee schedule beginning in January 1999. Since 
the physician fee schedule is adjusted for geographic variation by the 
GPCI, both the current and future payment systems will reflect similar 
geographic wage adjustments providing a smoother transition from the 
salary equivalency guidelines to the physician fee schedule.
    Comment: Commenters suggested that the hospital area wage index in 
the proposed rule did not reflect the known geographic differences in 
therapist wages in different settings, specifically, hospital-employed 
therapists as compared to SNF-employed therapists. Many commenters 
suggested that until HCFA can demonstrate that the geographic variation 
in the wages in other settings are comparable, the use of the PPS 
hospital area wage index should be abandoned.
    Response: We responded to the variation in wage levels among 
different settings in our responses to comments on the occupation labor 
market for therapists under section III.B. of this final rule. We have 
no data that indicate that the geographic adjustment needs to be done 
by setting if the national baseline amounts by setting are 
appropriately handled.
    Comment: A commenter recommended that HCFA use nursing home 
employed therapist wage data, and that the recent revision to the SNF 
Medicare cost report would be useful in this regard. The commenter 
suggested this as a long-term option and was willing to accept 
modification of the hospital area wage index as a short-term solution 
for reducing the influence of the geographic adjuster.
    Response: We have decided to use the GPCI from the physician fee 
schedule as the geographic adjuster. Currently, however, therapist wage 
data are not available on the Medicare SNF cost reports. Also, the 
Balanced Budget Act of 1997 provides for payment for outpatient 
rehabilitation services on a fee schedule basis which uses the GPCI as 
the wage index. Since we will only have salary equivalency guidelines 
for a short period of time, we have not developed a separate wage index 
for therapy services using nursing home employed therapist wage data.
2. Methodology for Determining Rural Rates Under Salary Equivalency
    We proposed to calculate the guidelines in rural (non-urban) areas 
in a given State as the weighted average of the prospective payment 
system hospital wage index for MSAs within a State's boundaries. We 
proposed this method because our analyses indicated that the therapy 
market for rural areas tends to reflect the prevailing compensation 
conditions of the surrounding urban areas in the region. By weighing 
the urban areas in a state by the amount of hours associated with the 
delivery of PPS hospital care, the rural rate would reflect the larger 
weight given to MSAs with the most hospital hours. These urban areas 
with most of the hospital hours also tend to have higher wage index 
values.
    Comment: Several commenters were concerned that rates in some rural 
areas may be set too low. Some commenters indicated that this would 
impede access to quality health care by Medicare beneficiaries because 
it would be difficult to recruit and retain therapists in rural areas. 
These commenters offered no recommendation on how to mitigate this 
potential problem.
    Response: Since we have decided, based on industry comments and 
HCFA analyses, to use the work, practice expense, and malpractice GPCIs 
from the physician fee schedule, we analyzed rural rates using the 
GPCI. Unlike the hospital area wage index, the GPCI provides no 
distinction between rural and urban areas. Instead, certain localities 
have separate GPCIs based on their unique characteristics. The rest of 
the areas in a state use the state GPCI. The localities given separate 
index values are usually the larger urban areas and have been separated 
because they have unique labor cost characteristics. Using the GPCI 
essentially creates a geographic cost adjustment for the unique areas 
and a different geographic cost adjustment for the rest of the state. 
Under this methodology, a rural area would have a similar guideline 
amount to any other area in the state (urban and non-urban), except 
those areas that have

[[Page 5123]]

unique cost markets. The 1990 Census data showed that therapist wages 
in rural areas were close to therapist wages in other rural and urban 
areas while therapist wages in the largest urban areas were distinctly 
higher than the national averages. Using the work GPCI produces a local 
labor adjustment that mirrors the actual geographic wage variations for 
therapists as determined from the 1990 Census data.
    Because of the resulting distribution created by using the GPCI, we 
do not feel that rural areas will have difficulty recruiting and 
retaining therapists. Since only those areas that have shown unique 
costs would have a different guideline amount, rural areas would 
receive effectively the same rate as most nonrural areas in the State. 
Thus, there would be no incentive to diminish services in rural areas 
or compromise access to quality health care by Medicare beneficiaries 
due to relatively lower wage levels. We do not believe that a local 
labor cost adjustment (work GPCI) that mirrors the actual geographic 
wage distributions for therapists will create shortages in rural areas.
    Comment: Several commenters were concerned that the guideline 
amounts would force SNFs in rural areas to use on-call therapists 
rather than contract therapists. The commenters stated that the only 
reason rural areas can currently attract contract therapists is that 
therapy companies can offer bonuses to their employees. If the rates in 
rural areas are set too low, contract therapy companies could not hire 
as many therapists and, therefore, could not provide services in rural 
areas. Thus, rural nursing homes would have to use on-call therapists 
who are less qualified than contract therapists.
    Response: Since we are using the GPCI to adjust the guidelines for 
relative cost differences by geographic area, we believe that we have 
addressed the concerns of these commenters. As explained above, most 
areas in a State, including rural areas, are adjusted by the same GPCI. 
Only those areas that have shown unique characteristics would have a 
different adjustment factor under the GPCI. In fact, there are 33 
states that have statewide rates only. We feel this methodology more 
accurately reflects the current labor market for therapists for two 
reasons: First, therapy companies can attract therapists under these 
guidelines because the guidelines more accurately reflect the relative 
costs of an hour of therapy patient-time for a given therapy type. 
Second, using the work GPCI to adjust the guidelines provides a more 
accurate reflection of the geographic distribution of therapist wages. 
Therefore, we see no reason for therapy companies to be unable to 
attract therapists nor do we see any reason for rural areas to be 
unable to attract contract therapists under these guidelines.
    The use of on-call therapists is a decision to be made by the 
individual nursing home. While some commenters believed that on-call 
therapists were not as qualified as contract therapists, other 
commenters seemed to imply that on-call therapists came from the same 
group of therapists as contract therapists. As far as we know, there is 
no difference in education, training, or credentialling between the 
two. Commenters also alluded to rural areas using on-call therapists 
because that was the nature of their caseload. We do not feel that 
these new salary equivalency guidelines disadvantage rural areas, 
particularly regarding on-call therapists.
    Comment: One commenter believed that HCFA's proposed methodology 
for computing the rural rates is incorrect because it should be based 
on the cost of employing labor in a rural area or weighted by other 
data representative of labor costs of speech language pathologists in 
rural areas. The commenter suggested using either rural area speech 
language pathology wage data, state average speech language pathology 
wage data, rural area hospital wage data, or state average hospital 
wage data. The commenter also suggested applying the prospective 
payment system hospital wage index to one-third of the guideline 
amounts instead of 83.378 percent as proposed.
    Response: There are no available data or index for speech language 
pathology wages in rural areas or state areas that could be used to 
adjust the guidelines. Because there are no available geographic data 
on speech language pathology wages and because the hospital wage 
distribution does not reflect therapist wage distribution, we have 
decided, based on industry comments and HCFA analyses, to use the work 
GPCI for the therapist compensation portion of the therapy-specific 
input price indexes. We will also apply the practice expense GPCI to 
the practice expense portion and the malpractice GPCI to the 
malpractice expense portion. Based on our analysis of the different 
data surveys of therapist wages by geographic region, the work GPCI 
provides a close approximation of the distribution of therapist wages.
    Comment: One commenter recommended that HCFA have a special 
adjustment for rural providers that contract for more than 40 percent 
of any specific therapy services.
    Response: This comment implied that the adjustment should increase 
the guideline amounts for rural providers that contract for large 
amounts of therapy services because contracting for these services in 
rural areas is more costly. We feel that, by using the GPCI to adjust 
the guideline amounts for geographic variation, we have adequately 
determined rural rates. The guideline amounts in rural areas are 
consistent with the guideline amounts in nonrural areas that have not 
displayed unique labor costs. The distribution of rural guideline 
amounts as they compare with guideline amounts in other areas is 
consistent with the geographic distribution patterns of therapist wages 
shown in other surveys.
    Comment: One commenter suggested that HCFA continue, as in the 
proposed rule, to apply a blended MSA rate as a substitute for rural 
calculations.
    Response: We are not blending urban rates to determine rural rates 
in this final rule because we are not using the hospital area wage 
index to adjust the guideline amounts for local labor cost variations. 
Instead, we are using the GPCI from the physician fee schedule to 
adjust the guideline amounts for relative cost differences by 
geographic area. The work GPCI more accurately reflects the geographic 
distribution of therapist wages and produces a rural area amount that 
is consistent with nonrural areas in a state that has not shown unique 
cost characteristics.
3. Local Labor Market Theory
    We proposed to adjust the salary equivalency guideline amounts for 
local labor cost variations because the labor market theory suggests 
that payment amounts reflect the costs of providing services in a given 
area. Many other Medicare payment systems such as hospital prospective 
payment system, SNF and HHA cost limits, and the physician fee 
schedule, adjust payments for geographic variation. Adjusting the 
guidelines for local labor cost variations is consistent with the 
adjustments made under these other payment systems. The only difference 
is that the salary equivalency guidelines are established for a single 
type of occupation (therapists) whereas costs in these other programs 
include all occupations in the industry. Because of this difference, 
there is no available adjustment factor that is completely accurate for 
therapist wage variations by geographic area. Instead, we use the 
adjustment index that best reflects the observed geographic 
distribution in therapist wages. The most appropriate adjustment index 
HCFA has been able to find was

[[Page 5124]]

the work GPCI from the physician fee schedule.
    Comment: One commenter believed that it was inconsistent for HCFA 
to simultaneously recognize and adjust for differences in therapist 
wages among geographic regions while, at the same time, insisting that 
the much greater wage differentials among sites of employment within 
the same geographic region are not also worthy of adjustment.
    Response: We believe that the adjustment to therapist wages for 
local labor cost variation is a different issue than the compensation 
of wage differentials among sites of employment within the same 
geographic area. We discuss our logic and the reasoning behind our 
decisions on wage differentials by employment setting in our responses 
to comments on the occupational labor market for therapists under 
Section III.B. of this final rule. We have concluded that the observed 
wage differentials by employment setting result from compensating 
differences in working conditions, skills required, short-run market 
disequilibrium, and different degrees of cost-minimizing behavior in 
different settings. The relative cost differentials by geographic area 
are simply variations caused by local market conditions and are not 
designed to replace the compensating differentials that HCFA 
incorporates in the guideline amounts. Relative cost differences by 
geographic area are captured in both the PPS hospital area wage index 
and the GPCI. However, for specific occupations, this differential can 
be smaller or larger than the average for all occupations. For 
therapists, we have found that local labor cost variation is smaller 
than the variation for all hospital occupations. The GPCIs and 
guideline amounts for each therapy type for each GPCI locality are in 
Table I under section V. of this final rule.

E. Salary Equivalency Amount Updates

    In the March 28, 1997 proposed rule, we discussed the development 
of the Rehabilitation Therapist Input Price Index needed to update 
guideline levels from the base period to the implementation period (62 
FR 14868). The rehabilitation therapist input price index would also be 
used to adjust the guidelines in future periods, using forecasts by 
Standard & Poor's DRI.
1. Rehabilitation Therapist Input Price Index and Related Issues
    As discussed at 62 FR 14868, we proposed that the therapist input 
price index would be a fixed-weight, or Laspeyres-type, index. The 
index would be consistent with other HCFA input price indexes used to 
update Medicare payment rates. HCFA input price indexes are normative 
indexes measuring the pure price change of a fixed market basket of 
inputs to provide specific services. A normative index is designed to 
measure pure price changes under normal competitive conditions, 
conditions that may not exist in health care markets given the 
extensive presence of third-party payers. The rehabilitation therapist 
input price index consists of two parts for each cost category: (1) 
base weights that are determined from the same data sources as used to 
produce the guideline payment levels, and (2) price proxies that show 
price changes reflective of cost-minimizer market forces impacting a 
given cost category.
    Comment: One commenter suggested that changes be made to correct 
the fringe benefit factor and to adjust the rental cost share to 
reflect what the commenter believes to be more realistic space needs. 
The commenter recommended using the ECI data on fringe benefits for 
hospital workers and increasing the rental area to 750 square feet.
    Response: As explained in the section on methodology, we have 
modified the fringe benefits factor to include the productive hours 
adjustment. The productive hours adjustment had previously been added 
to wages rather than fringe benefits. Reclassifying the productive 
hours adjustment to the fringe benefits factor increases its share of 
total compensation to more than 28 percent. This share which we 
calculated using the hospital Medicare Cost Reports and the productive 
hours adjustment, is consistent with the ECI data on fringe benefits 
for hospital workers. The consistency supports our view that the 
hospital Medicare Cost Reports are the most accurate source of fringe 
benefit data since they are carefully scrutinized for use under 
hospital prospective payment system. Therefore, we believe that this is 
an accurate estimate of the fringe benefit share for the rehabilitation 
therapist input price index.
    We also believe that the 250 square feet allowed as office space in 
the proposed rule is sufficient for efficient and effective therapy 
services as was explained in section III.B., Methodology, of this final 
rule. We will continue to use the cost associated with 250 square feet 
as the rent share in the rehabilitation therapist input price index.
    Comment: One commenter recommended using internal proxies for wages 
and fringe benefits consistent with the hospital and SNF blend used in 
determining wage levels for the guideline amounts.
    Response: The hospital and SNF blend uses rehabilitation therapy 
wage levels for physical therapy, occupational therapy, speech language 
pathology, and respiratory therapy to reflect occupational market wage 
levels for the nation. The rehabilitation therapy input price index is 
used to update the base wage levels for inflation and is analogous to 
our market baskets for prospective payment system hospitals and HHAs. 
In both of these market baskets, rehabilitation therapists are included 
as part of professional-technical occupations with a 50/50 blend of the 
ECI for civilian hospital workers and the ECI for private professional-
technical workers. The rehabilitation therapy input price index uses 
this same blend of ECIs.
    Comment: One commenter proposed an alternative method of escalation 
which, for the time period tested, actually would project lower monthly 
increases than would the 96:3 forecast of the rehabilitation therapist 
input price index.
    Response: The escalation method proposed by the commenter used a 
market basket that differed slightly from the one we derived. The 
commenter's market basket blended the ECI for nursing homes with the 
ECI for hospitals to create a blended internal wage proxy. Our 
rehabilitation therapist input price index is consistent with the 50/50 
blend of ECI for hospitals and the ECI for Professional and Technical 
used in the hospital PPS and HHA input price indexes. We believe this 
methodology most closely measures relevant buyer price inflation even 
if it results in projected monthly increases that are higher than the 
alternative proposal.
    Comment: One commenter suggested using the CPI plus an additional 
percentage, determined by HCFA, while another commenter suggested using 
the CPI plus 3 percent as the update factor if updates are not applied 
within a certain time limit.
    Response: Our rehabilitation therapy input price index updates are 
conceptually superior for adjusting the salary equivalency guidelines 
because they are specific to the cost structure of rehabilitation 
therapy. We use weights that reflect the mixture of costs appropriate 
for efficiently providing contract rehabilitation therapy services. The 
rehabilitation therapist input price index includes proxies for wages 
and benefits of health sector and professional and technical workers as 
well as wages and benefits for administrative support and managerial

[[Page 5125]]

personnel, office costs, and other costs. These proxies are 
conceptually closer to changes in the actual cost of rehabilitation 
therapy supply services than is a broad measure like the CPI.
    HCFA has currently produced updates through the year 2000. The 
Balanced Budget Act of 1997 shifts most services covered by salary 
equivalency guidelines to SNF PPS or to the physician fee schedule well 
before the year 2000.
2. Timing of Rebasing Rates and Market Basket
    Comment: Some commenters believed that HCFA should establish a 
schedule for adjusting inflation assumptions and provide that schedule 
in the final rule. These commenters also felt that HCFA should explain 
when and how rebasing would be done. Some commenters requested it be 
rebased at least every 3 years. One commenter recommended we update for 
inflation annually.
    Response: The Balanced Budget Act of 1997 included some provisions 
that we believe will implement more effective and simpler controls over 
providers' costs of contracting for therapy services and that appear to 
make revised salary equivalency guideline regulations unnecessary in 
the future. The Balanced Budget Act of 1997 provided prospective 
payment systems for SNFs, HHAs, and Community Mental Health Centers, 
which ultimately will eliminate the need for salary equivalency price 
restraints in those venues. In addition, the Balanced Budget Act of 
1997 contained various provisions which will move therapy payment from 
a cost basis to using the physician fee schedule for therapy provided 
in CORFs and outpatient rehabilitation facilities and by other 
providers furnishing Part B outpatient therapy service. This includes 
the therapy provided under Part B to nursing home patients, outpatient 
hospital services, and outpatient therapy services provided by an HHA 
to patients not under the HHA benefit. The Balanced Budget Act of 1997 
also provided a $1,500 annual limitation per Medicare beneficiary where 
therapy services are provided under the outpatient physical therapy 
benefit (which includes outpatient speech language pathology services) 
or occupational therapy benefit. We believe that these new prospective 
payment systems, application of the physician fee schedules, and the 
$1,500 annual limitation per Medicare beneficiary, when they are 
implemented, will override limiting payment of contracted therapy 
services to the salary equivalency guidelines because they will limit 
payment for contracted therapy services and should offer a strong 
incentive for providers to control costs. Therefore, we almost 
certainly will not be revising the salary equivalency guidelines in the 
future. Until the new payment systems are implemented for the different 
providers, this rule provides a monthly adjustment factor for May 1998 
through April 2001 (Table IV). Also, for cost reporting periods 
beginning on or after May 2001, the schedules would remain in effect, 
increased by the appropriate adjustment factor.

F. Other Technical and Policy Issues

1. Travel Allowance
    Comment: Several commenters requested clarification regarding 
payment of the standard travel allowance. Many commenters requested 
that we revise the current policy, which permits only one standard 
travel allowance per supplier traveling to a provider site. Some 
commenters suggested that we should permit a standard travel allowance 
for each therapist traveling to the provider site. Some commenters 
believed that the standard travel allowance is inadequate, especially 
for HHAs, and another commenter believed that the standard travel 
allowance may discourage therapists contracting with providers in rural 
areas. One commenter stated that it should be noted that a salaried 
therapist is not subjected to a reduced compensation allowance for time 
spent traveling to a patient's home. Another commenter recommended an 
alternative of one travel allowance for each discipline or therapy type 
that performs services at each provider site each day.
    Response: We have not found any evidence that the standard travel 
allowance has discouraged therapists from contracting with rural 
providers in rural areas. Also, our longstanding policy authorizes HHAs 
to receive payment under the optional travel allowance policy if they 
document their time spent in traveling and, if they choose, their 
travel mileage. We have decided to adopt the recommendation made by one 
commenter to provide a travel allowance for each discipline or therapy 
type that performs services at each provider site each day.
    Comment: We asked for comments in the proposed rule on extending 
the optional travel allowance established for home health agencies to 
all providers. We received a large amount of comments requesting that 
we adopt this provision. In addition, one commenter stated that a 
salaried employee is not subjected to reduced compensation when he/she 
travels to a patient's home. A salaried employee who receives a set 
compensation is paid for all duties of his job including travel time 
within an 8 hour day. This is in contrast to a person who is being paid 
on a contractual basis.
    Response: After consideration of the comments, we decided to expand 
the optional travel allowance. In this rule, we are permitting the 
optional travel allowance for all providers who furnish therapy 
services in areas in which geographic distance creates unique labor 
markets, e.g., rural areas. Under this optional travel allowance, each 
therapy type or discipline traveling to either the patient's home or 
provider site may claim this optional travel allowance. However, the 
provider must maintain documentation of the therapist's travel time and 
mileage. This optional travel allowance will help providers who are 
disadvantaged by one standard travel allowance per supplier. We believe 
that the standard travel allowance is adequate.
2. Data Sources for Future Salary Equivalency Guidelines
    This topic is now obsolete because, as a result of the Balanced 
Budget Act of 1997 provisions, we are not publishing revised guidelines 
in the future.
3. Application of Guidelines
    Comment: We received three comments regarding application of the 
guidelines in situations where compensation to a therapist employed by 
the provider is based (at least in part) on a fee-for-service or on a 
percentage of income (or commission) and that was of particular concern 
to the home health industry. One commenter pointed out that this issue 
is in litigation and should not be resolved through regulations. In 
addition, this commenter stated that, based on the law, HCFA could not 
apply salary equivalency guidelines to employees paid on a fee-for-
service basis and that this proposal is only one step away from 
applying guidelines to the allowable costs of all therapy services 
whether salaried employees, hourly compensated employees, ``fee-for-
service'' employees, or outside contractors. Another commenter felt 
that this proposal needs to be considered more carefully. The third 
commenter was in favor of this provision and felt that it was a good 
safety measure.
    Response: We are establishing regulations that will allow that the 
salary equivalency guidelines to apply in situations where at least 
partial compensation to a therapist employed by the provider is 
provided on a fee-for-

[[Page 5126]]

service basis or on a percentage of income (or commission). The entire 
compensation will be subject to the guidelines in cases where the 
nature of the arrangements are most like an ``under arrangement'' 
situation, although the provider may technically treat the therapists 
as employees. The guidelines will be applied in this situation so that 
an employment relationship is not being used to circumvent the 
guidelines. Since June 1977, our longstanding policy on this issue has 
been contained at section 1403 of the Provider Reimbursement Manual. We 
are now establishing this provision in regulations that further the 
statutory purpose of cost control as reflected in the legislative 
history of the guidelines. HCFA recognizes that certain employment 
relationships would effectively circumvent the guidelines, has provided 
for these circumstances in instructions in section 1403 of the Provider 
Reimbursement Manual, and now provides for them in regulations at 42 
CFR Sec. 413.106(c). The guidelines will only be applied in such cases, 
not to all salaried employees. We do not believe that the fact that 
there is litigation on this issue prevents us from establishing this 
longstanding policy in regulations.
4. Limiting Contracted Services to 40 Hours
    In the proposed rule, we had stated that, while we were evaluating 
the data used in developing the guideline amounts, we became aware of a 
tendency for contracted therapy hours in some cases to exceed 40 hours 
per therapist a week, the amount of hours a full-time employee would 
generally work (62 FR 14872). We proposed to eliminate the expense 
factor where the hours of therapy services per therapist exceed 40 
hours.
    Comment: An overwhelming amount of commenters requested that we not 
eliminate the expense factor for therapy hours per therapist that 
exceed 40 hours. Several commenters said that in rural areas, where it 
is hard to obtain therapists' services, the therapists must sometimes 
work over 40 hours.
    Response: We have decided to retain the expense factor in cases 
where the therapist provides services to the provider exceeding 40 
hours per week. We believe that this may be burdensome for the 
intermediaries and as stated by the commenters, there may be some 
providers who do appropriately utilize services in this manner.
5. Outcomes Based Systems
    Comment: Several commenters stated that they used the Functional 
Independence Measurements in SNFs. They also stated that they wanted 
payment outside of the expense factor for this service which should be 
reimbursed based on the prudent buyer policy.
    Response: Events have superseded our allowing an additional payment 
for outcomes-based systems. OBRA '87 required that the SNF must 
complete a comprehensive resident assessment which is the minimum data 
set. The Balanced Budget Act of 1997 also mandates, for purposes of the 
SNF prospective payment system, that SNFs complete the MDS for 
collecting information for payment under prospective payment system for 
therapy and other services. SNFs are and will be reimbursed for 
completing the minimum data set. We will not be able to permit an 
additional payment outside of the salary equivalency guidelines for 
other outcomes based systems.
6. Exception for Binding Contract
    We proposed to eliminate the exception for binding contract.
    Comment: Several commenters requested that we not eliminate the 
exception for binding contract and that it continue in the manner that 
it is currently provided for in the regulations. Other commenters 
believed that therapy contractors and nursing home providers should not 
be subject to rates that were not yet published at the time a contract 
was negotiated.
    Response: We continue to believe that providers should have been 
prudent buyers of therapy services at the time they negotiated the 
contracts. Therefore, elimination of the exception for binding contract 
and applying the salary equivalency guidelines to these services where 
a binding contract is in effect should not yield a different result 
than what a prudent buyer should pay. Accordingly, we are eliminating 
the binding contract exception in Sec. 413.106(f)(1).
7. Exceptions Process for Unique Circumstances or Special Labor Market 
Conditions Including Time Period for Submission of Requests
    We received several comments on the substantiating requirements and 
the process.
    Comment: One commenter asked that we establish a new exceptions 
process that would include specific requirements for a provider 
qualifying as having unique circumstances or a special labor market 
condition. The commenter also requested that we have specific time 
limits on intermediary, HCFA Regional Office, and Central Office review 
of the exception request. Several other commenters also made similar 
requests. Several commenters said that the exceptions process was 
adequate but recommended a deadline of 90 to 120 days from receipt of 
application for fiscal intermediary response.
    Response: At this time, we will not be establishing a new 
exceptions process. The Balanced Budget Act of 1997 introduces new 
payment systems which, for a large portion of the providers, will 
override the salary equivalency guidelines in the next year. We also 
believe that the current exceptions process provides sufficient 
latitude for submission of provider documentation to support either an 
exception request for unique circumstances or special labor market 
conditions. Also, with the 60 day increase in time that the provider 
has to submit documentation, the providers should have enough time to 
provide documentation to the fiscal intermediaries. Regulations at 
Sec. 413.106(f)(4) now reflect the increase from 90 to 150 days. We 
encourage providers to do so and, as suggested in the comments, we will 
require that the intermediaries process the exception requests within 
180 days after receiving the exception request which is the same time 
frame required for SNF and HHA exception requests to routine cost 
limits. Because this has never been a HCFA Central Office 
responsibility, we do not want to make it so now, since the salary 
equivalency guidelines will shortly be phased out for all providers. 
However, we believe the 180 days will give the intermediary enough time 
to conduct their own review of the documentation and, if necessary, 
enough time to consult with the Regional Office.
    Although we did not ask for comments in the proposed rule on 
payment for supervisory services, we received several comments on the 
issue of supervisory pay.
    Comment: Several commenters asked that payment for these services 
be made at 135 percent of the hourly salary equivalency guideline 
amount.
    Response: Because there was no evidence to substantiate these 
comments, we will continue to have the fiscal intermediaries pay for 
these services based on the intermediaries' knowledge of the 
differential between physical therapists', respiratory therapists', 
occupational therapists', and speech language pathologists' 
supervisors' salaries and physical therapists', respiratory 
therapists', occupational therapists', and speech language 
pathologists' salaries in similar provider settings in the area.
    Comment: Several commenters asked for a definition of a supervisor 
and an

[[Page 5127]]

administrator. Several commenters asked if one supervisor could 
supervise all types of therapy. One commenter asked if there could be a 
different supervisory rate per discipline.
    Response: In the past, the Medicare program has not defined these 
terms. However, section 1412.5 of the Provider Reimbursement Manual 
permits an additional payment for a chief therapist and those 
therapists who spend at least 20 percent of their time supervising 
other therapists or in administrative duties. Supervising other 
therapists is distinguished from simply being expected, as a staff 
therapist, to direct trainees, aides, and assistants in performing 
therapy services. Administrative responsibility is the performance of 
those duties that normally fall within the purview of a department head 
or other supervisor. Because the provider department head or supervisor 
is not providing direct patient care, it would not be necessary for 
this person to hold the credentials for the particular type of 
department he is heading. For that reason, we are not asking 
intermediaries to determine different administrative/supervisory rates 
for each discipline.
    Comment: Several commenters requested that we pay aides as a 
function of the hourly salary equivalency amount at 50 percent of these 
amounts. Some commenters suggested that aides be paid at one third of 
the hourly salary equivalency amount. Another commenter asked that HCFA 
conduct a study of the classification and compensation of 
rehabilitation therapy aides and establish a set of salary standards 
specific to respiratory therapy aides.
    Response: Because the commenters did not supply any substantiating 
evidence in the comments to support their request for paying aides as a 
function of the hourly slary equivalency amount at 50 percent, we will 
continue our policy of having the intermediary look at a comparable 
position, e.g., the nurses aide in order to determine the reimbursement 
amount. Because there are no educational requirements for coverage of 
aides' services and we continue to believe that their services are 
comparable to nurses aides, we do not feel that it is necessary to 
conduct a study of the classification and compensation of therapy 
aides.
    Although we did not request comments on payment for assistant 
services, we did receive several comments on this issue.
    Comment: Several commenters asked that we increase payment to 85 
percent of the hourly salary equivalency amounts for assistants.
    Response: Because there was no evidence to substantiate the 
commenters' request, we will continue with payment at 75 percent of the 
hourly salary equivalency amount.
    Comment: Several commenters were concerned that we were limiting 
payment for overtime.
    Response: The proposed rule did not specifically introduce new 
limits on payment for overtime. The proposed rule states that a 
provider would receive payment for overtime; however, if the therapist 
worked over 40 hours he/she would not receive the expense factor 
portion of the hourly salary equivalency guideline amount. As stated 
previously, we are not limiting the expense factor if a therapist works 
over 40 hours. We are also not revising the overtime policy. Section 
1412.4 of The Provider Reimbursement Manual contains our longstanding 
policy for overtime reimbursement.
    Comment: Several commenters asked that HCFA add a provision to the 
regulations that recognizes a 12.5 percent shift differential for 
weekend and second shift services.
    Response: We continue to believe that it is not customary for 
therapists to provide services on shifts that would not be part of a 
normal day-time shift. Therefore, we suggest, for those cases where a 
provider is paying a shift differential, that the provider apply for an 
exception as a unique circumstance. The fiscal intermediary will 
determine if the amount paid is reasonable and justifiable as a unique 
circumstance.
    Comment: One commenter suggested that HCFA use the HHA per visit 
limits for the salary equivalency guideline amounts instead of the 
proposed rule.
    Response: We cannot use the HHA per visit limits because they do 
not represent hourly wage rates for employees. They are visit costs 
which do not necessarily represent an hour's worth of service and do 
not represent hourly wage rates for therapists.
    Comment: One commenter felt that HCFA should exempt from the salary 
equivalency guidelines those facilities participating in Phase I of the 
Multi-State Case Mix Demonstration project.
    Response: In Phase I and Phase II of the Multi-State Came Mix 
Demonstration project, the therapy services were paid on a reasonable 
cost basis and therefore, payment was limited to the salary equivalency 
guidelines. Under Phase III, therapy services are paid on a prospective 
payment rate. However, the providers will have to continue to complete 
a Medicare cost report reflecting the salary equivalency guidelines. 
Ultimately, the salary equivalency guidelines will not effect the 
payment the providers receive because payment for therapy is on a 
prospective rate. As SNFs participating in the demonstration project 
are paid under the prospective payment system, they will no longer be 
paid under the demonstration project. They will be subject to 
prospective payment system for cost reporting periods beginning on or 
after July 1, 1998.
    Comment: One commenter recommended that a variety of costs should 
be reimbursed for contract therapists working in SNFs: (1) Education, 
(2) training, (3) attendance at professional meetings, (4) licensing 
and credentialing, and (5) liability insurance.
    Response: We believe that because these costs are the type of costs 
that an employee may incur, they are reimbursed under the hourly salary 
equivalency amount as part of the fringe benefit and expense factor.
    Comment: Several commenters supported an exception for certain 
diagnostic services, such as video fluoroscopies, and recommended that 
such procedures be exempt from the salary equivalency guidelines.
    Response: We do not believe that there should be an exception for 
these services. We believe that if qualified speech language 
pathologists are permitted to perform those services, then they are 
speech language pathology services that should be paid for in the same 
manner as other speech language pathology services. We want to point 
out that any special equipment that is required for these services will 
be reimbursed as an additional allowance to the hourly salary 
equivalency guideline amounts. Also, if these services take longer to 
perform than some other therapy services, the provider will be 
reimbursed for the additional hours.
    Comment: One commenter suggested that HCFA study the impact that 
the Medicare transfer agreement requirement has on the cost of 
providing respiratory therapy services to SNFs. The commenter stated 
that the transfer agreement creates another layer of costs.
    Response: Because the Balanced Budget Act of 1997 provides that, 
for respiratory therapy services furnished by a SNF on or after July 1, 
1998, there will no longer be a requirement for SNFs to provide 
respiratory therapy services to SNF patients through a transfer 
agreement hospital, we do not believe it is necessary to perform the 
suggested study.
    Comment: One commenter wanted HCFA to clarify which rate may be 
charged when a rehabilitation facility

[[Page 5128]]

bills for services using contracted employees in several sites that 
cross geographic wage index lines (i.e., charge geographic rates based 
on central office location or site location?)
    Response: We do not interfere with the provider's charging 
practices as long as it is consistently applied to all patients. 
However, the guidelines would limit provider's costs to the central 
office location guideline amount because the salary equivalency 
guidelines limit the costs of the provider who incurs the costs and 
does the billing. In addition, we do not have any site-of service-
billing requirements for therapy services.
    Comment: One commenter stated that HCFA was deficient in not 
developing data for HHAs, CORFs, and outpatient rehabilitation 
facilities.
    Response: We did not have the database resources to perform the 
types of studies and surveys that are necessary for the salary 
equivalency guidelines. As pointed out in other sections of this final 
rule, we are unable to use the cost report as a data source for wage 
rates because it does not collect information on hourly wages for 
employees. Moreover, no outside sources submitted reliable data for 
these individual provider types that were consistent with the type of 
data described in the Senate Committee on Finance Report (S. Rept. No. 
1230, 92nd cong., 2nd sess. 251 (1972)).
    Comment: One commenter wanted HCFA to develop salary equivalency 
guidelines for HHAs, rehabilitation agencies, and CORFs using relevant 
data from those settings.
    Response: As pointed out in the previous comment, we did not have 
the resources to develop this data, nor could we use the cost report 
for this purpose. In addition, we did not receive this type of data 
from outside sources. We also do not believe that the statutory 
language under section 1861(v)(5) of the Act requires that we develop 
individual salary equivalency guidelines for each provider type.
    Comment: One commenter stated that HCFA should continue to include 
professional associations in discussions concerning future payment 
methodologies.
    Response: Because we have no plans to publish revised salary 
equivalency guidelines in the future, we cannot address this issue in 
the context of further discussions of the salary equivalency 
guidelines. However, we have included, and will continue to include, 
professional associations in discussions of the new payment 
methodologies that are provided in the Balanced Budget Act of 1997.
    Comment: One commenter wanted HCFA to clarify its position 
regarding application of the salary equivalency guidelines as Medicare 
providers move to prospective payment systems.
    Response: The Balanced Budget Act of 1997 provided prospective 
payment systems for SNFs, HHAs, and community mental health centers and 
payment on a fee schedule basis for outpatient rehabilitation services. 
When providers go under these systems, the salary equivalency 
guidelines will no longer apply, as stated previously, because these 
prospective payment systems and fee schedules will limit payment for 
therapy services and should provide a strong incentive for providers to 
control costs.
    Comment: One commenter suggested that in place of salary 
equivalency guidelines, HCFA should develop a uniform method for 
payment of therapy services regardless of setting.
    Response: In the Balanced Budget Act of 1997, Congress enacted a 
uniform method for payment of therapy services regardless of setting 
and employee or contractor arrangements for services. This legislation 
provides for prospective payment systems for inpatient rehabilitation 
hospitals, skilled nursing facilities, home health agencies, and 
community mental health centers. It also provides for payment on a fee 
schedule basis for all outpatient rehabilitation services regardless of 
setting.
    Comment: One commenter suggested that HCFA reimburse the 
contractors' costs associated with therapists' 9 month clinical 
training program.
    Response: We can only reimburse the provider for services related 
to patient care. If the therapist will be providing services to 
Medicare patients, during the therapist's 9 month clinical trial, then 
we may reimburse the provider for some of those services as an aide.
    Comment: One commenter stated that HCFA should pay for in-service 
training and utilization review services that are contracted out by the 
SNF.
    Response: The Provider Reimbursement Manual section 1412.5, 
describes a therapist's professional services, as serving on 
utilization review and other appropriate committees and participating 
in training. Because this section is part of the instructions for 
salary equivalency guidelines which relate to contracted services, we 
are recognizing that a provider could contract out for these services.
    Comment: One commenter stated that calculation of the guideline 
amount for each metropolitan statistical area for each individual 
provider would take some time for each individual fiscal intermediary. 
The commenter also suggested that funding be provided to the 
maintainers of the STAR programs (formerly Aetna, now Mutual of Omaha) 
to provide a computer program to each fiscal intermediary that would 
automatically calculate the therapy limitations for each provider.
    Response: In the final rule, we used the GPCI as our wage index, we 
did not develop as many local rates as we did in the proposed rule. 
Therefore, it should be easier for the intermediaries to calculate the 
providers' guideline amounts.
    Comment: One commenter stated that there are a number of outpatient 
rehabilitation providers who have established branch offices. 
Therefore, HCFA should clarify the application of the proposed 
guidelines for providers with branch offices.
    Response: We do not have a policy which mandates that an outpatient 
rehabilitation provider bill for their services at the site of service. 
The guideline amounts have been based and will continue to be based on 
the central office address of the provider.
    Comment: One commenter wanted to know if the guidelines are 
finalized during a provider's cost reporting year, will the provider be 
subject to two sets of limits.
    Response: This has happened in previous schedules of guidelines. 
The intermediary will pro rate the different guideline amounts for the 
different parts of the cost reporting year to which they apply.

G. Statutory Issues

    Comment: One commenter was concerned that the proposed rule would 
violate section 1861(v)(5) of the Act that says: ``reasonable cost for 
these services may not exceed an amount equal to the salary that would 
reasonably have been paid for services to the person performing them * 
* *'' for several reasons. One commenter felt that HCFA must include 
data from all settings, while another commenter believed that the 
statute requires setting-specific rates. A third commenter stated that 
contract therapist wages should have been included.
    Response: HCFA has broad legal authority to determine reasonable 
cost. HCFA has implemented section 1861(v)(5) of the Act through 
regulations that authorize the establishment of salary equivalency 
guidelines. The Senate Finance Committee Report accompanying PL 92-603, 
section 251(c), discusses the methodology for developing the initial 
salary equivalency guidelines and revisions. The Senate Finance

[[Page 5129]]

Committee Report stated that guideline amounts should be set at the 
75th percentile of the range of salaries paid in the area (by type of 
therapy) to full-time employee therapists. The Report specifically 
mentioned the use of salary data compiled by the BLS in determining the 
75th percentile level of salaries in an area to the extent feasible, 
timely, and accurate. Thus, the committee report sets forth a detailed 
plan describing the measure of reasonableness (prevailing salary), the 
parameters (75th percentile), and the preferred data source (Bureau of 
Labor Statistics) which does not specify that HCFA set rates for each 
setting nor that we use data for each provider type. Until the 
publication of the proposed rule, we have always relied on the BLS 
hospital and nursing home wage data. Because there was some concern as 
to the timeliness of the 1989 and 1991 BLS hospital wage survey data 
which was the latest BLS survey data available, we felt that we could 
not use this data as our sole source for the salary equivalency 
guidelines. We decided to use the ``best estimate'' methodology 
combining a number of data sources.
    Comment: One commenter stated that lumping together data from 
different provider types to determine the reimbursement of all provider 
types does not meet the statutory and regulatory requirements.
    Response: We do not believe that the statute or regulations 
prohibit us from combining different provider type data for developing 
the salary equivalency guidelines. In fact, in 1983, where BLS had 
provided both hospital and nursing home wage data, we did combine the 
different types of provider type data. Again, the legislative history 
supports this approach. We believe that the word ``provider'' was used 
in the statute to include all types of entities that meet the 
definition of that term in the statute.
    Comment: One commenter stated that it would be appropriate to 
include salary data from rehabilitation agencies and other providers in 
developing salary equivalency guidelines, as these settings represent 
significant segments of the occupational market for therapy services. 
The commenter believes that the statutory language in stating, ``* * * 
with such provider or other organization'' refers to section 1861(p) of 
the Act where ``other organization'' includes rehabilitation agencies.
    Response: We did not receive nor did we have available this type of 
data. Moreover, as mentioned earlier, the Senate Committee on Finance 
Report endorsed the use of the BLS survey as the primary data source. 
Because the language in section 1861(p) of the Act regarding ``other 
organizations'' existed in the statute at the time the Report was 
written, we believe that the Report supports the use of the BLS 
provider data in establishing guidelines to be applied to these other 
organizations as well.

BILLING CODE 4120-01-P

[[Page 5130]]

IV. Schedules of Guidelines
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[[Page 5131]]

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[[Page 5132]]

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[[Page 5133]]



   Table III.--Rehabilitation Therapy Input Price Indexes for Forecasting the Increase in the Cost of Therapy   
                                             Services, CY 1991-2000                                             
----------------------------------------------------------------------------------------------------------------
                                                                              Speech                            
                                                  Physical   Occupational    language   Respiratory   Composite 
                 Calendar year                   therapist     therapist   pathologist   therapist    therapist 
                                                   index         index        index        index      index \1\ 
----------------------------------------------------------------------------------------------------------------
                                                   Historical                                                   
----------------------------------------------------------------------------------------------------------------
1991..........................................          4.9           4.9          4.9          4.9          4.9
1992..........................................          4.2           4.2          4.2          4.1          4.2
1993..........................................          3.6           3.6          3.6          3.5          3.6
1994..........................................          3.1           3.1          3.1          3.1          3.1
1995..........................................          2.6           2.6          2.6          2.6          2.6
1996..........................................          2.7           2.8          2.8          2.8          2.8
----------------------------------------------------------------------------------------------------------------
                                                  Forecast \2\                                                  
----------------------------------------------------------------------------------------------------------------
1997..........................................          2.4           2.4          2.4          2.4          2.4
1998..........................................          2.9           2.9          2.9          2.9          2.9
1999..........................................          3.2           3.2          3.2          3.2          3.2
2000..........................................          3.4           3.4          3.4          3.4          3.4
----------------------------------------------------------------------------------------------------------------
Released By: HCFA, OACT, National Health Statistics Group.                                                      
\1\ The estimated outlays for services rendered in 1998 were used to develop the outlays-weighted composite     
  rehabilitation therapy input price index.                                                                     
\2\ Source: Standard & Poor's DRI HHC 3rd QTR 1997; @USSIM/Trend25yr0897@CISSIM/CONTROL973.                     

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[[Page 5134]]

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[[Page 5135]]

V. Provisions of the Final Rule

    In this final rule, we are revising the methodology for 
establishing the schedules for the maximum payment for physical therapy 
and respiratory therapy services. We are revising the determination of 
reasonable cost for physical therapy and respiratory therapy furnished 
under arrangements by an outside contractor by rebasing the guideline 
amounts.
    We are also establishing salary equivalency guidelines for speech 
language pathology and occupational therapy services furnished under 
arrangements by an outside contractor using the same methodology as we 
are using for determining reasonable cost for physical therapy and 
respiratory therapy services.
    In addition, we are: (1) Eliminating the exception to the salary 
equivalency guidelines for a provider that entered into a written 
binding contract with a therapist or contracting organization prior to 
the date the initial guidelines are published; (2) applying the salary 
equivalency guidelines in situations where compensation, at least in 
part, to a therapist employed by the provider is based on a fee-for-
service or on a percentage of income (or commission).

VI. Summary of Changes in Methodology in the Final Rule

----------------------------------------------------------------------------------------------------------------
        Item description                    Proposed rule                             Final rule                
----------------------------------------------------------------------------------------------------------------
Estimate of the 75th percentile.  10 percent of the mean wage used   12 percent of the mean wage used to        
                                   to estimate the 75th percentile.   estimate the 75th percentile. This        
                                                                      accounts for the underlying variability   
                                                                      that may not have been quantified in      
                                                                      preliminary notice.                       
Market Basket shares for wages    The wage share was developed       The wage share was recalculated to include 
 and fringes.                      based on total paid hours rather   only worked hours. The fringe benefits    
                                   than actual worked hours. The      cost share was allocated paid hours not   
                                   fringe benefit cost share          worked due to vacation leave, sick leave, 
                                   excluded paid hours not worked     etc.                                      
                                   due to vacation leave, sick                                                  
                                   leave, etc.                                                                  
Market Basket: Office wages and   Source: IRS Statistics of Income-- Source: IRS Statistics of Income--1994 cost
 benefits expense share of costs.  1991 cost share.                   share.                                    
Market Basket: Rental space       Source: Building and Owners'       Source: BOMA--1995.                        
 converted to hourly cost of       Management Association (BOMA)--                                              
 therapy.                          1991 aged to 1995 using CPI                                                  
                                   rental.                                                                      
 Geographic Adjustment Factor...  Pre-Reclassified urban portion of  Geographic Practice Cost Indexes (GPCI)    
                                   Hospital Wage Index.               used for physician fee schedule.          
----------------------------------------------------------------------------------------------------------------

VII. Regulatory Impact

A. Background

    We have examined the impacts of this final rule as required by 
Executive Order 12866, the Unfunded Mandate Reform Act, and the 
Regulatory Flexibility Act (RFA) (Pub. L. 96-354).
1. Executive Order 12866 and RFA
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, when regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects; distributive impacts; and equity). We have determined that 
this final rule is an economically significant rule under this 
Executive Order, as discussed in detail under section VII.B below. The 
RFA requires agencies to analyze options for regulatory relief for 
small businesses. For purposes of the RFA, States and individuals are 
not considered small entities. All therapists, however, are treated as 
small entities.
    This final rule (1) revises the methodology for determining salary 
equivalency guidelines for physical therapy and respiratory therapy 
services furnished under arrangement; (2) applies the revised 
methodology for payment of physical therapy and respiratory therapy 
services to speech language pathology and occupational therapy 
services; and (3) establishes revised schedules of salary equivalency 
guidelines for physical and respiratory therapy services and initial 
schedules of salary equivalency guidelines for speech language 
pathology and occupational therapy services. These final guidelines 
will be used by Medicare fiscal intermediaries to determine the maximum 
allowable payment for therapy services furnished under arrangements.
    As we indicated earlier in the preamble of this final rule, the 
salary equivalency guidelines for physical and respiratory therapy 
services furnished under arrangements were last revised in 1983, with 
provisions for yearly adjustments for inflation. In addition, although 
the law gives us explicit authority to establish salary equivalency 
guidelines for speech language pathology and occupational therapy 
services furnished under arrangements, we have never previously done 
so. We have, instead, paid for these services using reasonable cost 
methodologies. We now believe that, if we continue to use these methods 
to pay for speech language pathology and occupational therapy services 
furnished under arrangements, we will be paying for costs that are in 
excess of what Congress intended under section 1861(v)(5) of the Act.
    We estimate that a large number of therapists, especially suppliers 
of rehabilitation therapy services, will be affected by these revised 
guidelines, and a substantial number of these entities may be required 
to make changes in their operations. However, we do not have sufficient 
available data to estimate how many of each type of entity will be 
affected. The analysis under section VII.B. below, in combination with 
the remainder of this preamble, is consistent with the standards for 
analysis set forth by the RFA and the Executive Order 12866.
2. Congressional Review
    Section 804(2) of Title 5, United States Code (as added by section 
251 of Public Law 104-121), specifies that a ``major rule'' is any rule 
that the Office of Management and Budget finds is likely to result in--
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers, 
individual industries, Federal, State, or local government agencies, or 
geographic regions; or
     Significant adverse effects on competition, employment, 
investment, productivity, innovation, or on the ability of United 
States-based enterprises to compete with foreign-

[[Page 5136]]

based enterprises in domestic and export markets.
    We estimate that the impact of this final rule will be an overall 
savings from fiscal years 1998 to 2000 of $260 million. Therefore, this 
rule is a major rule as defined in Title 5, United States Code, section 
804(2).
    Because this final rule is considered a major rule, and is required 
by law, this final rule is subject to congressional review. Therefore, 
this final rule is being forwarded to Congress for a 60-day review 
period.
3. Unfunded Mandate
    The Unfunded Mandate Reform Act of 1995 also requires (in section 
202) that agencies prepare an assessment of anticipated costs and 
benefits for any rule that may result in an annual expenditure by 
State, local, or tribal governments, in the aggregate, or by both the 
private sector, of $100 million. The final rule has no consequential 
effect on State, local, or tribal governments. We believe the private 
sector costs of this rule fall below the threshold, as well.
4. Rural Hospital Impact
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any final rule that may have a significant impact 
on the operations of a substantial number of small rural hospitals. 
Such an analysis must conform to the provisions of section 604 of the 
RFA. For purposes of section 1102(b) of the Act, we define a small 
rural hospital as a hospital that is located outside a Metropolitan 
Statistical Area and has fewer that 50 beds. We are not preparing a 
rural hospital impact statement because we have determined, and we 
certify, that this final rule will not have a significant economic 
impact on the operations of a substantial number of small rural 
hospitals.

B. Anticipated Effects

1. Effects on the Medicare Trust Funds
    The final guidelines are based upon a provider's reasonable cost 
for an employee therapist furnishing therapy services. This cost 
includes the prevailing salary levels for therapists, prevailing market 
area fringe benefits, as well as a share of the other expenses that 
could be attributed to an employee therapist. The estimated savings to 
the Medicare Trust Funds result from the differences in the final 
guidelines relative to current rates of payment after behavioral 
offsets for increased add-ons, volume, intensity, mix of services, and 
other revenue enhancement behaviors have occurred.
    We developed an estimate on the effect of the revised guidelines on 
the Medicare Trust Funds using all available data. We had limited data 
sources with which to develop hourly salary rates and other expense 
factors as well as to develop a projection of the effect of the revised 
guidelines on the Medicare Trust Funds for revised versus existing 
levels. We are limited because the Medicare cost reports and claims 
data do not furnish us with data on hourly rates paid to therapists and 
other relevant expense and net revenue data. Therefore, we based the 
hourly salary rates and the effect of the revised guidelines on the 
Medicare Trust Funds on the best data available to us from HCFA sources 
and the therapy industry. The hourly salary rates were based on a blend 
of hospital and SNF survey data sources. The impact analysis was based 
on billing data from HCFA's Decision Support Access Facility (DSAF) 
files and SNF cost report data from the Hospital Cost Reporting 
Information System file as well as industry sources.
    Based upon various data sources for 1993, 1994, and 1995, we formed 
a baseline in order to project the volume of services in future years 
for each of the four therapy types. For each therapy type, we then 
found the difference between the current rate and the revised rate, and 
multiplied that difference by the projected volume in order to estimate 
the savings or additional outlays that this proposed rule would have.
    When trend factors from the DRI/McGraw Hill third quarter 1997 
forecast of the HCFA rehabilitation therapist input price index are 
used, we estimate the revised guidelines for April 1998 will increase 
the current national or aggregate guidelines per hour for physical 
therapy by about 35 percent and the national or aggregate guidelines 
for respiratory therapy by about 10 percent. At the same time, the 
guidelines for occupational therapy and speech language pathology will 
decrease estimated current aggregate rates by about 40 percent and 
about 25 percent, respectively.
    Our projected savings per year are based on the difference between 
current and estimated total costs after a standard behavioral 
adjustment is applied for lower proposed prices relative to current 
payments under current payment rules.
    We followed the Office of the Actuary (OACT) standard practice of 
allowing an offset of 35 to 50 percent for behavioral changes when we 
estimated the savings resulting from lowered prices. In recent years, 
suppliers of therapy services have bundled physical therapy, 
occupational therapy, and speech language pathology (but not 
respiratory therapy) when they have contracted to furnish therapy 
services to SNFs. The 35 percent behavioral offset allows for changes 
in behavior that generate increased revenue to the suppliers at the 
lower average price for the bundle of services. The behavioral offset 
was not applied to respiratory therapy services because revised prices 
are higher than current regulation prices and the respiratory therapy 
industry contracts separately with the SNF industry. We chose the lower 
end of the range because services are provided in the facility based on 
time in facility, not fee-for-service, thus there are substantially 
fewer opportunities for revenue enhancing behavior. Suppliers are 
estimated to compensate for about one-third of the reduction in prices 
by a combination of increased add-ons, volume, intensity, change in 
mix, and a shift in the site of service or a change in options for 
reimbursement. Suppliers might shift from being suppliers where payment 
is controlled by salary equivalency guidelines to being providers where 
payment is on a reasonable cost basis not subject to guidelines (unless 
as providers they also contract for therapy services); or they may 
increase the volume of services in physical therapy where guideline 
amounts are higher; or they may use less experienced and, therefore, 
lower salaried therapists. Other revenue enhancement practices may 
emerge which cannot be fully anticipated. Using this offset, the 3 year 
impact of the guidelines for 1998 through 2000 for therapy services 
under arrangements is estimated to be a savings of $170 million for 
Medicare Part A and $90 million for Medicare Part B.
    Although we moved from using the hospital wage index in the 
proposed rule to the GPCI in the final rule, there was a negligible 
effect on the savings estimate in making this change. Because of the 
Balanced Budget Act of 1997 provisions, we revised our savings 
estimates from the proposed rule. These estimates are presented in the 
table below.
    Due to the Balanced Budget Act of 1997, these guidelines become 
obsolete as new payment methodologies are implemented for the various 
providers of services. By the end of fiscal year 2000, these guidelines 
will have no effect, as all providers will be subject to new payment 
methodologies. In other words, as a result of the statutory provisions 
in the Balanced Budget Act of 1997, the salary equivalency guidelines 
will no longer be in effect by the end of fiscal year 2000.

[[Page 5137]]



                  Salary Equivalency: Savings Estimates                 
------------------------------------------------------------------------
                                    Estimated savings after offset  (in 
                                             millions, rounded)         
       Federal fiscal year        --------------------------------------
                                      Part A       Part B       Total   
------------------------------------------------------------------------
1998.............................          $90          $50         $140
1999.............................           60           40          100
2000.............................           20            0           20
                                  --------------------------------------
    Totals.......................          170           90         260 
------------------------------------------------------------------------
The savings include coinsurance and are before the Part B premium       
  offset.                                                               
This applies the 35 percent offset to physical therapy, occupational    
  therapy, and speech language pathology only and no offset to          
  respiratory therapy.                                                  
Estimates are based on an effective date of April 1, 1998.              

2. Effects on Providers
    We expect that these salary equivalency guidelines will provide 
adequate payments for all classes of efficient providers. It is 
possible that certain inefficient therapy suppliers may be unwilling to 
contract with providers at the salary equivalency rates, expanding the 
market for more efficient therapy suppliers. We also understand that 
certain therapy suppliers were requiring providers to purchase a 
bundled package of physical therapy, occupational therapy, and speech 
language pathology services. By requiring this bundling of services, 
suppliers were able to make substantial profits because, even though 
there was an hourly payment limit on the physical therapy services, 
there were no guidelines for the speech-language pathology and 
occupational therapy services. Consequently, the suppliers marked up 
the speech-language pathology and occupational therapy services. The 
guidelines for speech-language pathology and occupational therapy 
services may eliminate suppliers profiting from excessively high prices 
for occupational therapy and speech language pathology. We expect that 
providers will continue to provide therapy services at the published 
rates. We expect that providers will be able to furnish the same array 
of beneficiary services they furnish under current guidelines amounts 
or payment on a reasonable cost basis.
3. Effects on Beneficiaries
    We believe that the impact of these guidelines on Medicare 
beneficiaries will be minimal. Beneficiaries may be slightly affected 
by the guidelines for physical therapy, speech language pathology, and 
occupational therapy services. With respect to physical therapy 
services, the Medicare Part B coinsurance amounts associated with these 
services that must be paid by beneficiaries (20 percent of the 
provider's charges to the beneficiary) may increase if providers 
increase charges for those services. The charges may increase because 
physical therapy hourly amounts recognized by Medicare fiscal 
intermediaries to determine the maximum allowable cost of those 
services will increase in this final rule over the previous schedules 
of guidelines. However, the Medicare program does not dictate a 
provider's charge structure. We do expect charges to be reasonably 
related to cost. Conversely, beneficiary coinsurance will be reduced 
for speech language pathology and occupational therapy services because 
Medicare payment rates for these services will be reduced by the 
establishment of guidelines in this final rule and the provider's 
charges to the beneficiary may also decrease. Because respiratory 
therapy provided in comprehensive outpatient rehabilitation facilities 
under arrangements is a Part B service, Medicare Part B coinsurance 
amounts related to those services that must be paid by beneficiaries 
may increase if providers increase charges for those services. This may 
also occur because respiratory therapy hourly amounts recognized by 
Medicare fiscal intermediaries to determine the maximum allowable cost 
of those services will increase in this final rule over the previous 
schedules of guidelines. We believe that the guideline amounts are 
adequate so that therapy suppliers should continue to contract with 
providers to furnish services to beneficiaries. Since we are now 
introducing new guideline amounts for occupational therapy and speech 
language pathology, if providers are passing along the therapy 
companies higher charges, then we would expect providers' charges may 
be lower for those services.
4. Effects on Therapists and Therapist Companies
    These salary equivalency guidelines will have varying impacts on 
the four categories of therapists. Speech language pathologists and 
occupational therapists working for contract suppliers should be 
minimally affected, since the suppliers typically bundle all therapy 
services when negotiating rates (including overhead) with providers. 
Physical therapists acting as suppliers or employed by supplying 
therapy companies may be affected positively because physical therapy 
hourly rates recognized by Medicare fiscal intermediaries to determine 
the maximum allowable cost of those services will increase in this 
final rule and, therefore, providers may contract with physical 
therapists at a higher amount. Also, providers may contract with 
therapy companies at a higher amount and they, in turn, may pay the 
therapists higher salaries. Similarly, respiratory therapists acting as 
therapy suppliers or employed by therapy suppliers may be positively 
affected because respiratory therapy hourly amounts recognized by 
Medicare fiscal intermediaries to determine the maximum allowable cost 
of those services will increase in this final rule and, therefore, 
providers may contract with respiratory therapy suppliers at a higher 
amount. Also providers may contract with therapy companies at a higher 
amount and they, in turn, may pay the therapists higher salaries.
    We recognize that a large percentage of providers have contracts 
with therapy companies that may dominate a market area. We understand 
that because the contracted physical therapy services have been limited 
by the guidelines, some of these therapy companies have been requiring 
providers to sign up for three therapy services, that is, physical, 
occupational and speech language pathology services, but were 
overcharging providers for speech language pathology and occupational 
therapy services. These therapy companies may incorrectly claim that 
the introduction of these guidelines for contracted speech language 
pathology and occupational therapy services may

[[Page 5138]]

put them out of business. Our rates are designed to reflect adequate 
rates for all classes of efficient suppliers. Even though we do not pay 
contracted therapy companies directly, unless they also act as 
providers, and (with the exception of independent physical therapists 
and occupational therapists) contracted therapy services are one of the 
few Medicare services that have not been targeted in earlier deficit 
reduction laws.
    Other changes in behavior might include a change in the type of 
therapy offered (perhaps substituting physical therapy for occupational 
therapy and increasing the volume of services furnished in physical 
therapy, which has a higher guideline amount), use by suppliers of less 
experienced (and therefore lower salaried) therapists, a shift by 
suppliers from furnishing therapy services under arrangements to 
furnishing therapy services under agreement, in which the therapy 
company bills Medicare directly as a provider under Part B. In the 
latter case, the providers are paid under Part B on a reasonable cost 
basis and are not subject to salary equivalency guidelines unless they 
contract for therapy services.
    Inefficiently run rehabilitation therapy companies may cut expenses 
and become more efficient, as is happening in much of the rest of the 
economy. More efficient companies may expand or enter the market, 
picking up the therapy services volume which less efficient suppliers 
may leave unserved. Therapists' productivity could increase. Overhead 
is a likely candidate for expense reduction. In addition, profit 
margins may be reduced, but still be at or above competitive rates for 
efficient firms. Individual therapy suppliers may already have lower 
overhead than corporate suppliers. Multi-therapy companies may adjust 
their service mix away from therapy types for which they are 
inefficient producers and expand the therapy types for which they are 
efficient producers.
    Due to these salary equivalency guidelines, some therapists who 
work for inefficient rehabilitation therapy suppliers may have 
compensation levels above competitive rates and may find that their 
yearly salary and fringe benefit increases lag those of therapists 
employed in other more competitive settings of the local therapist 
labor market. A deceleration in wage increases for workers with 
excessively high compensation levels will continue until wages in 
various settings, after compensating non-wage differences, are roughly 
comparable for each therapy type. Those therapists whose employers 
curtail furnishing services under arrangements with providers may 
either furnish therapy for those same employers as employees of 
rehabilitation agencies that will bill Medicare directly as providers, 
change employers to those efficiently run companies that expand their 
contracted therapy services, or become self-employed and contract 
directly with providers to furnish therapy services under arrangements. 
Therapists who are employed by efficient rehabilitation therapy 
suppliers where salaries are in line with those of other therapists 
(after adjustments for compensating non-wage differentials) in the 
local labor market should notice no substantial effect. The expected 
effects described above result in a better functioning, more efficient 
health care system.

C. Alternatives Considered

    Section 1861(v)(5) of the Act requires HCFA to determine the 
reasonable cost of services furnished to Medicare beneficiaries ``under 
an arrangement'' with a provider of services by therapists or other 
health-related personnel. Other alternatives to implementing the salary 
equivalency program are to continue paying for therapy services, 
furnished under arrangements, using current reasonable cost 
methodologies or to use alternative data sources to establish the 
salary equivalency guidelines in this final rule.
    We rejected the first alternative because, if we continue to pay 
for speech language pathology and occupational therapy services 
furnished under arrangements using reasonable cost methodologies, we 
will be paying for costs that are in excess of what Congress intended 
under section 1861(v)(5) of the Act, to the detriment of the Medicare 
Trust Funds. In the case of physical therapy and respiratory therapy 
services, current salary equivalency guidelines may reflect less than a 
provider's reasonable costs in furnishing these services.
    As we indicated in our discussion of data sources we used to 
establish the guidelines (see section III.B. of this final rule), we 
were unable to find a sole or primary source of data on hourly rates 
paid to therapists by providers that is timely and statistically valid. 
Because the BLS hospital wage industry surveys were not timely, we were 
unable to use that data as our sole source as in prior guideline 
notices. The rehabilitation therapy industry submitted survey data to 
HCFA that they believe support higher guideline amounts than are in the 
final rule. Although the survey data were submitted to HCFA in order to 
determine its appropriateness for use in determining new guideline 
amounts as provided in Sec. 413.106(b)(6), it did not meet the 
requirements in the final rule. Nevertheless, we evaluated the data. As 
indicated in Section II.A. of this preamble, we decided to blend select 
hospital and SNF data sources so that the wages and salary parts of 
this final rule have been determined using a ``best estimate'' 
approach, giving equal weight, but not preferential status to each data 
source. We decided on the ``best estimate'' approach because we were 
unable to find a sole or primary source that met our criteria of 
reliability, validity, and representativeness.

D. Conclusion

    Federal Medicare expenditures have grown at an extraordinary rate 
in recent years. A study commissioned by the National Association for 
Support of Long-Term Care indicates that 75 percent of all therapy 
services under arrangements were furnished in SNFs. We also project 
that the 65 and over population will nearly double by the year 2025. We 
believe that the salary equivalency guidelines in this final rule are 
in the public interest since they balance the needs of Medicare program 
beneficiaries, taxpayers, providers of therapy services, and suppliers 
who furnish therapy services under arrangements.
    In accordance with the provisions of Executive Order l2866, this 
final rule was reviewed by the Office of Management and Budget.

VIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment before a collection of information requirement is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. In order to fairly evaluate whether an information collection 
should be approved by OMB, section 3506(c)(2)(A) of the PRA requires 
that we solicit comment on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
     The accuracy of the agency's estimate of the information 
collection burden;
     The quality, utility, and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    However, the information collection requirements referenced in this 
rule as

[[Page 5139]]

outlined in Secs. 413.106(e) and 413.106(f) are currently approved 
under the PRA. In particular, these requirements are currently captured 
in each of HCFA's provider cost report information collections.
    Section 413.106(e) requires a provider of therapy services to 
supply its intermediary with documentation that supports additional 
costs incurred for services furnished by an outside supplier.
    Section 413.106(f) requires that before an exception to the 
application of the guidelines may be granted, the provider must submit 
appropriate evidence, in accordance with instructions issued in section 
1414 of the Provider Reimbursement Manual, to its intermediary to 
substantiate its claim.
    Organizations and individuals desiring to submit comments on any of 
these information collection and recordkeeping requirements, should 
direct them directly to the following:

Health Care Financing Administration, Office of Information Services, 
Information Technology Investment Management Group, Division of HCFA 
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard, 
Baltimore, MD 21244-1850. ATTN: HCFA-1808-F
    and
Office of Management and Budget, Office of Information and Regulatory 
Affairs, Room 10235, New Executive Office Building, Washington, DC 
20503, ATTN.: Allison Herron Eydt, HCFA Desk Officer

List of Subjects in 42 CFR Part 413

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

    42 CFR part 413 is amended as set forth below:

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

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

    Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social 
Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

    2. Section 413.106(c)(5) is redesignated as (c)(6) and republished, 
a new paragraph (c)(5) is added, paragraph (f)(1) is removed and 
paragraphs (f)(2), (3), and (4) are redesignated as (f)(1), (2), and 
(3) and republished to read as follows:


Sec. 413.106  Reasonable cost of physical and other therapy services 
furnished under arrangements.

* * * * *
    (c) Application. * * * 
    (5) If therapy services are performed in situations where 
compensation to a therapist employed by the provider is based, at least 
in part, on a fee-for-service or on a percentage of income (or 
commission), the guidelines will apply. The entire compensation will be 
subject to the guidelines in cases where the nature of the arrangements 
is most like an under ``arrangement'' situation, although technically 
the provider may treat the therapists as employees. The intent of this 
section is to prevent an employment relationship from being used to 
circumvent the guidelines.
    (6) These provisions are applicable to individual therapy services 
or disciplines by means of separate guidelines by geographical area and 
apply to costs incurred after issuance of the guidelines but no earlier 
than the beginning of the provider's cost reporting period described in 
paragraph (a) of this section. Until a guideline is issued for a 
specific therapy or discipline, costs are evaluated so that such costs 
do not exceed what a prudent and cost-conscious buyer would pay for the 
given service.
* * * * *
    (f) Exceptions: The following exceptions may be granted but only 
upon the provider's demonstration that the conditions indicated are 
present:
    (1) Exception because of unique circumstances or special labor 
market conditions. An exception may be granted under this section by 
the intermediary if a provider demonstrates that the costs for therapy 
services established by the guideline amounts are inappropriate to a 
particular provider because of some unique circumstances or special 
labor market conditions in the area. The provider's request for an 
exception, together with substantiating documentation, must be 
submitted to the intermediary each year, no later than 150 days after 
the close of the provider's cost reporting period. If the circumstances 
giving rise to the exception remain unchanged from a prior cost 
reporting period, however, the provider need only submit evidence of 
the intermediary 150 days after the close of its cost reporting period 
to establish that fact.
    (2) Exception for services furnished by risk-basis HMO providers. 
For special rules concerning services furnished to an HMO's enrollees 
who are Medicare beneficiaries by a provider owned or operated by a 
risk-basis HMO (see Sec. 417.201(b) of this chapter) or related to a 
risk-basis HMO by common ownership or control (see Sec. 417.205(c) of 
this chapter).
    (3) Exception for inpatient hospital services. Effective with cost 
reporting periods beginning on or after October 1, 1983, the costs of 
therapy services furnished under arrangements to a hospital inpatient 
are excepted from the guidelines issued under this section if such 
costs are subject to the provisions of Sec. 413.40 or part 412 of this 
chapter. The intermediary will grant the exception without request from 
the provider.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773 
Medicare--Hospital Insurance Program and Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: January 16, 1998.
Nancy-Ann Min Deparle,
Administrator, Health Care Financing Administration.

    Dated: January 22, 1998.
Donna E. Shalala,
Secretary.
[FR Doc. 98-2154 Filed 1-29-98; 8:45 am]
BILLING CODE 4120-01-P