[Federal Register Volume 63, Number 91 (Tuesday, May 12, 1998)]
[Rules and Regulations]
[Pages 26252-26316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12208]



[[Page 26251]]

_______________________________________________________________________

Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



_______________________________________________________________________



42 CFR Parts 409, et al.



Medicare Program: Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities; Final Rule

  Federal Register / Vol. 63, No. 91 / Tuesday, May 12, 1998 / Rules 
and Regulations  

[[Page 26252]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 409, 410, 411, 413, 424, 483, and 489

[HCFA-1913-IFC]
RIN 0938-AI47


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

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

ACTION: Interim final rule with comment period.

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

SUMMARY: This interim final rule implements provisions in section 4432 
of the Balanced Budget Act of 1997 related to Medicare payment for 
skilled nursing facility services. These include the implementation of 
a Medicare prospective payment system for skilled nursing facilities, 
consolidated billing, and a number of related changes. The prospective 
payment system described in this rule replaces the retrospective 
reasonable cost-based system currently utilized by Medicare for payment 
of skilled nursing facility services under Part A of the program.

DATES: These regulations are effective July 1, 1998.
    Comments will be considered if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on July 13, 1998.

ADDRESSES: Mail an original and 3 copies of written comments to the 
following address:

Health Care Financing Administration, Department of Health and Human 
Services, Attention: HCFA-1913-IFC, P.O. Box 26688, Baltimore, MD 
21207-0488

    If you prefer, you may deliver an original and 3 copies of your 
written comments to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, D.C. 20201,
    or
Room C5-09-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1913-IFC. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
D.C., on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: (202) 690-7890).
    Copies: To order copies of the Federal Register containing this 
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    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
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asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is http://www.access.gpo.gov/su__docs/, by using local WAIS client 
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password required). Dial-in users should use communications software 
and modem to call (202) 512-1661; type swais, then login as guest (no 
password required).

FOR FURTHER INFORMATION CONTACT:

Laurence Wilson, (410) 786-4603 (for general information). John Davis, 
(410) 786-0008 (for information related to the Federal rates).
Dana Burley, (410) 786-4547 (for information related to the case-mix 
classification methodology).
Steve Raitzyk, (410) 786-4599 (for information related to the facility-
specific transition payment rates).
Bill Ullman, (410) 786-5667 (for information related to consolidated 
billing and related provisions).

SUPPLEMENTARY INFORMATION: To assist readers in referencing sections 
contained in this document, we are providing the following table of 
contents.

Table of Contents

I. Background

A. Current System for Payment of Skilled Nursing Facility Services 
Under Part A of the Medicare Program
B. Requirement of the Balanced Budget Act of 1997 for a Prospective 
Payment System for Skilled Nursing Facilities
C. Summary of the Development of the Medicare Prospective Payment 
System for Skilled Nursing Facilities
D. Skilled Nursing Facility Prospective Payment System--General 
Overview
    1. Payment Provisions--Federal Rate
    2. Payment Provisions--Transition Period
    3. Payment Provisions--Facility-Specific Rate
    4. Implementation of the Prospective Payment System (PPS)
E. Consolidated Billing for Skilled Nursing Facilities

II. Prospective Payment System for Skilled Nursing Facilities

A. Federal Payment Rates
    1. Cost and Services Covered by the Federal Rates
    2. Data Sources Utilized for the Development of the Federal 
Rates
    a. Cost Report Data
    b. Estimate of Part B Payments
    c. Hospital Wage Index
    d. Case-Mix Indices
    e. MEDPAR Case-Mix Analog
    (1) Rehabilitation Category
    (2) Non-Rehabilitation Categories
    (3) Case-Mix Using the Analog
    f. Skilled Nursing Facility Market Basket Index
    3. Methodology Used for the Calculation of the Federal Rates
    a. Per Diem Costs
    b. Updating the Data
    c. Standardization of Cost Data
    d. Computation of National Standardized Payment Rates
B. Design and Methodology for Case-Mix Adjustment of Federal Rates
    1. Background on the Resource Utilization Groups (RUGs) Patient 
Classification System
    2. The RUG-III Classification System
    3. Use of RUG-III ``Grouper'' Software
    4. Determining the Case-Mix Indices
    5. Application of the RUG-III System
    6. Use of the Resident Assessment Instrument--Minimum Data Set 
(MDS 2.0)
    7. Required Schedule for Completing the MDS
    8. The Relationship Between Payment and the MDS
    9. Assessments and the Transition to the Prospective Payment 
System
    a. Medicare Beneficiaries Receiving Part A Benefits Admitted 
Within the Past 30 Days
    b. Medicare Beneficiaries Receiving Part A Benefits Admitted 
Over 30 Days Prior
    c. Medicare Part A Beneficiaries With Less Than 14 Days of 
Medicare Eligibility Remaining
    10. Late Assessments
    11. The Default Rate

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    12. Case-Mix Adjusted Federal Payment Rates
C. Wage Index Adjustment to Federal Rates
D. Updates to the Federal Rates
E. Relationship of RUG-III Classification System to Existing Skilled 
Nursing Facility Level of Care Criteria

III. Three-Year Transition Period

A. Determination of Facility-Specific Per Diem Rates
    1. Part A Cost Determination
    a. Freestanding Skilled Nursing Facilities
    (1) Skilled Nursing Facilities Without an Exception for Medical 
and Paramedical Education (Sec. 413.30(f)(4)) or a New Provider 
Exemption in the Base Year
    (2) Skilled Nursing Facilities With an Exception for Medical and 
Paramedical Education in the Base Year
    (3) Skilled Nursing Facilities With New Provider Exemptions From 
the Cost Limits in the Base Year
    b. Hospital-Based Skilled Nursing Facilities
    (1) Skilled Nursing Facilities Without an Exception for Medical 
and Paramedical Education or a New Provider Exemption
    (2) Skilled Nursing Facilities With an Exception for Medical and 
Paramedical Education in the Base Year
    (3) Skilled Nursing Facilities With Exemptions From the Cost 
Limits in the Base Year
    c. Medicare Low Volume Skilled Nursing Facilities Electing 
Prospectively Determined Payment Rate (Fewer Than 1500 Medicare 
Days)
    (1) Providers Filing HCFA-2540-S-87
    (2) Providers Filing HCFA-2540 or HCFA-2552
    d. Providers Participating in the Multistate Nursing Home Case-
Mix and Quality Demonstration--Calculation of the Prospective 
Payment System Rate
    e. Base Period Cost Reports That Are Adjusted for Exception 
Amounts or Other Post Settlement Adjustments
B. Determination of the Part B Estimate
C. Calculation of the Facility-Specific Per Diem Rate
D. Computation of the Skilled Nursing Facility Prospective Payment 
System Rate During the Transition

IV. The Skilled Nursing Facility Market Basket Index

A. Rebasing and Revising of the Skilled Nursing Facility Market 
Basket
    1. Background
    2. Rebasing and Revising of the Skilled Nursing Facility Market 
Basket
B. Use of the Skilled Nursing Facility Market Basket Percentage
    1. Facility-Specific Rate Update Factor
    a. Short Period in Base Year
    b. Short Period in Initial Period
    c. Short Period Between Base Year and Initial Period
    2. Federal Rate Update Factor

V. Consolidated Billing

A. Background of the Skilled Nursing Facility Consolidated Billing 
Provision
B. Skilled Nursing Facility Consolidated Billing Legislation
    1. Specific Provisions of the Legislation
    2. Types of Services That Are Subject to the Provision
    3. Facilities That Are Subject to the Provision
    4. Skilled Nursing Facility ``Resident'' Status for Purposes of 
This Provision
    5. Effects of This Provision
C. Effective Date for Consolidated Billing

VI. Changes in the Regulations

VII. Response to Comments

VIII. Waiver of Proposed Rulemaking

IX. Regulatory Impact Statement

A. Background
B. Impact of This Interim Final Rule
    1. Budgetary Impact
    2. Impact on Providers and Suppliers
C. Rural Hospital Impact Statement

X. Collection of Information Requirements

Regulations Text

Appendix A--Technical Features of the 1992 Skilled Nursing Facility 
Total Cost Market Basket Index

I. Synopsis of Structural Changes Adopted in the Revised and Rebased 
1992 Skilled Nursing Facility Total Cost Market Basket
II. Methodology for Developing the Cost Category Weights
III. Price Proxies Used To Measure Cost Category Growth

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

ADLs  Activities of daily living
AHEs  Average Hourly Earnings
BBA  1997 Balanced Budget Act of 1997
BEA  [U.S.] Bureau of Economic Analysis
BLS  [U.S.] Bureau of Labor Statistics
CAH  Critical access hospital
CFR  Code of Federal Regulations
CPI  Consumer Price Index
CPI-U  Consumer Price Index for All Urban Consumers
CPT  [Physicians'] Current Procedural Terminology
ECI  Employment Cost Index
FI  Fiscal intermediary
HCFA  Health Care Financing Administration
HCPCS  HCFA Common Procedure Coding System
ICD-9-CM  International Classification of Diseases, Ninth Edition, 
Clinical Modification
MDS  Minimum Data Set
MEDPAR  Medicare provider analysis and review file
MSA  Metropolitan Statistical Area
NECMA  New England County Metropolitan Area
PCE  Personal Care Expenditures
PPI  Producer Price Index
PPS  Prospective payment system
RAI  Resident Assessment Instrument
RAPs  Resident Assessment Protocol Guidelines
RUG  Resource Utilization Group
SNF  Skilled nursing facility
STM  Staff time measure

I. Background

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

    Under the present payment system, Medicare skilled nursing facility 
(SNF) services are paid according to a retrospective, reasonable cost-
based system. Under Medicare payment principles set forth in section 
1861 of the Social Security Act (the Act) and part 413 of the Code of 
Federal Regulations (CFR), SNFs receive payment for three major 
categories of costs: routine costs, ancillary costs, and capital-
related costs.
    In general, routine costs are the costs of those services included 
by the provider in a daily service charge. Routine service costs 
include regular room, dietary, nursing services, minor medical 
supplies, medical social services, psychiatric social services, and the 
use of certain facilities and equipment for which a separate charge is 
not made. Ancillary costs are costs for specialized services, such as 
therapy, drugs, and laboratory services, that are directly identifiable 
to individual patients. Capital-related costs include the costs of 
land, building, equipment, and the interest incurred in financing the 
acquisition of such items.
    Under Medicare rules, the reasonable costs of ancillary services 
and capital-related expenses are paid in full. Routine operating costs 
are also paid on a reasonable cost basis, subject to per diem limits. 
Sections 1861(v)(1) and 1888 of the Act authorize the Secretary to set 
limits on the allowable routine costs incurred by an SNF.
    In addition, section 1888(d) of the Act gives low Medicare volume 
SNFs the option of receiving a single prospectively determined payment 
rate for routine operating and capital-related costs in lieu of the 
normal reasonable cost reimbursement method. A SNF may elect this 
payment method only if it had fewer than 1,500 Medicare covered 
inpatient days in its immediately preceding cost reporting period. An 
SNF's prospective payment rate under section 1888(d) of the Act, 
excluding capital-related costs, cannot exceed its routine service cost 
limits. Under this payment method, ancillary costs are still a pass-
through cost.

B. Requirement of the Balanced Budget Act of 1997 for a Prospective 
Payment System for Skilled Nursing Facilities

    Section 4432(a) of the Balanced Budget Act of 1997 (BBA 1997) 
(Public Law 105-33), enacted on August 5, 1997, amended section 1888 of 
the Act by adding subsection (e). This

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subsection requires implementation of a Medicare SNF prospective 
payment system (PPS) for all SNFs for cost reporting periods beginning 
on or after July 1, 1998. Under the PPS, SNFs will be paid under a PPS 
applicable to all covered SNF services. These payment rates will 
encompass all costs of furnishing covered skilled nursing services 
(that is, routine, ancillary, and capital-related costs) other than 
costs associated with operating approved educational activities. 
Covered SNF services include posthospital SNF services for which 
benefits are provided under Part A (the hospital insurance program) and 
all items and services (other than services excluded by statute) for 
which, prior to July 1, 1998, payment may be made under Part B (the 
supplementary medical insurance program) and which are furnished to SNF 
residents during a Part A covered stay.
    Section 1888(e)(4) of the Act provides the basis for the 
establishment of the per diem Federal payment rates applied under the 
PPS. It sets forth the formula for establishing the rates as well as 
the data on which they are based. In addition, this section requires 
adjustments to such rates based on geographic variation and case-mix 
and prescribes the methodology for updating the rates in future years.
    Section 1888(e)(2) sets forth a requirement applicable to most 
providers for a transition phase covering the first three cost 
reporting periods under the PPS. During this transition phase, SNFs 
will receive a payment rate comprised of a blend between the Federal 
rate and a facility-specific rate based on historical costs. Section 
1888(e)(3) prescribes the methodology for computing the facility-
specific rates.
    In addition to the payment methodology, section 4432(a) of the BBA 
1997 added several other provisions to the Act related to the 
implementation and administration of the PPS.
    Section 1888(e)(8) prohibits judicial or administrative review on 
matters relating to the establishment of the Federal rates. This 
includes the methodology used in the computation of the Federal rates, 
the case-mix methodology, and the development and application of the 
wage index. This limitation on judicial and administrative review also 
extends to the establishment of the facility-specific rates, except the 
determinations of reasonable cost in the fiscal year 1995 cost 
reporting period used as the basis for these rates.
    In addition, section 1888(e)(7) requires the application of the PPS 
to extended care services furnished in hospital swing bed units. 
However, this requirement is to be implemented no earlier than cost 
reporting periods beginning on July 1, 1999 and no later than for cost 
reporting periods beginning in the 12-month period starting on July 1, 
2001. Accordingly, we are not revising the payment regulations for 
swing-bed hospitals (42 CFR 413.114) at this time, but will do so at a 
later date.
    Finally, section 4432(c) of the BBA 1997 requires the Secretary to 
establish a medical review process to examine the impact of the PPS, 
consolidated billing, and other related changes set forth in this rule 
on the quality of SNF services provided to Medicare beneficiaries. This 
medical review process will place a particular emphasis on the quality 
of non-routine covered ancillary and physician services.

C. Summary of the Development of the Medicare Prospective Payment 
System for Skilled Nursing Facilities

    The prospective payment system described in the following sections 
is the culmination of substantial research efforts beginning as early 
as the 1970s, focusing on the areas of nursing home payment and 
quality. In addition, it is based on a foundation of knowledge and work 
by a number of States that have developed and implemented similar 
payment methodologies for their Medicaid nursing home payment systems. 
Over the last 20 years, approximately 25 nursing home case-mix payment 
systems have been implemented by such States as New York, Ohio, West 
Virginia, and Texas.
    Building on earlier research, the Health Care Financing 
Administration (HCFA) funded the development of the Multistate Nursing 
Home Case-Mix and Quality Demonstration in 1989. The purpose of this 
project was to design, implement, and evaluate a Medicare nursing home 
prospective payment and quality monitoring system across several 
States. These States were Kansas, Maine, Mississippi, New York, South 
Dakota, and Texas. The 3-year demonstration was implemented in 1995.
    The current focus in the development of State and Federal payment 
systems for nursing home care rests on explicit recognition of the 
differences among residents, particularly in the utilization of 
resources. Recognition of these differences ensures that payment levels 
are adequate to support quality and access to care, especially for more 
costly resource intensive patients. In a case-mix adjusted payment 
system, the amount of payment given to the nursing home for care of a 
resident is tied to the intensity of resource use (for example, hours 
of nursing or therapy time needed per day) and/or other relevant 
factors (for example, requirement for a ventilator). The focus of the 
demonstration was on the development and testing of such a case-mix 
PPS.
    A case-mix system measures the intensity of care and services 
required for each resident and then translates it into a payment level. 
As discussed above, a number of States do have case-mix prospective 
payment systems for their Medicaid nursing home benefits. However, most 
of these payment systems were not readily transferrable to Medicare due 
to the relative differences in the resident populations served by each 
program. While naturally there is overlap, Medicare generally serves a 
more postacute resident population while Medicaid generally serves a 
longer-term custodial care population.
    As a result of these differences, the development phase of the 
Multistate demonstration was devoted to developing a case-mix 
classification system appropriate for the Medicare population. The 
demonstration, like the national PPS set forth in this rule, utilized 
information from the Minimum Data Set (MDS) resident assessment 
instrument to classify residents into resource utilization groups 
(RUGs), which account for the relative resource use of different 
patient types. This classification system and its relationship to the 
MDS and the PPS are described in detail elsewhere in this rule.

D. Skilled Nursing Facility Prospective Payment--General Overview

    As described above, the BBA 1997 requires implementation of a 
Medicare SNF PPS for cost reporting periods beginning on or after July 
1, 1998. Under the PPS, SNFs are no longer paid in accordance with the 
present reasonable cost-based system but rather through per diem 
prospective case-mix adjusted payment rates applicable to all covered 
SNF services. These payment rates cover all the costs of furnishing 
covered skilled nursing services (that is, routine, ancillary, and 
capital-related costs) other than costs associated with operating 
approved educational activities. Covered SNF services include 
posthospital SNF services for which benefits are provided under Part A 
and all items and services for which, prior to July 1, 1998, payment 
had been made under Part B (other than physician and certain other 
services specifically excluded under the BBA 1997) but furnished to SNF 
residents during a Part A covered stay.

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1. Payment Provisions--Federal Rate
    The PPS utilizes per diem Federal payment rates based on mean SNF 
costs in a base year updated for inflation to the first effective 
period of the system. We develop the Federal payment rates using 
allowable costs from hospital-based and freestanding SNF cost reports 
for reporting periods beginning in fiscal year 1995. The data used in 
developing the Federal rates also incorporate an estimate of the 
amounts payable under Part B for covered SNF services furnished during 
fiscal year 1995 to individuals who were residents of a facility and 
receiving Part A covered services. In developing the rates, we update 
costs to the first effective year of the PPS (15-month period beginning 
July 1, 1998) using a SNF market basket index, and standardize for 
facility differences in case-mix and for geographic variations in 
wages. Providers that received ``new provider'' exemptions from the 
routine cost limits are excluded from the data base used to compute the 
Federal payment rates. In addition, costs related to payments for 
exceptions to the routine cost limits are excluded from the data base 
used to compute the Federal payment rates. In accordance with the 
formula prescribed in the BBA 1997, we set the Federal rates at a level 
equal to a weighted mean of freestanding costs plus 50 percent of the 
difference between the freestanding mean and a weighted mean of all SNF 
costs (hospital-based and freestanding) combined. We compute and apply 
separately payment rates for facilities located in urban and rural 
areas.
    The Federal rate also incorporates adjustments to account for 
facility case-mix using a resident classification system that accounts 
for the relative resource utilization of different patient types. This 
classification system, Version III of the Resource Utilization Groups 
(RUGs-III), utilizes resident assessment data (from the Minimum Data 
Set or MDS) completed by SNFs to assign residents into one of 44 
groups. SNFs complete these assessments according to an assessment 
schedule specifically designed for Medicare payment (that is, on the 
5th, 14th, 30th, 60th, and 90th days after admission to the SNF). For 
Medicare billing purposes, there are revenue codes associated with each 
of the 44 RUG-III groups, and each assessment applies to specific days 
within a resident's SNF stay. SNFs that fail to perform assessments 
timely are paid a default payment for the days of a patient's care for 
which they are not in compliance with this schedule. In addition, we 
adjust the portion of the Federal rate attributable to wage-related 
costs by a wage index.
    For the initial period of the PPS, beginning on July 1, 1998 and 
ending on September 30, 1999, the payment rates are contained in this 
interim final rule. For each succeeding fiscal year, we will publish 
the rates in the Federal Register before August 1 of the year preceding 
the affected Federal fiscal year. For fiscal years 2000 through 2002, 
we will increase the rates by a factor equal to the SNF market basket 
index amount minus 1 percentage point. For subsequent fiscal years, we 
will increase the rates by the applicable SNF market basket index 
amount.
2. Payment Provisions--Transition Period
    Beginning with a provider's first cost reporting period beginning 
on or after July 1, 1998, there is a transition period covering three 
cost reporting periods. During this transition phase, SNFs receive a 
payment rate comprised of a blend between the Federal rate and a 
facility-specific rate based on each facility's fiscal year 1995 cost 
report. We exclude SNFs that received their first payment from Medicare 
on or after October 1, 1995, from the transition period, and we make 
payment according to the Federal rates only.
    For SNFs that qualify for the transition, the composition of the 
blended rate varies depending on the year of the transition. For the 
first cost reporting period beginning on or after July 1, 1998, we make 
payment based on 75 percent of the facility-specific rate and 25 
percent of the Federal rate. In the next cost reporting period, the 
rate consists of 50 percent of the facility-specific rate and 50 
percent of the Federal rate. In the following cost reporting period, 
the rate consists of 25 percent of the facility-specific rate and 75 
percent of the Federal rate. For all subsequent cost reporting periods, 
we base payment entirely on the Federal rate.
3. Payment Provisions--Facility-Specific Rate
    We compute the facility-specific payment rate utilized for the 
transition using the allowable costs of SNF services for cost reporting 
periods beginning in fiscal year 1995 (cost reporting periods beginning 
on or after October 1, 1994 and before October 1, 1995). Included in 
the facility-specific per diem rate is an estimate of the amount 
payable under Part B for covered SNF services furnished during fiscal 
year 1995 to individuals who were residents of the facility and 
receiving Part A covered services. In contrast to the Federal rates, 
the facility-specific rate includes amounts paid to SNFs for exceptions 
to the routine cost limits. In addition, we also take into account 
``new provider'' exemptions from the routine cost limits but only to 
the extent that routine costs do not exceed 150 percent of the routine 
cost limit.
    We update the facility-specific rate for each cost reporting period 
after fiscal year 1995 to the first cost reporting period beginning on 
or after July 1, 1998 (the initial period of the PPS) by a factor equal 
to the SNF market basket percentage increase minus 1 percentage point. 
For the fiscal years 1998 and 1999, we update this rate by a factor 
equal to the SNF market basket index amount minus 1 percentage point, 
and, for each subsequent year, we update it by the applicable SNF 
market basket index amount.
4. Implementation of the Prospective Payment System (PPS)
    As discussed above, the PPS is effective for cost reporting periods 
beginning on or after July 1, 1998. This is in contrast to the 
consolidated billing provision, which is effective for items and 
services furnished on or after July 1, 1998. Accordingly, we will 
require a number of SNFs to implement consolidated billing prior to 
migrating to the PPS.

E. Consolidated Billing for Skilled Nursing Facilities

    Section 4432(b) of the BBA 1997 sets forth a consolidated billing 
requirement applicable to all SNFs providing Medicare services. SNF 
Consolidated Billing is a comprehensive billing requirement (similar to 
the one that has been in effect for inpatient hospital services for 
well over a decade), under which the SNF itself is responsible for 
billing Medicare for virtually all of the services that its residents 
receive. As with hospital bundling, the SNF consolidated billing 
requirement does not apply to the services of physicians and certain 
other types of medical practitioners. In a related provision, section 
4432(b)(3) of the BBA 1997 requires the use of fee schedules and 
uniform coding specified by the Secretary for SNF Part B bills. These 
provisions are effective for services furnished on or after July 1, 
1998.

II. Prospective Payment System for Skilled Nursing Facilities

A. Federal Payment Rates

    This interim final rule with comment period sets forth a schedule 
of Federal prospective payment rates applicable to Medicare Part A SNF 
services for cost

[[Page 26256]]

reporting periods beginning on or after July 1, 1998. This schedule 
incorporates per diem Federal rates designed to provide payment for all 
the costs of services furnished to a Medicare resident of an SNF. This 
section describes the components of the Federal rates and the 
methodology and data used to compute them.
1. Cost and Services Covered by the Federal Rates
    The Federal rates apply to all costs (that is, routine, ancillary, 
and capital-related costs) of covered skilled nursing services other 
than costs associated with operating approved educational activities as 
defined in 42 CFR 413.85. Under section 1888(e)(2) of the Act, covered 
SNF services include posthospital SNF services for which benefits are 
provided under Part A (the hospital insurance program) and all items 
and services (other than services excluded by statute) for which, prior 
to July 1, 1998, payment may be made under Part B (the supplementary 
medical insurance program) and which are furnished to SNF residents 
during a Part A covered stay. (These excluded service categories are 
discussed in greater detail in section V.B.2., in the context of the 
SNF Consolidated Billing provision.)
2. Data Sources Utilized for the Development of the Federal Rates
    The methodology utilized by HCFA in developing the Federal rates 
combines a number of data sources. These sources include cost report 
data, claims data, case-mix indices, a wage index, and a market basket 
inflation index. This section describes each of these data sources 
while the following section describes the methodology that combines 
them to produce the Federal rates.
    a. Cost report data. In accordance with sections 1888(e)(3)(A)(i) 
and (e)(4) of the Act, the primary data source for developing the cost 
basis of the Federal rates was the cost reports for hospital-based and 
freestanding SNFs for reporting periods beginning in fiscal year 1995 
(that is, beginning on or after October 1, 1994 through September 30, 
1995). Only those cost reports for periods of at least 10 months but 
not more than 13 months were included in the data base. We excluded 
shorter and longer periods on the basis that such data may not be 
reflective of a normal cost reporting period and, therefore, may 
distort the rate computation.
    In accordance with section 1888(e)(4)(A) of the Act, providers that 
were exempted from the limits in the base year under Sec. 413.30(e)(2) 
were excluded from the data base to compute the Federal rates; in 
addition, allowable costs related to exceptions payments were excluded. 
Finally, costs related to approved educational activities were excluded 
from the data base.
    In calculating the Federal rates, we utilized fiscal year 1995 cost 
report data, including both settled and as-submitted cost reports. In 
accordance with section 1888(e)(4)(A) of the Act, adjustment factors 
were applied separately to routine and ancillary costs from as-
submitted cost reports to make the data reflect the average adjustments 
that would result from the cost report settlement process. Routine 
costs were adjusted downward by 1.31 percent, and ancillary costs were 
adjusted downward by 3.26 percent.
    These adjustment factors were developed through comparisons of cost 
data from as-submitted and settled cost reports for providers contained 
in the data base from 1995. The factors represent the percent change of 
cost elements used in the PPS rate setting methodology between 
submission and settlement of the cost reports. These factors were 
validated by examining the relationship between as-submitted and 
settled cost reports for SNF cost reports beginning in the three 
preceding Federal fiscal years (that is, 1992, 1993, and 1994) as well. 
This comparison showed an overall consistency in the relationship 
between as-submitted and settled cost reports for the SNF cost elements 
utilized in the PPS rate development methodology.
    b. Estimate of Part B payments. Section 1888(e)(4)(A)(ii) of the 
Act, as added by the BBA 1997, requires that in developing the Federal 
rates, the Secretary estimate the amounts that would be payable under 
Part B for covered SNF services furnished to SNF residents. 
Accordingly, it was necessary to examine the Part B allowable charges 
(including coinsurance) associated with the SNFs contained in the cost 
report data base. To estimate the Part B allowable charges, we matched 
100 percent of the Medicare Part B SNF claims associated with Part A 
covered SNF stays to the SNF cost reports described above. The matched 
Part B allowable charges were incorporated at a facility level by the 
appropriate cost report cost center (for example, laboratory services, 
medical supplies) with the cost report data.
    c. Hospital wage index. Section 1888(e)(4) requires that we both 
standardize the Federal rates and provide for appropriate adjustments 
to account for area wage differences ``using an appropriate wage index 
as determined by the Secretary.'' We cannot use a wage index based on 
SNF wage data because the industry-specific data necessary to compute a 
wage index for SNFs are not yet available. However, under section 106 
of the Social Security Act Amendments of 1994 (Public Law 103-432), 
HCFA was required to begin collecting data no later than October 31, 
1995, on employee compensation and paid hours of employment in SNFs for 
the purpose of constructing an SNF wage index adjustment. Until this 
data collection effort is completed and the data are analyzed, we 
believe that the hospital wage data provide the best available measure 
of comparable wages that would also be paid by SNFs. We believe that 
the use of the hospital wage data results in an appropriate adjustment 
to the labor portion of the costs based on an appropriate wage index as 
required under section 1888(e) of the Act.
    For the rates effective with this rule, we are using wage index 
values that are based on hospital wage data from cost reporting periods 
beginning in fiscal year 1994--the most recent hospital wage data in 
effect before the effective date of this rule (see Table 2.I). 
Accordingly, the wage index values used in this rule are based on the 
same wage data as used to compute the FY 1998 wage index values for the 
hospital PPS.
    d. Case-mix indices. As discussed in section I, section 1888(e)(4) 
of the Act requires us to make adjustments to the Federal rates to 
account for the relative resource use of different patient types (that 
is, case-mix). In addition, the law requires us to standardize the cost 
data used in developing the Federal rates for case-mix.
    The goal of a case-mix payment system is to measure the intensity 
of care and services required for each patient and translate it into an 
appropriate payment level. Accordingly, in making this adjustment, the 
Federal rates will incorporate a patient classification system based on 
intensity of resource use with corresponding payment weights.
    As discussed previously, the patient classification system utilized 
under this PPS is RUG-III. RUG-III, a 44-group patient classification 
system, provides the basis for the case-mix payment indices used both 
for standardization of the Federal rates and subsequently to establish 
the case-mix adjustments to the rates for patients with different 
service use. These indices reflect the weight or value of each of the 
44 RUG-III groups relative to all the groups. A full discussion of the 
design and structure of RUG-III is presented later in this section. 
These payment indices are

[[Page 26257]]

based on staff time measure (STM) studies conducted in 1995 and 1997 
that measured the nursing and therapy staff time required to care for 
groups of residents. The STM is based on a 24-hour period for nursing 
and therapy services. Accordingly, there are separate case-mix payment 
indices for nursing and related services and for therapy services.
    The STM studies were conducted in 12 States across 154 SNFs and 
2,900 residents. These States were Kansas, Maine, Mississippi, South 
Dakota, Texas, California, Colorado, Maryland, Florida, Ohio, 
Washington, and New York. The study utilized a stratified sample of 
SNFs, including both freestanding and hospital-based SNFs and those 
with different care delivery models. The resulting indices were 
adjusted to account for the relative salary differences between 
different types of nursing staff (registered nurses, licensed practical 
nurses, and aides) and the different therapy disciplines (occupational 
therapy, physical therapy, and speech pathology). The adjustment to the 
nursing index for relative salary differences in nursing staff was 
based on data from the American Health Care Association's 1995 study of 
national nursing home salaries. The adjustment to the therapy index for 
relative salary differences among disciplines was based on data from 
several different sources. These sources were surveys from the American 
Health Care Association, the National Association for the Support of 
Long-Term Care, the Bureau of Labor Statistics, the American 
Rehabilitation Association, the University of Texas, Mutual of Omaha, 
and the Maryland Health Cost Review Commission. They were used in 
HCFA's ``best estimate'' approach in the development of rehabilitation 
therapy salary equivalency guidelines. The schedule detailing the 
national case-mix payment indices is presented later in this section 
(see Tables 2.E and 2.F).
    e. MEDPAR case-mix analog. Section 1888(e)(4)(C) requires that the 
data used in developing the Federal payment rates be standardized to 
remove the effects of geographic variation in case-mix. Standardization 
ensures that the aggregate impact of the case-mix adjustments on the 
Federal rates does not alter the aggregate payments that would occur in 
the absence of such an adjustment. In order to fulfill this 
requirement, it is necessary to have data on the average case-mix of 
each SNF in our data base for its cost reporting period beginning in 
fiscal year 1995. Because a national source of MDS derived case-mix 
data does not exist for this period, it was necessary to utilize 
existing data sources. Accordingly, to provide national case-mix data 
on SNFs in our data base, we constructed a crosswalk between the RUG-
III categories and the data from all Medicare claims in our Medicare 
Provider Analysis and Review file (MEDPAR).
    The MEDPAR file is an analytical file created from Part A Medicare 
hospital and SNF claims and maintained by HCFA. These claims are the 
basis of the interim payments made by fiscal intermediaries and contain 
information on SNF stays paid for by Medicare Part A nationwide. 
Although Medicare claims information does not include all the data 
elements necessary to classify SNF patients exactly as they are in RUG-
III, it does contain sufficient information to assign Medicare SNF 
patients to RUG-III categories at a general level. Classification into 
a RUG-III category is based on detailed clinical information from the 
patient assessment performed in the SNF. The claims in the MEDPAR file 
do not have the level of clinical detail required for classification 
into the RUG-III categories but do have basic clinical information that 
has been required on the claim for payment in the cost-based Medicare 
payment system. By using the clinical information in the MEDPAR file to 
crosswalk to the RUG-III grouping specifications, we were able to model 
how the national Medicare SNF population will classify into RUG-III 
categories. The model is referred to as the ``MEDPAR analog.'' The 
value of the MEDPAR analog is that it provides a means to use available 
data to examine the case-mix of Medicare SNF patients nationally.
    In order to examine case-mix based on the MEDPAR file data, it was 
necessary to recognize certain limitations of this file, identify where 
crosswalks could be made between the data contained in the MEDPAR file 
and that needed to assign an SNF patient to a RUG-III group, and 
establish proxy criteria where feasible to make more case 
classifications possible.
    One limitation of the analog results from the Medicare coverage 
rules for physical, occupational, and speech rehabilitation therapy 
services. Rehabilitation therapy provided in the SNF is covered under 
Part A (and thereby will have claims data in MEDPAR), unless the 
services are provided by an independent agency, in which case they may 
be billed under Part B (although our analysis of Part B supplier bills 
indicated relatively few rehabilitation therapy services being billed 
in this way). In addition, a small number of facilities do not detail 
rehabilitation therapy charges in their claims. For these reasons, the 
MEDPAR proxy may not be a complete record of all the services a patient 
in the SNF may receive during the course of a beneficiary's stay.
    In spite of these limitations, MEDPAR is a reasonable tool to use 
in approximating the RUG-III categories related to Medicare SNF claims 
and appropriate for use in rate standardization. The file contains ICD-
9-CM (International Classification of Diseases, Ninth Edition, Clinical 
Modification) diagnosis and procedure codes that provide a partial 
clinical profile of the patient supplemented by lengths of stay, 
revenue codes that represent types of services provided during each 
nursing home stay, and limited admission and discharge information. In 
addition, some of the facilities report rehabilitation charge 
information, making it possible for us to approximate frequency and 
duration of rehabilitation therapies, as well as to directly reproduce 
which discipline provided services.
    The analog was first created in 1993, using the 1990 MEDPAR SNF 
file and an earlier version of the Minimum Data Set (MDS), the MDS+. We 
updated that work for the national implementation analyses, using 
instead the 1997 MEDPAR SNF file and the MDS 2.0. As stated above, the 
MDS 2.0 collects extensive patient information that includes 
demographic information, diagnoses, medication use, nursing 
rehabilitation services, activities of daily living (ADL) capabilities, 
and minutes per day of rehabilitative services provided. This 
information is the basis for assignment to a particular RUG-III group. 
Thus, in the creation of the MEDPAR analog, MDS+ (and now, MDS 2.0) 
definitions formed the key against which MEDPAR diagnosis and revenue 
service codes were matched.
    The RUG-III classification system is a hierarchy of major patient 
types, organized into seven major categories. The categories are 
Rehabilitation, Extensive Services, Special Care, Clinically Complex, 
Impaired Cognition, Behavior Problems, and Reduced Physical Function. 
Each of these categories is further differentiated to yield the 44 
specific patient groups used for payment.
    The categories and groups within them are based on the research 
findings of staff time measurement studies performed in 1990, 1995, and 
1997, described in detail below. Through analyses of the patient 
characteristics recorded on the MDS and the staff time associated with 
caring for patients in nursing homes, clinical criteria were identified 
that were predictive of resource use, and categories were

[[Page 26258]]

formed that would group patients according to resource use. The 
criteria for each category were derived from the actual staff time 
measurement study data.
    The information contained in the MEDPAR file is not adequate to 
enable differentiation to the 44 groups, however. Therefore, the analog 
classifies patients only to the category level.
    There are seven RUG-III categories: Rehabilitation, Extensive 
Services, Special Services, Clinically Complex, Impaired Cognition, 
Behavior, and Physical. The Rehabilitation category has five sub-
categories, based on the number of minutes therapy is provided and the 
number of disciplines providing service. The sub-categories are: Ultra 
High, Very High, High, Medium, and Low. Using the crosswalk model, we 
were able to classify the claims in the MEDPAR file into the five 
rehabilitation therapy sub-categories and four of the remaining six 
categories: Extensive Services, Special Services, Clinically Complex, 
and Impaired Cognition. There were no available data elements in the 
MEDPAR to crosswalk for classification into the Behavior or Physical 
categories.
    (1) Rehabilitation category. This is the most complex RUG-III 
category to crosswalk using the MEDPAR data base. A patient classifies 
into the Rehabilitation category based on the minutes per week of 
rehabilitation therapy services received. We also considered whether 
more than one of the rehabilitation disciplines provided services. 
MEDPAR data do not include minutes of service, but do reflect types of 
service provided. We, therefore, used charges as a proxy for minutes in 
approximating the amounts of service each beneficiary received. Since 
service patterns had to be approximated using ranges of rehabilitation 
therapy charges, great attention was paid to developing decision rules 
that would yield the most accurate description possible using Medicare 
claims. In addition, there are five levels of intensity within the 
Rehabilitation category. Using research study findings (Marsteller, 
Jill A. and Korbin Liu, ``High End Therapy Patients: How Many and How 
Much?'' Washington, DC, The Urban Institute, May 1994) and consultation 
with rehabilitation professionals, upper and lower charge limits were 
set to create groupings like each of the five RUG-III Rehabilitation 
categories.
    As previously mentioned, nursing home case-mix is not a direct 
function of diagnosis. Diagnosis obviously has a role in determining 
what services a patient receives, but it is the services themselves, 
with the staff time required to provide them, that determine case-mix 
in nursing homes. Thus, for the Rehabilitation categories, the RUG-III 
system uses measures of staff time and service frequency, variety, and 
duration to classify patients. The criteria are in the form of minimum 
numbers of minutes of therapy per day or per week, minimum frequencies 
of therapy sessions over a week, and minimum numbers of therapy 
disciplines used per patient. While the MEDPAR analog can directly 
reproduce the variety of therapy given, frequency and duration can only 
be approximated using Part A covered charges for skilled therapy 
thought to be commensurate with certain patterns of service.
    The five Rehabilitation sub-categories for the MEDPAR analog were 
determined using ranges of covered charges per day to approximate the 
RUG-III criteria. The ranges of covered charges used to classify the 
MEDPAR cases were based on an average charge of $300 per day for 
rehabilitation services. This amount is based on the covered charges 
for rehabilitation therapy in the MEDPAR file. To group cases using the 
MEDPAR file, the following ranges of covered charges were used: the Low 
Rehabilitation sub-category ranges from $150 per day and below in any 
combination of types of skilled therapy; the Medium Rehabilitation sub-
category ranges from $150 to $199 per day in any combination of 
therapies; the High Rehabilitation sub-category ranges from $200 to 
$299 per day in any combination of therapies; the Very High 
Rehabilitation sub-category ranges from $300 to $399 per day in any 
combination of therapies (or $400 per day and above if only one 
therapy); and the Ultra High Rehabilitation sub-category range 
encompasses any case with covered charges higher than $400 per day in 
at least two of the three therapies. Refer to Table 2.C for comparison 
of these charge ranges to the number of minutes per day and per week 
required by the RUG-III system.
    We set a threshold at $1,000 of covered charges for rehabilitation 
therapy services as a minimum for classification into any of the 
rehabilitation sub-categories. We based this on our finding, based on 
claims in the National Claims History file, that $400 is a common 
charge for an initial evaluation and $250 is a common charge for 
treatment by licensed therapists. Thus, we determined this threshold 
amount as representative of patients who received an evaluation by a 
professional rehabilitative therapist but no substantial course of 
rehabilitative therapy. That is, claims for patients with total therapy 
charges less than $1,000 were identified as having received an initial 
evaluation to determine the need for therapy but generally received no 
more than 1 week of rehabilitative therapy services.
    Using the MEDPAR file, there was no way to approximate the nursing 
rehabilitation component of the RUG-III Low Rehabilitation sub-
category. It was possible, however, to model rehabilitative therapy (of 
less than 5 days per week) using therapy charges that parallel such a 
pattern of treatment.
    The Ultra High Rehabilitation sub-category is intended to apply 
only to the most complex cases requiring rehabilitative therapy well 
above the average amount of service time. This translates into higher 
charges for therapy services, both because treatment is more frequent 
and complex, and because length of stay is longer than for other 
skilled rehabilitation groups. In line with the intended complexity of 
this classification group, the lowest charge that the Ultra High sub-
category includes is $400 per day in at least two of the three 
therapies.
    The RUG-III criteria for Ultra High Rehabilitation are:
     Two of the three rehabilitation therapy disciplines are 
represented.
     At least 720 minutes of treatment per week across the 
three disciplines.
     One discipline providing services at least 5 days per 
week.
    The remaining three sub-categories, Very High, High, and Medium 
Rehabilitation are not driven by a specific number of disciplines 
represented. All three require at least 5 days per week of skilled 
rehabilitative therapy, but they are split according to weekly 
treatment time. The Very High cases must be receiving 500 minutes per 
week and must be receiving at least one of the disciplines all 5 days; 
any additional disciplines will count toward the total time, but no 
other disciplines are required for assignment to this sub-category. 
Similarly, those in the High sub-category must be receiving a minimum 
of 325 minutes per week and this time must include one of the 
rehabilitation disciplines being provided daily (at least 5 days per 
week). Cases in the Medium sub-category must be receiving at least 150 
minutes of skilled rehabilitation in any combination of disciplines 
over the minimum 5 days (or five 30-minute sessions).
    (2) Non-rehabilitation categories. As stated above, MEDPAR contains 
ICD-9-CM codes as the variables describing patient diagnoses and 
procedures. This numerical coding system is used by hospitals to report 
patient information,

[[Page 26259]]

and nursing homes use these codes on a more limited basis for 
reporting. The MDS 2.0 has many of the most prevalent diagnoses found 
in this patient population listed for check-off by the nurse performing 
the assessment, with a section elsewhere on the form available to write 
in any relevant additional ICD-9-CM codes. The analog for the non-
rehabilitation categories was created by matching the ICD-9-CM codes in 
the MEDPAR file to as much of the specific clinical criteria on the MDS 
2.0 used to classify residents into the Extensive Services, Special 
Care, Clinically Complex, and Impaired Cognition categories.
    Certain RUG-III criteria could not be satisfactorily coded by an 
ICD-9-CM code. Although we could capture the clinical characteristics 
of the patients, many of the items used to assign patients to specific 
RUG-III groups are not included in the ICD-9-CM coding scheme. In the 
Clinically Complex category, for example, the number of physician 
visits or order changes is a qualifying factor that cannot be captured 
by an ICD-9-CM code, and will not be reported in the MEDPAR file. 
Similarly, we could not capture the patient's ADL capabilities.
    For the lower categories, Impaired Cognition, Behavior Only, and 
Physical Function Reduced, our ability to match the MDS 2.0 items to 
those likely to be reported on the MEDPAR was greatly diminished. We 
were able to identify a few codes with which to group some of the cases 
that would fall into the Cognitively Impaired category, but there were 
no ICD-9-CM codes that describe the patients who meet the criteria for 
the remaining two categories. Therefore, the analog only groups 
patients into the top five categories, leaving all other cases as 
unclassified.
    (3) Case-mix using the analog. As explained above, in the RUG-III 
system, the case-mix index is a function of the distribution of 
residents in each of the categories, further detailed across the ADL 
index, and then by service counts, depression, or nursing 
rehabilitation services. ADLs, nursing rehabilitation, depression, and 
service counts could not be modeled using MEDPAR. For the analog, the 
nursing and nursing/therapy weights could not be applied to the second 
and third levels of the RUG-III system. In the Rehabilitation category, 
weights for the five sub-categories were combined.
    f. Skilled Nursing Facility market basket index. Section 1888(e)(4) 
of the Act requires the Secretary to establish an SNF market basket 
index that reflects changes over time in the prices of an appropriate 
mix of goods and services included in covered SNF services. The SNF 
market basket index is used to develop the Federal rates and also to 
update the Federal rates on an annual basis beginning in fiscal year 
2000. We have developed an SNF market basket index that consists of the 
most commonly used cost categories for SNF routine services, ancillary 
services, and capital-related expenses. A complete discussion 
concerning the design and application of the SNF market basket index 
and the factors used in developing the payment rates is presented in 
section IV of this rule.
3. Methodology Used for the Calculation of the Federal Rates
    The methodology used to compute the per diem standardized Federal 
rates was a multi-step process combining each of the data sources 
described above. This section details each of these steps. The schedule 
of Federal rates (Tables 2.G and 2.H) that results from this 
methodology is presented later in this section.
    a. Per diem costs. In developing the per diem costs of SNFs, the 
cost data (including the estimate of Part B costs) for each facility 
are separated in components based on their relationship to the case-mix 
indices described above. This facilitates both the standardization of 
costs for case-mix and, similarly, the application of appropriate case-
mix adjustment to the Federal rates. Costs related to nursing 
(excluding nurse management) and social services salaries (including 
benefits) and total costs (after allocation) of non-therapy ancillary 
services are grouped in the component related to the nursing index. Our 
analysis of patient level charges for these non-therapy ancillary 
services indicates a correlation between the RUG-III classification 
system and these services.
    Occupational, physical, and speech therapy costs (after allocation) 
are grouped in the component related to the therapy index. The majority 
of SNF therapy costs are included in this therapy component of the per 
diem rate. As can be seen in the schedule of rates presented in Tables 
2.E and 2.F, the therapy component of the per diem rates is only 
applicable to the 14 RUG-III therapy groups. However, through our 
analysis of Medicare claims and other data, we observed a low level of 
therapy services being utilized by patients that would not be 
classified into a RUG-III therapy group. These therapy services would 
include evaluations for rehabilitation in one or more of the therapy 
disciplines. Therefore, in order to provide more appropriate payment 
levels in the non-therapy RUG-III groups, we estimated therapy costs in 
our data base associated with non-therapy RUG-III groups. These costs 
were grouped into the non-case-mix component of costs but, as can be 
seen in the rate schedule, are only applicable to the non-therapy RUG 
III groups.
    This estimate was determined using the percentage of therapy 
charges by discipline for each facility in our data base associated 
with the non-therapy RUG-III RUG categories as determined by the MEDPAR 
Analog. This percentage was applied by discipline to the therapy costs 
in each facility's cost report data. The results of this calculation 
are presented in Tables 2.A and 2.B. All other costs are grouped in the 
non-case-mix related component.
    For each facility in the data base, components are converted to a 
per diem by dividing the costs by Medicare days. For the therapy 
component, costs are divided by the number of Medicare days related to 
patients receiving therapy. For the remaining components, costs are 
divided by total Medicare days. For each component of cost, an outlier 
elimination process is performed to eliminate aberrant values. 
Facilities with per diem amounts greater than three standard deviations 
from the geometric mean are determined to be outliers and are 
eliminated from the calculation of the per diem cost for that 
component.
    As required by section 1888(e)(4)(E)(i) of the Act, all costs are 
updated from the base year to the initial period of the PPS (that is, 
the 15-month period beginning July 1, 1998 and ending September 30, 
1999) using the SNF market basket index described in section IV of this 
rule (see Tables 4.D. and 4.E). As required by the statute, this update 
is determined using the annual SNF market basket percentage minus 1 
percentage point.
    b. Updating the data. The SNF market basket index is used to adjust 
each per diem amount forward to reflect cost increases occurring 
between the midpoint of the cost reporting period represented in the 
data and the midpoint of the initial period (beginning July 1, 1998 and 
ending September 30, 1999) to which the payment rates apply. In 
accordance with section 1888(e)(4)(B) of the Act, the cost data are 
updated for each year between the cost reporting period and the initial 
period by a factor equivalent to the annual market basket index 
percentage minus 1 percentage point.
    c. Standardization of cost data. Section 1888(e)(4)(C) of the Act 
requires that the Secretary standardize the updated cost data for each 
facility for the effects of case-mix and geographic

[[Page 26260]]

differences in wage levels. In order to standardize for wage 
differences, the proportion of labor related and non-labor related 
components of SNF costs must be identified. These proportions are based 
on the relative importance of the different components of the SNF 
market basket index (see Table 4.C). Accordingly, the labor-related 
portion of costs is 75.888 percent of costs while the non-labor portion 
is 24.112 percent. Costs are standardized for geographic differences in 
wage levels using the hospital wage index (described earlier in this 
section).
    To standardize the cost data for the effects of case-mix, we used 
the MEDPAR Analog on claims data applicable to the fiscal year 1995 
cost reporting periods in the data base. This allowed us to classify 
each SNF's residents into one of 10 RUG-III categories produced by the 
analog. By applying the case mix indices applicable to the RUG-III 
categories assigned by the analog, we were able to develop average 
case-mix index values (nursing and therapy) for each facility. As 
described below, these index values were used in standardizing SNF 
costs for case-mix.
    As discussed earlier in this rule, a MEDPAR Analog is used to 
standardize for case-mix because actual MDS data are not available on a 
national level. However, in order to correct for systematic differences 
between the case-mix estimates produced by the analog method and the 
method that will be used under this PPS (that is, based on MDS data), a 
sensitivity analysis of the analog was performed. This analysis 
involved a comparison of case-mix values (based on the application of 
the case-mix indices) generated by the analog and corresponding values 
generated from actual MDS resident assessments for a sample of SNFs and 
patients. While the availability of such comparative data is limited, 
we were able to draw a sample from the States participating in the 
Multistate Nursing Home Demonstration that included patients from 
approximately 100 SNFs in five States. The sample contained 13,354 
Medicare claims covering 139,766 days of care. On average, case-mix 
values based on MDS data are 3 percent higher than analog-based values 
for the nursing index and 28 percent higher for the therapy index. This 
variance produced by the analog in the assignment of case-mix values is 
factored into the standardization methodology to ensure the rates are 
set at the appropriate level.
    Each urban and rural component of per diem cost is standardized for 
differences in wage levels and case-mix by dividing total 
unstandardized cost by a standardization factor that reflects each 
facility's wage level and case-mix. This factor is based in part on 
each facility's wage adjustment (.7588 times its wage index plus .2412) 
multiplied by the appropriate case-mix value and number of days of 
care. These facility values are summed to obtain the standardization 
factor. The standardized cost is divided by the appropriate total days 
to obtain the standardized per diem cost.
    This process equates per diem standardized cost (per diem cost 
adjusted for individual facility wage and case-mix differences) to per 
diem unstandardized cost. In this manner, standardization accounts for 
the application of individual facility wage index and case-mix 
adjustments to the per diem payment rates without altering the 
aggregates of the per diem cost data used to construct the per diem 
payment rates.
    d. Computation of national standardized payment rates. Section 
1888(e)(4)(D)(iii) of the Act authorizes the Secretary to compute 
separate payment rates for SNFs in urban and rural areas as defined in 
section 1886(d)(2)(D). Under the statute, urban areas are those defined 
by the Office of Management and Budget as metropolitan statistical 
areas (MSAs) or New England County Metropolitan Areas (NECMAs). All 
other areas are considered rural areas. Table 2.I showing the wage 
index indicates all areas considered urban for purposes of establishing 
these rates.
    Using the data described above and the formula prescribed in 
section 1888(e)(4)(E) of the Act, we calculated the national average 
per diem standardized payment rates separately for urban and rural SNFs 
using the following steps. The unadjusted Federal rates resulting from 
this calculation are presented in Tables 2.A and 2.B below.
    (1) As required by section 1888(e)(4)(D)(ii) of the Act, for each 
of the four components of cost, we computed the mean based on data from 
freestanding SNFs only. This mean was weighted by the total number of 
Medicare days of the facility.
    (2) As required by section 1888(e)(4)(D)(i) of the Act, for each of 
the four components of cost, we computed the mean based on data from 
both hospital-based and freestanding SNFs. Again, this mean was 
weighted by the total number of Medicare days of the facility.
    (3) As required by section 1888(e)(4)(E)(i) of the Act, for each of 
the four components of cost, we calculated arithmetic mean of the 
amounts determined under steps (1) and (2) above.
    (4) The unadjusted Federal rate for the initial period is 
calculated differently depending on the RUG-III case-mix grouping. For 
the 14 RUG-III therapy groups, the unadjusted Federal rate is the sum 
of the nursing case-mix, non-case-mix and therapy case-mix components. 
For other RUG-III groups, the unadjusted Federal rate is the sum of the 
nursing case-mix, non-case-mix and therapy non-case-mix components.

                                  Table 2.A.--Unadjusted Federal Rate Per Diem                                  
                                                     [Urban]                                                    
----------------------------------------------------------------------------------------------------------------
                                                            Nursing--     Therapy--     Therapy--               
                     Rate component                         case mix      case mix    non-case mix  Non-case mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.........................................      $109.48        $82.67        $10.91        $55.88 
----------------------------------------------------------------------------------------------------------------


                                  Table 2.B.--Unadjusted Federal Rate Per Diem                                  
                                                     [Rural]                                                    
----------------------------------------------------------------------------------------------------------------
                                                            Nursing--     Therapy--     Therapy--               
                     Rate Component                         case mix      case mix    non-case mix  Non-case mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.........................................      $104.88        $95.51        $11.66        $56.95 
----------------------------------------------------------------------------------------------------------------


[[Page 26261]]

B. Design and Methodology for Case-Mix Adjustment of Federal Rates

    As indicated earlier, section 1888(e)(4)(G) of the Act requires 
that the Federal rates be adjusted for case-mix (the relative resource 
utilization of patients). The RUG-III classification is a patient 
classification system that accounts for the relative resource 
utilization of different patient types. To adjust for case-mix, care 
provided directly to, or for, a patient is represented by an index 
score (case-mix index) that is based on the amount of staff time, 
weighted by salary levels, associated with each group. That is, each 
RUG-III group is assigned an index score that represents the amount of 
nursing time and rehabilitation treatment time associated with caring 
for the patients who qualify for the group. The nursing weight includes 
both patient-specific time spent daily on behalf of each patient type 
by registered nurses, licensed practical nurses, and aides, as well as 
patient non-specific time spent by these staff members on other 
necessary functions such as staff education, administrative duties, and 
other tasks associated with maintenance of the care giving environment.
    The case-mix indices are applied to the unadjusted rates presented 
above resulting in 44 separate rates, each corresponding with one of 
the 44 RUG-III classification groups. To determine the appropriate 
payment rate, SNFs are required to classify patients into a RUG-III 
group based on assessment data from the MDS 2.0. The design and 
structure of RUG-III and the methodology and Federal policy associated 
with the classification of patients into RUG-III groups, including the 
completion of assessments (MDS 2.0) for Medicare patients, under this 
PPS, are described in the following pages.
1. Background on the Resource Utilization Groups (RUGs) Patient 
Classification System
    As part of the Nursing Home Case-Mix and Quality demonstration 
project, Version III of the Resource Utilization Groups (RUG-III) case-
mix classification system was developed to capture resource use of 
nursing home patients and to provide an improved method of tracking the 
quality of their care.
    RUG-III is a 44-group model for classifying nursing home patients 
into homogeneous groups according to the amount and type of resources 
they use. The RUG-III groups are the basis for the payment indices used 
to establish equitable prospective payment levels for patients with 
different service use. Care provided directly to, or for, a patient is 
represented by an index score that is based on the amount of staff 
time, weighted by salary levels, associated with each group. That is, 
each RUG-III group is assigned an index score that represents the 
amount of nursing time and rehabilitation treatment time associated 
with caring for the patients who qualify for the group. The nursing 
weight includes both patient-specific time spent daily on behalf of 
each patient type by registered nurses, licensed practical nurses, and 
aides, as well as patient non-specific time spent by these staff 
members on other necessary functions such as staff education, 
administrative duties, and other tasks associated with maintenance of 
the care giving environment.
    The principal goal of case-mix measurement is to identify patient 
characteristics associated with measured resource use. In nursing 
homes, no adequate models have been found for using length of stay or 
episode cost to explain resource use. Thus, the RUG-III nursing home 
case-mix system explains patient resource use on a daily basis.
    The classification system was designed using resident 
characteristic information and measures of wage-weighted staff time. 
Information regarding a patient's characteristics and care needs is 
derived from the MDS, a set of core screening and assessment items and 
item definitions. The MDS is part of a standardized, comprehensive 
patient assessment instrument (the Resident Assessment Instrument or 
RAI) that all long term care facilities that are certified to 
participate in Medicare or Medicaid are required to use to develop 
individualized plans of care for each individual in the facility. The 
staff time measure (STM) study captured the amount of nursing staff 
time required to care for groups of residents over a 24-hour period and 
over the span of a week for therapy services.
    Patient assessment and staff time data used to develop the initial 
version of the RUG-III classification system were collected from March 
to December 1990 for 7,648 patients in 202 nursing facilities in 
Kansas, Maine, Mississippi, South Dakota, Nebraska, Texas, and New 
York. Since then, two more staff time data collections have been 
performed on 154 Medicare certified units of hospital and freestanding 
facilities in 12 States (California, Colorado, Florida, Kansas, Maine, 
Maryland, Mississippi, New York, Ohio, South Dakota, Texas, and 
Washington). Only units that were judged to be providing adequate care 
were considered for participation in the study. Of these, States were 
asked to select facilities that included 35 percent Medicare certified 
units, 25 percent hospital units, and two Alzheimer's units. ``Unit'' 
was defined as a nursing center such as a corridor or a floor, 
controlled from one nursing station. The remainder of the sample was 
selected by the State's demonstration project staff to represent the 
characteristics of the State's nursing homes.
    The sample was purposefully targeted toward residents needing 
complex care and/or with cognitive impairments. This assured that 
sufficient numbers of patients with rare types of complex care needs 
were included in the sample. Facilities with special care units (for 
example, Alzheimer's or Rehabilitation units) that participated in the 
study were also asked to provide data from a non-specialized unit.
    During the data collection, personnel on the study units 
electronically recorded all of the time in their work days: time 
providing services directly to patients; in activities related to 
specific patients, such as charting or consultation with family members 
or other members of the patient care team; as well as time that is not 
attributable to any particular patient, like that spent in meetings, in 
training, on breaks, etc. The time was allocated according to whether 
or not it was directly related to a particular patient, and was 
categorized as either patient specific time or non-patient specific 
time.
    Those data have been used to modify the classification system to 
create the current RUG-III and establish updated average staff times to 
be salary-weighted. Analyses of the staff time data in conjunction with 
the patient MDS information identified three main predictors of a 
patient's resource utilization: (1) clinical characteristics; (2) 
limitations in the activities of daily living (ADLs); and (3) skilled 
services received. The RUG-III classification system uses these three 
types of variables to describe SNF patients for the purposes of 
determining the relative cost of caring for different types of patients 
(case-mix).
    Analysis of the data indicated that patients with serious clinical 
conditions such as dehydration and respiratory infections, as well as 
patients who were very dependent in ADLs, require more nursing time 
than patients without complicating conditions. The RUG-III 
classification system resulting from the analyses is hierarchical. The 
clinical characteristics of patients, as identified by the MDS, that 
were associated with the greatest utilization of nursing time and 
rehabilitative therapy time, were used to categorize patients into the 
highest case-mix classification groups.

[[Page 26262]]

Similarly, the clinical characteristics associated with the lowest 
utilization of nursing time were used to categorize patients into the 
lowest case-mix classification group. Not all clinical characteristics 
are recognized separately by the classification system. Only those 
characteristics that were predictive of resource use and that would not 
introduce incentives that are considered to be negative, or not 
compatible with high quality patient care, are used to classify 
patients into RUG-III groups.
    Table 2.C shows the mutually exclusive, layered categories of the 
RUG-III classification system. The table describes which patient 
clinical characteristics, levels of assistance used in performing ADLs, 
and services are used to assign the patient to a RUGs group. Clinical 
characteristics include the patient diagnoses, conditions, and 
comorbidities. ADLs include bed mobility, toilet use, transfer from bed 
to chair, and eating. Patients receive a single RUG-III ADL score that 
measures the patient's ability to perform these activities (scores 
range from 4-18; higher scores represent greater functional dependence 
and a need for more assistance). Finally, treatments and services 
include respiratory therapy, amount of rehabilitation received, and 
treatments such as suctioning and intravenous medication 
administration.

                            Table 2.C.--Crosswalk of MDS 2.0 Items and RUG III Groups                           
----------------------------------------------------------------------------------------------------------------
               Category                        ADL index               End splits           MDS RUG  III codes  
----------------------------------------------------------------------------------------------------------------
                                                 REHABILITATION                                                 
----------------------------------------------------------------------------------------------------------------
ULTRA HIGH............................  16-18                   Not Used................  RUC                   
Rx 720 minutes/week minimum...........  9-15                    Not Used................  RUB                   
At least 2 disciplines, one at least 5  4-8                     Not Used................  RUA                   
 days/week.                                                                                                     
VERY HIGH.............................  16-18                   Not Used................  RVC                   
Rx 500 mins. a wk. minimum............  9-15                    Not Used................  RVB                   
At least 1 discipline--5 days.........  4-8                     Not Used................  RVA                   
HIGH..................................  13-18                   Not Used................  RHC                   
Rx 325 mins. a wk. minimum............  8-12                    Not Used................  RHB                   
1 discipline 5 days a week............  4-7                     Not Used................  RHA                   
MEDIUM................................  15-18                   Not Used................  RMC                   
Rx 150 mins. a wk. minimum............  8-14                    Not Used................  RMB                   
5 days across 3 disciplines...........  4-7                     Not Used................  RMA                   
LOW--Rx 45 minutes/week over at least   14-18                   Not Used................  RLB                   
 3 days.                                                                                                        
Nursing rehabilitation 6 days/week, 2   4-13                    Not Used................  RLA                   
 activities.                                                                                                    
EXTENSIVE SERVICES--(Adlsum <7                                                                                  
 Special)                                                                                                       
    IV Feeding in last 7 days.........  7-18                    count of other            SE3                   
                                                                 categories code.                               
    In last 14 days, IV medications,    7-18                    into plus IV............  SE2                   
     suctioning.                                                                                                
    Tracheostomy care, ventilator/      7-18                    Meds +Feed..............  SE1                   
     respirator.                                                                                                
SPECIAL CARE--(ADLSUM <7 Clin.                                                                                  
 Complex)                                                                                                       
    MS, Quad, or CP with ADLsum >=10,   17-18                   Not Used................  SSC                   
     Resp. Ther.=7 days.                                                                                        
    Tube fed and aphasic; Radiation     15-16                   Not Used................  SSB                   
     tx; Rec'g tx for surgical wnds/                                                                            
     lesions or ulcers (2=sites, any                                                                            
     stg; 1 site stg 3 or 4).                                                                                   
    Fever with Dehy., Pneu., Vomit.,    7-14                    Not Used................  SSA                   
     Weight Loss, or Tube Fed.                                  (Extensive <7 ADL)......                        
CLINICALLY COMPLEX--Burns, Coma,        17-18D                  Signs of depression.....  CC2                   
 Septicemia, Pneumonia, Footwnds,                                                                               
 Internal Bld, Dehyd, Tube fed                                                                                  
 (minimum.                                                                                                      
501 ml. fl, 26% cals), Oxygen,          17-18                   ........................  CC1                   
 Transfusions.                                                                                                  
Hemiplegia with ADL sum >=10,           12-16D                  Signs of depression.....  CB2                   
 Chemotherapy, Dialysis.                                                                                        
No. of Days in last 14--Phys. Visits/   12-16                   ........................  CB1                   
 makes order changes:.                                                                                          
    visits>=1 and chng.>=4; or          4-11D                   Signs of depression.....  CA2                   
     visits>=2 and chng.>=2.                                                                                    
Diabetes with injection 7 days/wk and   4-11                    (Special <7 ADL)........  CA1                   
 order chng.>=2 days.                                                                                           
IMPAIRED COGNITION:                                                                                             
    Score on MDS2.0 Cognitive.........  6-10                    Nursing rehabilitation    IB2                   
                                                                 not receiving.                                 
    Performance Scale >=3.............  6-10                    ........................  IB1                   
    (Score of ``6'' will be Clin.       4-5                     Nursing rehabilitation    IA2                   
     Comp. or PE2-PD1).                                          not receiving.           IA1                   
BEHAVIOR ONLY:                                                                                                  
    Code on MDS 2.0 items.............  6-10                    Nursing rehabilitation    BB2                   
                                                                 not receiving.                                 
    4+ days a week....................  6-10                    ........................  BB1                   
    wandering, physical or verbal       4-5                     ........................  BB2                   
     abuse.                                                                                                     
    inappropriate behavior or resists   4-5                     ........................  BA1                   
     care.                                                                                                      
    or hallucinations, or delusions...  4-5                     ........................  BA1                   
PHYSICAL FUNCTION REDUCED:                                                                                      
    No clinical variables used........  16-18                   Nursing rehabilitation    PE2                   
                                        16-18                    not receiving.           PE1                   
                                        11-15                                                                   
    Nursing Rehab. Activities >=2, at   11-15                   Nursing rehabilitation    PD2                   
     least 6 days a wk.                                          not receiving.           PD1                   
    Passive or Active ROM, amputation   9-10                    Nursing rehabilitation..  PC2                   
     care, splint care.                                                                                         
    Training in dressing or grooming,   9-10                    not receiving...........  PC1                   
     eating or swallowing.                                                                                      
    transfer, bed mobility or walking,  6-8                     Nursing rehabilitation    PB2                   
     communication, scheduled           6-8                      not receiving.           PB1                   
     toileting program or bladder       4-5                     Nursing rehabilitation    PA2                   
     retraining.                        4-5                      not receiving.           PA1                   

[[Page 26263]]

                                                                                                                
                                                                                                  Default       
----------------------------------------------------------------------------------------------------------------
Source: Analysis of the 1995 Medicare Units Staff Time.                                                         
Study: Update of RUG III Classification MDS.                                                                    

2. The RUG-III Classification System
    In the RUG-III classification system, patient characteristic and 
health status information from the MDS, such as ``diagnoses,'' 
``ability to perform ADLs,'' and ``treatments received,'' will be used 
to assign the patient to a resource group for payment. The RUG-III 
system is a hierarchy of major patient types. RUG-III consists of seven 
major categories that are the first level of patient classification. 
The major categories, in hierarchical order, are Rehabilitation, 
Extensive Services, Special Care, Clinically Complex, Impaired 
Cognition, Behavior Problems, and Reduced Physical Function. These 
major categories are further differentiated into 44 more specific 
patient groupings. Except for Rehabilitation and Extensive Services, 
these categories are first subdivided into groups based on the 
patient's ADL score. The next level of subdivision is based on nursing 
rehabilitation services and signs of depression.
    The initial subdivision of the Rehabilitation category is based on 
minutes per week of rehabilitative therapy services. The second level 
of subdivision uses ADL score. The Extensive Services category does not 
use ADL limitations except as a threshold for assignment into the 
category. Rather, services that require more technical clinical 
knowledge and skill are the variables used for assignment of patients 
into this category. Examples of these services are intravenous feeding 
or medications and tracheostomy care.
    For example, the Special Care category includes patients with 
quadriplegia, multiple sclerosis, surgical wound(s), open lesions, 
fever with vomiting, dehydration, pneumonia, tube feedings, or weight 
loss, those who are aphasic and need to be tube fed, those receiving 
treatment for 2 or more skin ulcers, and patients who are receiving 
radiation therapy. Any patient with one or more of these conditions, 
who is not receiving rehabilitation services, will be assigned to this 
category. The patient's assignment to one of the three groups within 
this category is dependent on the patient's ADL score.
    The Rehabilitation category is organized differently than the 
clinical categories that follow in the hierarchy. Within this category, 
there are five sub-categories (Ultra High, Very High, High, Medium, and 
Low) that are then further split into the individual groups for 
payment. The sub-categories are defined by minutes per week of 
rehabilitation received by the patient, number of rehabilitation 
disciplines providing service, and the number of days per week on which 
rehabilitation services were provided. Assignment into a specific 
payment group is based on the patient's ability to perform certain of 
the activities of daily living as represented by his ADL score. As 
stated elsewhere, the patient is assessed on his ability to perform 
independently all of the activities of daily living and is assigned an 
ADL sum score that represents performance of the four ``late loss'' 
ADLs. The ``late loss'' ADLs used in the MDS ADL sum score are: eating; 
toileting; bed mobility; and transferring.
    A brief description of the respective RUG-III categories follows.
    Rehabilitation: This category includes patients who, if they were 
not receiving rehabilitation therapy, would qualify for one of the 
other RUG-III skilled care categories. This category is divided into 
subcategories based on the number of minutes of rehabilitative services 
received in a week, combinations of rehabilitation disciplines 
providing services, receipt of nursing rehabilitative services, and the 
patient ADL scores. The range of rehabilitation therapy minutes per day 
represented in the Rehabilitation category varies from a low of 45 
minutes per week to a high of more than 720 minutes per week. Patients 
who qualify for assignment to the Ultra High Rehabilitation sub-
category receive at least 720 minutes per week of rehabilitation 
therapies. At least two disciplines must be providing services: one of 
the disciplines must provide services 5 days each week, and the other 
must provide services at least 3 days each week. In contrast, patients 
assigned to the lowest rehabilitation sub-category, Low Rehabilitation, 
must receive at least 45 minutes of rehabilitative therapy services 
across at least 3 days each week, in addition to 6 days per week of 
nursing rehabilitation in two activities.
    Extensive Services: To qualify for this category, patients must 
have, in the past 14 days, received intravenous medications, 
tracheostomy care, required a ventilator/respirator, required 
suctioning, or must have, in the past 7 days, received intravenous 
feeding. In addition, the patients assigned to this category will have 
an ADL score that is at least 7.
    Each patient in the extensive services category is assigned a score 
of 0-5 based on five criteria. The score is used to classify the 
patient to one of the three RUG-III groups in this category--0 or 1 
will classify into the SE1 group, those with scores of 2 or 3 will go 
to SE2, and those with 4 or 5 will group to SE3.
    For the following five criteria, the patient receives one point for 
each criterion that applies to him or her. The first three criteria are 
presence of a clinical condition that qualifies the patient for 
classification to the Special Care category, Clinically Complex 
category, or the Cognitively Impaired category. The fourth and fifth 
criteria are whether the patient is receiving intravenous feeding or 
whether the patient is receiving intravenous medication.
    For example, a person who qualifies for both the Cognitively 
Impaired and Special Care categories will be assigned a score of 2 and 
will be classified into the SE2 group. Similarly, a patient who is 
ventilator dependent and requires suctioning will be assigned a score 
of 0 and will be classified into SE1.
    Special Care: Patients who are assigned to this category have at 
least one of the following: multiple sclerosis, cerebral palsy, 
quadriplegia with an ADL score of 10 or more, or receive respiratory 
therapy 7 days per week; have, and receive treatment for, pressure or 
stasis ulcers on 2 or more body sites; have a surgical wound(s) or open 
lesions; be tube fed with at least 26 percent of daily calorie 
requirements and at least 501 ml of fluid through the tube per day, and 
aphasic; receive radiation therapy; or have a fever in combination with 
dehydration, pneumonia, vomiting, weight loss, or tube feedings.
    Clinically Complex: Patients qualify for this category if they are 
comatose, have burns, septicemia, pneumonia, internal bleeding, 
dehydration, dialysis, hemiplegia in combination with an ADL

[[Page 26264]]

score of 10 or more, receive chemotherapy, tube feedings that comprise 
at least 26 percent of daily calorie requirements and at least 501 ml 
of fluid through the tube per day, treatments for foot wounds, or 
transfusions. Also included in this category are diabetics who receive 
injections 7 days per week and who have two or more physician order 
changes in the past 14 days as well as patients who have received 
oxygen therapy in the past 14 days. In order to assure inclusion of 
patients with unstable conditions, we also use a combination of 
physician visits and order changes as qualifying criteria for this 
category. This is a proxy measure for the amounts of skilled nursing 
observation, care planning, and monitoring usually required by this 
type of patient. The qualifying combinations of physician visit/order 
changes that must occur within the 14-day observation period to qualify 
for this category are: one or more visits with at least four order 
changes, or two or more visits with two or more order changes.
    Impaired Cognition: Patients in this category and the following two 
categories frequently will not qualify for Medicare coverage although 
some may, due to specific circumstances. The patients in this category 
will have scores on the MDS 2.0 Cognition Performance Scale of 3, 4, or 
5, and for two of the groups in this category will be receiving nursing 
rehabilitation services 6 days per week. Some patients with Alzheimer's 
disease or other types of dementia who have been acutely ill will 
classify to this category for Medicare. Under the SNF coverage 
guidelines, these patients could qualify based on the need for skilled 
nursing rehabilitation.
    Behavior Only: These are patients who, in 4 of the last 7 days, 
exhibited behaviors that include resisting care, being combative, being 
physically and/or verbally abusive, wandering, and who have 
hallucinations or delusions.
    Physical Function Reduced: The patients in this category are those 
who do not have any of the conditions or characteristics identified 
above. However, some have been documented as receiving ``skilled 
nursing'' and have been covered by Medicare in the past. With proper 
documentation and justification regarding the need for skilled care, 
Medicare may continue to cover SNF services.
3. Use of RUG-III ``Grouper'' Software
    As discussed at the beginning of this section, all data necessary 
to classify a patient to one of the RUG-III categories is contained on 
the MDS 2.0. Under this PPS, SNFs are required to use the MDS 2.0 as 
the data source for classification of patients for case-mix. The 
software programs that use the MDS 2.0 to assign patients to the 
appropriate groups, called groupers, are available from many software 
vendors. The version we use is available at no cost from our web site 
at: http://www.hcfa.gov/medicare/ hsqb/mds20.
    The logic used in the groupers is based on the hierarchical nature 
of the RUG-III system. This means that the patient is first assigned to 
the highest category for which the patient qualifies, and then, using 
relevant additional criteria, as explained above (ADL score, nursing 
rehabilitation, etc.), the patient is assigned to one of the groups 
within that category.
    The grouper assigns patients to the highest-weighted group rather 
than to the highest group in the hierarchy. This is important because 
there may be rare instances in which a case would qualify for a group 
that, although higher in the hierarchy, has a lower payment index than 
a group that is lower in the hierarchy.
4. Determining the Case-Mix Indices
    Care provided directly to, or for, a patient is represented by an 
index score that is based on the amount of staff time, weighted by 
salary levels, associated with each group. That is, each RUG-III group 
is assigned an index score that represents the amount of nursing time 
and rehabilitation treatment time associated with caring for the 
patients who qualify for the group. The nursing weight includes both 
patient-specific time spent daily on behalf of each patient type by 
registered nurses, licensed practical nurses, and aides, as well as 
patient non-specific time spent by these staff members on other 
necessary functions such as staff education, administrative duties, and 
other tasks associated with maintenance of the care giving environment.
    As explained above (in section II.B.1), measures of the staff time 
required to care for nursing home patients were collected and used to 
identify specific clinical characteristics that are predictive of 
patient resource use. In order to do this, characteristics of the 
patients in the STM study and the time it took to care for them were 
combined and analyzed. In addition, the ratio of salaries for nursing 
staff and rehabilitative therapy staff were computed in order to 
calculate nursing and therapy weights for each RUG-III category. These 
analyses were then used to identify the patient characteristics that 
best explain weighted patient specific time. From this, the 44 groups 
and an index for each was calculated. The basic calculation performed 
for each group was to take the minutes spent providing patient care and 
multiply them by the weight that represents the staff person's salary. 
Thus, the registered nurse's minutes were multiplied by 1.41, whereas 
those of the aide were multiplied by 0.59. The therapy weights include 
physical therapist (1.32), occupational therapist (1.23), and speech 
pathologist (1.16) time plus licensed physical therapy assistant 
(0.87), licensed occupational therapy assistant (0.81), and therapy 
aide (0.61) time, on a weekly basis. The nursing and therapy weights 
are multiplied by the number of patients in each group to yield an 
array of 44 nursing case-mix index scores and 5 therapy case-mix index 
scores. These indices are shown later in this section (see Tables 2.E 
and 2.F).
5. Application of the RUG-III System
    Following are some illustrative case studies to illustrate how the 
RUG-III classification system would compare patients with similar 
descriptions but disparate classifications.
    Example 1. Ms. A was recently hospitalized with a stroke. She has 
several comorbidities that include cardiac dysrhythmia, hypertension, 
and diabetes mellitus, and experienced a urinary tract infection within 
the last 30 days. In addition, she has lost voluntary movement in her 
left arm and leg, and has an unsteady gait, pain almost daily, and some 
localized edema, but is continent when toileted at regular intervals. 
She can see, hear, understand, and make herself understood. She tires 
easily and carries out ADLs slowly. Her mood is frequently tearful, and 
she expresses sadness about the loss of past life roles. She is 
concerned about her health and views herself, and is viewed by staff, 
as having potential for rehabilitation.
    Her memory is good, although she does have some difficulty making 
decisions in new situations. She is involved in the daily life of the 
nursing home, interacts well with others, and is able to set her own 
goals. She spends some time in her own room in self-initiated 
activities.
    Ms. A requires the assistance of one person to accomplish her 
personal hygiene, dressing, toileting (RUG-III ADL index score=4), bed 
mobility and transferring (ADL scores=4 each), and locomotion and 
eating (ADL score=2). She uses pressure-relieving chair and bed pads 
and receives special attention for her skin. She undergoes physical 
therapy and occupational therapy for 1 hour each, 5 days per week. Ms. 
A

[[Page 26265]]

receives daily restorative/rehabilitative follow-up nursing care and 
skill training for eating, active and passive range of motion, 
transferring, dressing, grooming, and locomotion, and participates in a 
bowel and bladder retraining program. Discharge from the facility is 
planned within the next 3 months.
    As a stroke patient receiving two therapies five times a week, Ms. 
A is classified in the Very High Rehabilitation category. She has an 
ADL index score of 14 (4+4+4+2) and will therefore be classified into 
the RVB group. In case-mix calculations, her case receives a nursing 
weight of 1.04 and a therapy weight of 1.41.
    Example 2, a non-rehabilitation patient. Ms. B has multiple 
sclerosis. At the present time she is recovering from a bout of 
pneumonia. She also had a urinary tract infection within the last 30 
days. She has lost some voluntary movement in her extremities and 
cannot balance herself well in a standing position. She is not bedfast, 
however, and is in a wheelchair during the day. She has a history of 
pressure sores, but none are present at this time. There is stiffness 
in her hips, hands, feet, and shoulders. She complains of constipation 
and is sometimes incontinent of the bladder. She is able to see, hear, 
fully understand what is said, and is understood.
    Her memory is good, and she is independent in her decision making. 
Her mood, however, is tearful, and she expresses distress. She grieves 
for her past life as a professional musician, and she is often 
withdrawn and has been verbally abusive to her roommate during the past 
week.
    Ms. B uses extensive assistance with transferring (RUG-III ADL 
index score=4), locomotion, and toileting (ADL score=4), and limited 
assistance with bed mobility (ADL score=3), personal hygiene, and 
dressing. As she has had a history of pressure sores, she uses bed and 
chair pressure prevention pads and receives special skin care, 
positioning, and turning regularly over the day. Her intake and output 
are monitored, and the nursing staff provides passive and active range 
of motion and skill training for transferring with a trapeze while 
encouraging active range of motion where possible. She also began a 
bowel and bladder retraining program last week. Any discharge plan for 
Ms. B is uncertain at this time.
    With multiple sclerosis and a high level of ADL dependency, Ms. B 
is classified into the Special Care category. Her ADL score is at least 
12 (4+3+4+1). Service counts and mental state are not used in the 
Special Care category, so her depressed mood does not factor into her 
assignment into a RUG group, although it influences her plan of care. 
She will be classified to the SSA group in the Special Care category. 
In RUG-III case-mix calculations, Ms. B is assigned a nursing weight of 
1.01 and a therapy weight of 0 since she did not receive occupational, 
physical, or speech therapy in the last 7 days. Note that these weights 
are lower than those assigned to Ms. A in example 1, despite the 
similarities in their clinical descriptions.
6. Use of the Resident Assessment Instrument--Minimum Data Set (MDS 
2.0)
    The requirements for patient assessment found at Sec. 483.20 apply 
to all patients in a Medicare or Medicaid certified long term care 
facility, regardless of the patient's age, diagnoses, length of stay, 
or payer source. Certified facilities are required to use the RAI 
specified by the State to assess patients. Each State's RAI consists of 
HCFA's MDS at a minimum. The RUG-III classification system and, 
subsequently, the Medicare SNF prospective payment, are based on the 
Minimum Data Set (MDS). The MDS contains a core set of screening, 
clinical, and functional status elements, including common definitions 
and coding categories, that form the basis of a comprehensive 
assessment.
    In order to receive Medicare payment under PPS, in addition to 
completion of the uniform MDS as set forth at Sec. 483.20, the facility 
will be required to complete two additional sections of the MDS: 
Sections T and U. Section U is currently an optional section of the MDS 
used to collect information on medication. However, completion of this 
section is required for States participating in HCFA's Nursing Home 
Case-Mix and Quality (NHCMQ) demonstration and several other States as 
well. Although collection of medication information on Section U will 
be required for Medicare patients under this PPS, we will not require 
completion and transmission of this information until October 1, 1999. 
In the interim, we will examine the potential for refining Section U in 
a way that would streamline data collection, reduce opportunities for 
error, and thereby maximize the accuracy and usefulness of the data.
    Section T provides information on special treatments and therapies 
not reported elsewhere in the patient assessment. In section T, the 
facility must record the rehabilitative therapy services (physical 
therapy, occupational therapy, and speech therapy) that have been 
ordered and are scheduled to occur during the early days of the 
patient's SNF stay. As rehabilitation services often are not initiated 
until after the first MDS assessment's observation period ends, we 
believe that allowing the patient time for transition is appropriate. 
Section T provides an overall picture of the amount of rehabilitation 
that a patient will likely receive through the 15th day from admission. 
This information on the MDS will make possible an accurate 
classification of the patient for whom rehabilitation is planned into 
the appropriate RUG-III group. SNFs must complete this section for 
services furnished on or after July 1, 1998.
    Section T also provides information needed to evaluate a patient's 
response to therapy. For example, by assessing a patient's ability to 
walk at his most self-sufficient level, small increments of improvement 
can be measured. This level of detail is not contained in other areas 
of the MDS in contrast with the information recorded elsewhere in the 
MDS, regarding the patient's walking ability most of the time. 
Assessment of the patient's ``most self sufficient'' can be used to 
evaluate the effectiveness of physical therapy and nursing 
rehabilitation, the continued need for therapy and nursing 
rehabilitation, and maintenance of walking ability immediately after 
therapy is discontinued.
7. Required Schedule for Completing the MDS
    Under section 1888(e)(6) of the Act, SNFs must ``provide the 
Secretary, in a manner and within the timeframes prescribed by the 
Secretary, the resident assessment data necessary to develop and 
implement the rates under this subsection.'' We are requiring that SNFs 
perform patient assessments by the 5th day (although there is a grace 
period that allows performance by the 8th day) of the SNF stay, again 
by the 14th day, by the 30th day, and every 30 days thereafter as long 
as the patient is in a Medicare Part A stay. A full MDS must be 
submitted by facilities at each of these timeframes during a patient's 
Medicare Part A stay. Each Medicare patient is classified in a RUG-III 
group for each assessment period for which he is in a Part A SNF stay. 
The group to which the patient classifies is based on the information 
about his clinical resource needs as recorded on the MDS assessment.
    Facilities will send each patient's MDS assessments to the State 
and claims for Medicare payment to the fiscal intermediary on a 30-day 
cycle.

[[Page 26266]]

Payment will be made according to the RUG-III group(s) recorded on the 
claim sent to the fiscal intermediary. For the first 30 days in an SNF, 
a Medicare patient will be assessed three times (at 5 days, 14 days, 
and 30 days) and perhaps more often, if the patient's needs change 
requiring additional MDS assessments and care plan modifications. Any 
of the assessments performed may result in a RUG-III classification 
change.
    Each patient is to be assessed using full or comprehensive 
assessments according to the stated schedule. The State's RAI 
constitutes a ``comprehensive'' assessment, which is required at 
various timeframes according to Federal regulations found at 
Sec. 483.20. In the following schedule, ``full'' assessment refers to 
completion of the entire MDS, and ``comprehensive'' refers to 
completion of the Resident Assessment Protocols (RAPs) in addition to 
the entire MDS. The SNF provider should adhere to the following 
assessment schedule for newly admitted and readmitted beneficiaries 
whose stays are expected to be covered by Medicare during the first 30 
days of admission/readmission to the SNF.

Day 0  Represents the period prior to admission
Day 1  Patient admission day and notification of ``Non-coverage''
Day 5 Last day for Assessment Reference Date for the Medicare 5 Day 
Assessment
Day 14 Last day for Assessment Reference Date for the Medicare 14 
day Assessment (In accordance with Federal requirements at 
Sec. 483.20, RAPS must be completed with the 5 day or the 14 day 
assessment)
Day 29 Last day for Assessment Reference Date for the Medicare 30 
day assessment (RAPs not required for Medicare unless a Significant 
Change in Status has occurred)
Day 59 Last day for Assessment Reference Date for the Medicare 60 
day assessment (RAPs not required for Medicare unless a Significant 
Change in Status has occurred)
Day 89 Last day for Assessment Reference Date for Medicare 90 day 
assessment (RAPs not required for Medicare unless a Significant 
Change in Status has occurred)
Day 100 Last possible day of Medicare coverage. Staff should return 
to the State-required MDS assessment schedule.

This schedule applies to Medicare beneficiaries during Part A Medicare 
nursing home stays.
    Note that historically, instructions for completing the RAI, as in 
the Long Term Care Resident Assessment Instrument User's Manual, state 
that ``when calculating when the Resident Assessment Instrument (RAI) 
is due, the day of admission is counted as day zero.'' Counting the day 
of admission as day zero has allowed the maximum flexibility in terms 
of time to complete the RAI. For case-mix reimbursement purposes, 
however, States that participated in HCFA's Nursing Home Case-Mix and 
Quality Demonstration (NHCMQ) project have required that the day of 
admission be counted as day one. The use of the day of admission as day 
one is continued under the PPS rules for reimbursement scheduling. In 
support of this scheduling, in the future, HCFA will provide 
instructions for RAI completion counting the day of admission as day 
one.
    In order to be in compliance with the requirements of Medicare and 
Medicaid certification, facilities must complete an Initial Admission 
assessment, including RAPs, within 14 days of a patient's admission to 
the facility. Within approximately the same time, the requirements for 
PPS specify that facilities must complete two assessments for each 
patient in a Medicare-covered Part A stay. These include a Medicare 5-
day and a Medicare 14-day assessment. According to the rules for PPS, 
the RAPs must be completed with either the 5-day or the 14-day 
assessment, and the facility may choose with which of these assessments 
to complete the RAPs.
    In order to minimize burden on facility staff, in some instances, 
the same assessment that is completed and electronically submitted to 
the State to meet the clinical requirements at Sec. 483.20 may also be 
used to meet the PPS requirements. For example, the facility may use 
either the Medicare 5-day or the Medicare 14-day assessment (whichever 
one included the RAPs) to meet both the requirements for PPS, as well 
as the clinical requirements for completing and transmitting an Initial 
Admission assessment. In this case, the ``Reason for Assessment'' item 
on the MDS would be coded both as an Initial Admission assessment and 
as a Medicare 5-day or 14-day assessment. There is no grace period for 
the Initial Admission assessment to correspond with the grace period 
that the PPS rules allow for the Medicare 14-day assessment. Therefore, 
if a facility is using the Medicare 14-day assessment to also meet the 
requirement for the Initial Admission assessment, the assessment must 
be completed by day 14, and the grace period does not apply.
    In order to be in compliance with the requirements for Medicare and 
Medicaid certification, facilities must perform the HCFA Standard 
Quarterly Review assessment for each resident in the facility at least 
every 92 days. The requirements for PPS specify that a Medicare 90-day 
assessment be completed for each patient whose stay is still covered 
under Medicare. To minimize burden on facility staff, the Medicare 90-
day assessment that is completed to meet PPS requirements may also be 
used to meet the clinical requirements at Sec. 483.20 for completion of 
a Quarterly Review assessment. In this case, the ``Reason for 
Assessment'' item on the assessment would be coded both as a 
``Quarterly Review'' assessment, and as a Medicare 90-day assessment. 
Although the PPS rules allow a 5-day grace period in completing the 
Medicare 90-day assessment, the Quarterly Review assessment must be 
completed within 92 days of completion of the last assessment. 
Therefore, if a facility is using the Medicare 90-day assessment to 
also meet the requirement for the Quarterly Review assessment, the 
assessment must be completed within 92 days of completion of the prior 
assessment, and only 2 days of the 5-day grace period could apply.
    Facilities must also adhere to Federal regulations that require a 
comprehensive reassessment if the patient experiences a significant 
change in status. A significant change is a major change in a patient's 
status that is not self-limiting, affects more than one area of his 
health status, and requires interdisciplinary review. Accordingly, a 
patient must be reassessed whenever significant improvement or decline 
is consistently noted by facility staff. The current guidelines for 
determining a significant change in the patient's status are listed in 
the Long Term Care Resident Assessment Instrument User's Manual. These 
include, for example, a change in the patient's decision-making 
abilities from 0 or 1 to 2 or 3 on item B4 of the MDS 2.0. As a 
complement to these standard guidelines, we are requiring under PPS, 
that a comprehensive assessment be performed when a patient's 
rehabilitation service is discontinued unless the patient is physically 
discharged from the facility. For those rare instances in which a 
Significant Change in Status assessment is not clinically warranted, 
but rehabilitative services are discontinued, we are requiring a 
comprehensive assessment to be coded as ``Other Medicare Required 
Assessment.''
    The assessment reference date for this assessment may be no earlier 
than 8 days after the conclusion of all rehabilitative therapies and no 
later than 10 days after the conclusion of such services. If the 
patient expires or is discharged from the facility, no

[[Page 26267]]

assessment is required. This assessment will result in a new case-mix 
classification for the patient and a new rate of payment. The new 
classification and payment rate will be effective as of the assessment 
reference date of this comprehensive assessment. If the resulting new 
classification is below those groups deemed covered by Medicare in the 
RUG-III hierarchy and the patient would not be covered by the existing 
administrative criteria for making SNF level of care determinations, a 
``continued stay'' denial notice should be issued.
    A Significant Change in Status assessment or Other Medicare 
Required Assessment that falls during the assessment window of a 
Medicare mandated assessment may take the place of one of the regularly 
scheduled assessments. If the assessment reference date of an Other 
Medicare Required Assessment or a Significant Change in Status 
assessment coincides with the range of days allowable for use as the 
assessment reference date for a regularly scheduled Medicare 
assessment, a single assessment may be coded as both a Significant 
Change in Status or Other Medicare Required Assessment and as a 
regularly scheduled Medicare assessment. For example, a Significant 
Change in Status assessment completed on day 28 of the patient's 
nursing home stay would replace the 30-day scheduled assessment. 
However, a significant change that occurs on day 40 would not replace 
any scheduled assessment. Table 2.D below presents the schedule for MDS 
completion related to days covered and payment.

                                    Table 2.D.--Medicare Assessment Schedule                                    
----------------------------------------------------------------------------------------------------------------
                                                                          Number of days                        
                                   Reason for      Assessment reference   authorized for    Applicable medicare 
  Medicare MDS assessment type     assessment              date            coverage and        payment days     
                                   (AA8b code)                                payment                           
----------------------------------------------------------------------------------------------------------------
5 day..........................               1  Days 1-8*..............              14  1 through 14.         
14 day.........................               7  Days 11-14**...........              16  15 through 30.        
30 day.........................               2  Days 21-29.............              30  31 through 60.        
60 day.........................               3  Days 50-59.............              30  61 through 90.        
90 day.........................               4  Days 80-89.............              10  91 through 100.       
----------------------------------------------------------------------------------------------------------------
* If a patient expires or transfers to another facility before day 8, the facility will still need to prepare an
  MDS as completely as possible for the RUG-III classification and Medicare payment purposes. Otherwise the days
  will be paid at the default rate.                                                                             
**-RAPs follow Federal rules; RAPs must be performed with either the 5-day or 14-day assessment.                

    SNFs must submit the RAPs with either the 5-day or 14-day 
assessment. As noted above, RAPs must be completed as part of any 
Significant Change in Status assessments and Other Medicare Required 
Assessments that are appropriate. SNFs should consult the current 
version of the Long Term Care Resident Assessment Instrument User's 
Manual for more specific information regarding the RAPs.
    The first MDS assessment for Medicare eligible beneficiaries should 
be completed by day 5 of the patient's SNF stay. The admission day 
counts as day 1. The Assessment Reference Date for the 5-day assessment 
may be any day between days 1 and 5 (although there is a 3-day grace 
period to day 8).
    As stated in the note following Table 2.D, if a patient expires or 
transfers to another facility before day 8, the facility will still 
need to prepare an MDS as completely as possible for RUG-III 
classification and Medicare payment purposes. Otherwise, the days will 
be paid at the default group rate.
    Subsequent to the 5-day assessment, the SNF must complete 
assessments for each coverage period in accordance with the Medicare 
assessment schedule. The staff must use the time periods as specified 
in the current Long Term Care Resident Assessment Instrument User's 
Manual and must include the assessment reference date/last day of the 
observation period to judge the patient's condition except for the 
change items found at the end of particular MDS sections. The change 
items in Sections B, C, E, G, and H are assessed by referring back to 
the reference day of the last MDS completed.
    The nurse coordinating the care of a Medicare Part A covered 
patient has considerable leeway in determining the reference date for 
all assessments after the initial MDS. This should be helpful in making 
the assessment schedule required for Medicare coincide with Significant 
Change in Status, and Other Medicare Required Assessments that may be 
necessary, or in avoiding scheduling or service delivery problems 
during holiday periods. The following is an example: Ms. Smith was 
admitted on March 21, 1997. The assessment reference date for Ms. 
Smith's 14-day assessment was April 2, 1997. The nurse coordinator has 
selected April 16, 1997 as the assessment reference date for her 30-day 
assessment. In this case, the instructions for the change items should 
be interpreted as the period between the assessment reference date of 
April 2, 1997 (the 14-day assessment) and the assessment reference date 
of April 16, 1997 (the 30-day assessment).
8. The Relationship Between Payment and the MDS
    As explained above, each Medicare patient is classified in a RUG-
III group for each assessment period for which he is in a Part A SNF 
stay. The group to which the patient classifies is based on the 
information about his clinical resource needs as recorded on the MDS 
assessment.
    Facilities will send each patient's MDS assessments to the State 
and claims for Medicare payment to the fiscal intermediary on a 30-day 
cycle. Payment will be made according to the RUG-III group(s) recorded 
on the claim sent to the fiscal intermediary. For the first 30 days in 
an SNF, a Medicare patient will be assessed three times (at 5 days, 14 
days, and 30 days) and perhaps more often, if the patient's needs 
change requiring additional MDS assessments and care plan 
modifications. Any of the assessments performed may result in a RUG-III 
classification change.
    For example, a facility may have a patient whose first (5-day) MDS 
results in assignment to a Special Care group, but whose second 
assessment (14-day) indicates an assignment to a High Rehabilitation 
group. The facility must record these groups on its claim and will 
receive payment at the Special Care group rate for 14 days and then at 
the High Rehabilitation group rate for the

[[Page 26268]]

15th through 30th days. If a third MDS is performed during that 30 days 
indicating a change in the patient's condition that results in 
assignment to yet a third RUG-III group, the facility must record three 
groups on its claim to the fiscal intermediary and will receive payment 
accordingly for the days in the third RUG-III group. Table 2.D shows 
the relationship of the billing cycle to the MDS submissions.
9. Assessments and the Transition to the Prospective Payment System
    For Medicare patients already in the nursing home during the 
facility's transition into the PPS, we are providing several 
alternative assessment schedule options from which to choose.
    a. Medicare beneficiaries receiving Part A benefits admitted within 
the past 30 days. For a Medicare patient in a Part A covered stay, 
admitted in the 30 days before the SNF became subject to PPS, who has 
had an MDS completed during those 30 days, facility staff may choose to 
use the most recent full MDS assessment completed (within the past 30 
days) for RUG-III classification. This classification would be 
effective on the first day the SNF joins PPS and determines the payment 
the SNF receives for the patient for the first 14 days the facility is 
in the new system. The next assessment must be completed by the 14th 
calendar day of the month the facility entered the PPS.
    Another option is for the facility staff to choose to treat the 
beneficiary as a ``new'' admission on the first day of the facility's 
billing period. In this instance, a Medicare 5-day assessment must be 
performed as if the day the facility enters the PPS is day 1 of the 
patient's Part A nursing home stay, and then the assessment schedule 
followed as it would be for a new admission, as detailed above. There 
is no change in the patient's Medicare eligibility or coverage. 
Further, no additional days are added to Medicare's 100-day limit.
    b. Medicare beneficiaries receiving Part A benefits admitted over 
30 days prior. If a Medicare beneficiary was receiving Medicare Part A 
benefits for the past 30 days and has not had a full MDS assessment 
completed within the past 30 days, the beneficiary is considered a new 
admission to the PPS and follows the assessment schedule presented 
above (paragraph (a)). The new admission status is only for Medicare 
MDS assessment scheduling. There is no change in the patient's Medicare 
eligibility or coverage. Further, no additional days are added to 
Medicare's 100-day limit.
    c. Medicare Part A beneficiaries with less than 14 days of Medicare 
eligibility remaining. If the patient has less than 14 days of Medicare 
eligibility remaining when the SNF becomes subject to PPS, the facility 
has the option of completing an Other Medicare Required assessment or 
using the most recent assessment to classify the resident.
    These guidelines are intended to maximize the beneficiary's 
opportunity to receive Medicare Part A benefits during the facility's 
transition from one payment system to another, provided that the 
Medicare Part A eligibility rules and coverage guidelines are met. 
Facility staff are able to utilize the RUG-III clinical categories to 
determine coverage for this group of beneficiaries.
10. Late Assessments
    We recognize that the effect on revenue for missing an assessment 
can be great. To allow facilities flexibility and to minimize their 
revenue loss, we will permit an assessment to be completed as quickly 
as possible. Once a late assessment is conducted, the facility should 
return to the regular Medicare assessment schedule.
    Frequent late assessments may result in an on-site review of 
assessment scheduling practices for the facility. Also, facilities need 
to be aware that assessments not completed within Federal timeframes 
established at Sec. 483.20 may be cited as evidence of regulatory 
noncompliance.
    Late 5-day assessments. As discussed above, the assessment 
reference date for a 5-day assessment may be set as early as day 1 or 
as late as day 5 of the patient's stay. However, in the event of a late 
5-day assessment, a facility will be allowed to use up to and including 
day 8 as the assessment reference date with no financial penalty. This 
means that the facility may set an assessment reference date that is up 
to 3 days beyond the regular schedule and still receive the RUG-III 
rate calculated from the late assessment for the entire 14-day period 
of service covered by the 5-day assessment.
    A 5-day assessment with an assessment reference date of day 9 or 
later will be paid at the RUG-III default rate for all 8 or more days 
of service provided before the assessment reference date of the late or 
missed assessment. The RUG-III rate calculated from the late assessment 
will be paid starting on the assessment reference date entered on the 
late assessment through day 14.
    Late 14-day assessments. In order for an SNF to be in compliance 
with the requirements for Medicare or Medicaid certification, a 
comprehensive assessment must be performed for each patient in the 
facility by day 14. Therefore, unless the 5-day assessment included the 
RAPs, the 14-day assessment must include RAPs and must be completed by 
day 14. If the RAPs were completed with the 5-day assessment, then this 
assessment counts as the admission assessment and should be coded as 
both a Medicare 5-day assessment and as the admission assessment. When 
the 5-day assessment is the admission assessment (that is, it includes 
the RAPs), then no RAPs are required with the 14-day assessment, and 
the 14-day assessment may have an assessment reference date through day 
19, and a 5-day grace period like that allowed for the 30- and 60-day 
assessments.
    Late 30-day, 60-day, or 90-day assessments. A 5-day grace period is 
permitted for late 30- or 60-day assessments with no financial penalty. 
This means that the facility may set an assessment reference date that 
is up to 5 days beyond the regular schedule and still receive the RUG-
III rate calculated from the late assessment for the entire period of 
service covered by the assessment.
    To be in compliance with the requirements for Medicare and Medicaid 
certification, facilities must perform assessments quarterly. For this 
reason, the 90-day assessment grace period is only 2 days, in agreement 
with that allowed by the certification requirement. The latest that the 
first quarterly assessment may be completed is on day 92. The 90-day 
assessment should be coded both as a Medicare 90-day assessment and a 
quarterly review assessment.
    Assessments that have an assessment reference date that is 6 or 
more days beyond the regular schedule will result in a payment at the 
RUG-III default rate for those 5 or more days of service without a 
current assessment. The RUG-III rate calculated from the late 
assessment will be paid starting on the day of the assessment reference 
date entered on the late assessment.
    In the case of an error on an MDS that has been locked (in 
accordance with the requirements set forth at Sec. 483.20(f)), the 
facility must follow the normal MDS correction procedures. These 
procedures may require that the facility perform a Significant Change 
in Status assessment or a ``significant correction'' assessment. If 
appropriate, the facility must perform a new assessment with a new 
assessment reference period and then submit this new assessment. 
Payment will be based on the new assessment reference date if 
appropriate.

[[Page 26269]]

11. The Default Rate
    As described above, assessments are completed by SNFs according to 
an assessment schedule specifically designed for Medicare payment, and 
each assessment applies to specific days within a resident's SNF stay 
for purposes of making that payment. Compliance with this assessment 
schedule is critical to ensure that the appropriate level of payment is 
made by Medicare and the quality of Medicare SNF services is maintained 
under the PPS. Accordingly, SNFs that fail to perform assessments 
timely are to be paid a RUG-III default rate for the days of a 
patient's care for which they are not in compliance with this schedule 
(assuming that they submit sufficient documentation in lieu of a 
completed assessment to enable the fiscal intermediary to establish 
coverage under the existing administrative criteria used for this 
purpose, as discussed in section II.D of this rule). The RUG-III 
default rate takes the place of the otherwise applicable Federal rate 
(it does not supersede the facility-specific portion of the blended 
rate used for the transition period--see section III of this rule).
    The RUG-III default rate may be lower than the Federal rate that 
would have been paid for a patient had an SNF submitted an assessment 
in accordance with the prescribed assessment schedule. For the initial 
period of the PPS, the RUG-III default rate is $117.15 per day for 
urban SNFs and $116.85 per day for rural SNFs. This rate equals the 
lowest Federal rate category (PA1) listed in Tables 2.G and 2.H. and is 
subject to the wage index adjustment.
12. Case-Mix Adjusted Federal Payment Rates
    Application of the case-mix indices to the per diem Federal rates 
presented in Tables 2.A and 2.B result in 44 separate case-mix adjusted 
payment rates corresponding to the 44 separate RUG-III classification 
groups described above (see Tables 2.E and 2.F). The case-mix adjusted 
payment rates are listed separately for urban and rural SNFs (44 each) 
in Tables 2.E and 2.F below along with the corresponding case-mix index 
values. The rates are listed in total and by component. The application 
of the wage index, described later in this section, is the final 
adjustment applied to the Federal rates.

BILLING CODE 4120-01-P

[[Page 26270]]

[GRAPHIC] [TIFF OMITTED] TR12MY98.000



[[Page 26271]]

[GRAPHIC] [TIFF OMITTED] TR12MY98.001



[[Page 26272]]

[GRAPHIC] [TIFF OMITTED] TR12MY98.002



[[Page 26273]]

[GRAPHIC] [TIFF OMITTED] TR12MY98.003



BILLING CODE 4120-01-C

[[Page 26274]]

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we provide for 
adjustments to the Federal rates to account for differences in area 
wage levels using ``an appropriate wage index as determined by the 
Secretary.'' As discussed elsewhere in this rule, for the rates 
effective with this rule, we are using wage index values that are based 
on hospital wage data from cost reporting periods beginning in fiscal 
year 1994--the most recent hospital wage data in effect before the 
effective date of this rule. Accordingly, the wage values used in this 
rule are based on the same wage data as used to compute the wage index 
values for the hospital prospective payment system for discharges 
occurring in fiscal year 1998. To compute the SNF wage index values, 
HCFA groups wage data from all hospitals by urban (MSA) and rural area. 
Total wages and hours are summed for all hospitals in each area. An 
average hourly wage is computed for each area by dividing the total 
wages by the total hours. Wage index values are computed for each area 
by comparing the area specific average hourly wage to the national 
average hourly wage (computed in a similar manner). (A detailed 
description of the methodology used to compute the hospital prospective 
payment wage index is set forth in the final rule published in the 
Federal Register on August 29, 1997 (62 FR 45966).)
    The SNF wage index values are based on the Metropolitan Statistical 
Area (MSA) designations in effect prior to publication of this rule. 
For purposes of computing SNF wage index values, we are not taking into 
account changes in geographic classification for certain rural 
hospitals required under section 1886(d)(8)(B) of the Act or geographic 
reclassifications based on decisions of the Medicare Geographic 
Classification Review Board or the Secretary under section 1886(d)(10) 
of the Act. For SNF routine cost limits established under section 
1888(a) of the Act and in effect for cost reporting periods beginning 
prior to July 1, 1998, HCFA has always applied a hospital wage index 
that does not reflect geographic reclassifications. Changing the basis 
of the wage index now would likely have a distributional impact on 
payments. In consideration of this and the fact that HCFA may be 
changing to a SNF wage index in the near future (which could also have 
distributional effects), we find it appropriate to employ a hospital 
wage index that does not reflect these reclassifications. Accordingly, 
we continue to believe that the MSA (or non-MSA) designation provides 
the best method for determining the wage index values used for SNF 
payments and the physical location of hospitals is the appropriate 
basis upon which to construct the wage index.
    Table 2.I at the end of this section presents the wage indices 
applicable to urban and rural areas for use in making geographic 
adjustments to the Federal rates. Similar to the methodology described 
earlier relating to the standardization of the cost data for geographic 
differences in wage levels, the wage index adjustment is applied to the 
labor-related portion of the Federal rate, which is 75.888 percent of 
the total rate. The schedule of Federal rates below shows the Federal 
rates by labor-related and non-labor related components. Instructions 
and an example related to the application of the wage index to the 
case-mix adjusted rates are provided following the table.
    In addition, section 1888(e)(4)(G) of the Act requires that the 
wage index adjustment to the Federal rates be made in a manner that 
does not result in aggregate payments that are greater or less than 
those that would otherwise be made if the rates were not adjusted by 
the wage index. In the initial year of the PPS, this requirement is 
addressed through the standardization methodology, described earlier, 
which ensures that the application of the wage index has no effect on 
the level of aggregate payments (that is, any effects are purely 
distributional). In future years, HCFA must make wage index budget 
neutrality adjustment in updating the payment rates.

           Table 2.G.--Case Mix Adjusted Federal Rates for Urban SNFs by Labor and Non-Labor Component          
----------------------------------------------------------------------------------------------------------------
                                                                                                        Total   
                            RUGs III category                                 Labor-     Non-labor     Federal  
                                                                             related      related        rate   
----------------------------------------------------------------------------------------------------------------
RUC......................................................................      $291.57       $92.64      $384.21
RUB......................................................................       262.50        83.40       345.90
RUA......................................................................       248.37        78.91       327.28
RVC......................................................................       224.74        71.41       296.15
RVB......................................................................       217.27        69.03       286.30
RVA......................................................................       198.16        62.96       261.12
RHC......................................................................       206.06        65.47       271.53
RHB......................................................................       189.45        60.19       249.64
RHA......................................................................       173.66        55.18       228.84
RMC......................................................................       202.88        64.46       267.34
RMB......................................................................       181.27        57.60       238.87
RMA......................................................................       170.47        54.17       224.64
RLB......................................................................       161.60        51.35       212.95
RLA......................................................................       135.85        43.16       179.01
SE3......................................................................       191.93        60.98       252.91
SE2......................................................................       166.17        52.80       218.97
SE1......................................................................       147.89        46.99       194.88
SSC......................................................................       144.57        45.93       190.50
SSB......................................................................       137.92        43.82       181.74
SSA......................................................................       134.59        42.77       177.36
CC2......................................................................       143.74        45.67       189.41
CC1......................................................................       132.94        42.24       175.18
CB2......................................................................       126.29        40.13       166.42
CB1......................................................................       120.47        38.28       158.75
CA2......................................................................       119.65        38.01       157.66
CA1......................................................................       113.00        35.90       148.90
IB2......................................................................       108.01        34.32       142.33

[[Page 26275]]

                                                                                                                
IB1......................................................................       106.35        33.79       140.14
IA2......................................................................        98.04        31.15       129.19
IA1......................................................................        94.72        30.09       124.81
BB2......................................................................       107.18        34.06       141.24
BB1......................................................................       104.69        33.26       137.95
BA2......................................................................        97.21        30.89       128.10
BA1......................................................................        90.56        28.78       119.34
PE2......................................................................       116.32        36.96       153.28
PE1......................................................................       114.66        36.43       151.09
PD2......................................................................       110.51        35.11       145.62
PD1......................................................................       108.85        34.58       143.43
PC2......................................................................       104.69        33.26       137.95
PC1......................................................................       103.86        33.00       136.86
PB2......................................................................        93.05        29.57       122.62
PB1......................................................................        92.23        29.30       121.53
PA2......................................................................        91.40        29.04       120.44
PA1......................................................................        88.90        28.25       117.15
----------------------------------------------------------------------------------------------------------------


           Table 2.H.--Case Mix Adjusted Federal Rates for Rural SNFs by Labor and Non-Labor Component          
----------------------------------------------------------------------------------------------------------------
                                                                                                        Total   
                            RUGs III category                                 Labor-     Non-labor     Federal  
                                                                             related      related        rate   
----------------------------------------------------------------------------------------------------------------
RUC......................................................................      $309.77       $98.42      $408.19
RUB......................................................................       281.92        89.57       371.49
RUA......................................................................       268.39        85.27       353.66
RVC......................................................................       235.35        74.78       310.13
RVB......................................................................       228.20        72.50       300.70
RVA......................................................................       209.88        66.69       276.57
RHC......................................................................       211.64        67.24       278.88
RHB......................................................................       195.72        62.18       257.90
RHA......................................................................       180.60        57.38       237.98
RMC......................................................................       206.48        65.60       272.08
RMB......................................................................       186.78        59.03       244.81
RMA......................................................................       175.43        55.74       231.17
RLB......................................................................       162.73        51.71       214.44
RLA......................................................................       138.06        43.86       181.92
SE3......................................................................       187.38        59.53       246.91
SE2......................................................................       162.70        51.69       214.39
SE1......................................................................       145.19        46.13       191.32
SSC......................................................................       142.00        45.12       187.12
SSB......................................................................       135.63        43.10       178.73
SSA......................................................................       132.45        42.09       174.54
CC2......................................................................       141.21        44.87       186.08
CC1......................................................................       130.86        41.58       172.44
CB2......................................................................       124.49        39.56       164.05
CB1......................................................................       118.92        37.79       156.71
CA2......................................................................       118.13        37.53       155.66
CA1......................................................................       111.76        35.51       147.27
IB2......................................................................       106.99        33.99       140.98
IB1......................................................................       105.39        33.49       138.88
IA2......................................................................        97.43        30.96       128.39
IA1......................................................................        94.25        29.95       124.20
BB2......................................................................       106.19        33.74       139.93
BB1......................................................................       103.80        32.98       136.78
BA2......................................................................        96.64        30.70       127.34
BA1......................................................................        90.27        28.68       118.95
PE2......................................................................       114.95        36.52       151.47
PE1......................................................................       113.35        36.02       149.37
PD2......................................................................       109.37        34.75       144.12
PD1......................................................................       107.78        34.25       142.03
PC2......................................................................       103.80        32.98       136.78
PC1......................................................................       103.00        32.73       135.73
PB2......................................................................        92.66        29.44       122.10
PB1......................................................................        91.86        29.19       121.05
PA2......................................................................        91.07        28.93       120.00
PA1......................................................................        88.68        28.17       116.85
----------------------------------------------------------------------------------------------------------------


[[Page 26276]]

    For any RUG-III group, to compute a wage adjusted Federal payment 
rate applicable to the initial period of the PPS, the labor related 
portion of the payment rate is multiplied by the SNF's appropriate wage 
index factor listed in Table 2.I. The product of that calculation is 
added to the corresponding non-labor related component. The resulting 
amount is the Federal rate applicable to a patient in that RUG-III 
group for that SNF. See the example below.
    ABC SNF is located in State College, Pennsylvania. The per diem 
Federal rate applicable to an Ultra High Rehabilitation `A' patient 
(RUA) is calculated using the rates listed in Table 2.G and the wage 
index factor found in Table 2.I. Accordingly, the computation of the 
adjusted per diem rate is made as follows: 
(248.37 x .9635)+78.91=$318.21 per diem.
    This Federal rate will be applicable to all patients in the RUA 
category for Happy Valley SNF for the initial period of the PPS (July 
1, 1998 through September 30, 1999).

D. Updates to the Federal Rates

    For the initial period of the PPS beginning on July 1, 1998 and 
ending on September 30, 1999, the payment rates are those contained in 
this interim final rule. In accordance with section 1888(e)(4)(H) of 
the Act, for each succeeding fiscal year, we will publish the rates in 
the Federal Register before August 1 of the year preceding the affected 
Federal fiscal year.
    For fiscal years 2000 through 2002, section 1888(e)(4)(E)(ii) of 
the Act requires that the rates be increased by a factor equal to the 
SNF market basket index change minus 1 percentage point. In addition, 
for subsequent fiscal years, this section requires the rates to be 
increased by the applicable SNF market basket index change.
    Section 1888(e)(4)(F) of the Act provides that the Secretary 
``may'' adjust the unadjusted Federal per diem rates if the Secretary 
``determines that the adjustments under subparagraph (G)(i) for a 
previous fiscal year (or estimates that such adjustments for a future 
fiscal year) did (or are likely to) result in a change in aggregate 
payments'' during the fiscal year because of changes in the aggregate 
case-mix of the Medicare patient population that are not related to 
actual patient condition (that is, ``case-mix creep''). HCFA is 
currently developing a methodology to implement this adjustment.
    In addition, since enactment of the BBA 1997, various suggestions 
have been made relating to adjustments to the rates promulgated in this 
interim final regulation. Some have suggested that the rates should be 
increased to reflect such factors as additional nursing care, the 
future growth of subacute care practices, specific services, and other 
items that may not be accurately reflected in the rates, etc. Other 
suggestions have related to downward adjustments to the rates to 
reflect the presence of inappropriate care or payments in the 1995 cost 
data used to establish the rates promulgated in this rule. For example, 
concerns have been raised regarding whether these data are inflated, 
reflecting medically unnecessary care and/or improper payments related 
to therapies and other ancillary services and that the inclusion of 
such costs results in inappropriately high payments to SNFs under the 
PPS. Studies by the Office of the Inspector General (OIG) and HCFA 
program integrity activities have found that incorrect payments have 
been made to SNFs in the past. One way to remove such costs from the 
data is the application of adjustments to the 1995 data base and 
recomputing the payment rates. However, the magnitude of these 
incorrect payments is not definitively known at this time. Therefore, 
the OIG, in conjunction with HCFA, is proposing to examine the extent 
to which the base period costs reflect costs that were inappropriately 
allowed. If this examination reveals excessive inappropriate costs, we 
would address this issue in a future proposed rule, or perhaps seek 
legislation to adjust future payment rates downward.

                 Table 2.I.--Wage Index for Urban Areas                 
------------------------------------------------------------------------
                                                                  Wage  
    Urban Area (Constituent counties or county equivalents)       index 
------------------------------------------------------------------------
0040  Abilene, TX.............................................    0.8287
  Taylor, TX                                                            
0060  Aguadilla, PR...........................................    0.4188
  Aguada, PR                                                            
  Aguadilla, PR                                                         
  Moca, PR                                                              
0080  Akron, OH...............................................    0.9772
  Portage, OH                                                           
  Summit, OH                                                            
0120  Albany, GA..............................................    0.7914
  Dougherty, GA                                                         
  Lee, GA                                                               
0160  Albany-Schenectady-Troy, NY.............................    0.8480
  Albany, NY                                                            
  Montgomery, NY                                                        
  Rensselaer, NY                                                        
  Saratoga, NY                                                          
  Schenectady, NY                                                       
  Schoharie, NY                                                         
0200  Albuquerque, NM.........................................    0.9309
  Bernalillo, NM                                                        
  Sandoval, NM                                                          
  Valencia, NM                                                          
0220  Alexandria, LA..........................................    0.8162
  Rapides, LA                                                           
0240  Allentown-Bethlehem-Easton, PA..........................    1.0086
  Carbon, PA                                                            
  Lehigh, PA                                                            
  Northampton, PA                                                       
0280  Altoona, PA.............................................    0.9137
  Blair, PA                                                             
0320  Amarillo, TX............................................    0.9425
  Potter, TX                                                            
  Randall, TX                                                           
0380  Anchorage, AK...........................................    1.2842
  Anchorage, AK                                                         
0440  Ann Arbor, MI...........................................    1.1785
  Lenawee, MI                                                           
  Livingston, MI                                                        
  Washtenaw, MI                                                         
0450  Anniston, AL............................................    0.8266
  Calhoun, AL                                                           
0460  Appleton-Oshkosh-Neenah, WI.............................    0.8996
  Calumet, WI                                                           
  Outagamie, WI                                                         
  Winnebago, WI                                                         
0470  Arecibo, PR.............................................    0.4218
  Arecibo, PR                                                           
  Camuy, PR                                                             
  Hatillo, PR                                                           
0480  Asheville, NC...........................................    0.9072
  Buncombe, NC                                                          
  Madison, NC                                                           
0500  Athens, GA..............................................    0.9087
  Clarke, GA                                                            
  Madison, GA                                                           
  Oconee, GA                                                            
0520  Atlanta, GA.............................................    0.9823
  Barrow, GA                                                            
  Bartow, GA                                                            
  Carroll, GA                                                           
  Cherokee, GA                                                          
  Clayton, GA                                                           
  Cobb, GA                                                              
  Coweta, GA                                                            
  De Kalb, GA                                                           
  Douglas, GA                                                           
  Fayette, GA                                                           
  Forsyth, GA                                                           
  Fulton, GA                                                            
  Gwinnett, GA                                                          
  Henry, GA                                                             
  Newton, GA                                                            
  Paulding, GA                                                          
  Pickens, GA                                                           
  Rockdale, GA                                                          
  Spalding, GA                                                          
  Walton, GA                                                            
0560  Atlantic City-Cape May, NJ..............................    1.1155
  Atlantic City, NJ                                                     
  Cape May, NJ                                                          
0600  Augusta-Aiken, GA-SC....................................    0.9333
  Columbia, GA                                                          
  McDuffie, GA                                                          
  Richmond, GA                                                          
  Aiken, SC                                                             
  Edgefield, SC                                                         
0640  Austin-San Marcos, TX...................................    0.9133

[[Page 26277]]

                                                                        
  Bastrop, TX                                                           
  Caldwell, TX                                                          
  Hays, TX                                                              
  Travis, TX                                                            
  Williamson, TX                                                        
0680  Bakersfield, CA.........................................    1.0014
  Kern, CA                                                              
0720  Baltimore, MD...........................................    0.9689
  Anne Arundel, MD                                                      
  Baltimore, MD                                                         
  Baltimore City, MD                                                    
  Carroll, MD                                                           
  Harford, MD                                                           
  Howard, MD                                                            
  Queen Annes, MD                                                       
0733  Bangor, ME..............................................    0.9478
  Penobscot, ME                                                         
0743  Barnstable-Yarmouth, MA.................................    1.4291
  Barnstable, MA                                                        
0760  Baton Rouge, LA.........................................    0.8382
  Ascension, LA                                                         
  East Baton Rouge, LA                                                  
  Livingston, LA                                                        
  West Baton Rouge, LA                                                  
0840  Beaumont-Port Arthur, TX................................    0.8593
  Hardin, TX                                                            
  Jefferson, TX                                                         
  Orange, TX                                                            
0860  Bellingham, WA..........................................    1.1221
  Whatcom, WA                                                           
0870  Benton Harbor, MI.......................................    0.8634
  Berrien, MI                                                           
0875  Bergen-Passaic, NJ......................................    1.2156
  Bergen, NJ                                                            
  Passaic, NJ                                                           
0880  Billings, MT............................................    0.9783
  Yellowstone, MT                                                       
0920  Biloxi-Gulfport-Pascagoula, MS..........................    0.8415
  Hancock, MS                                                           
  Harrison, MS                                                          
  Jackson, MS                                                           
0960  Binghamton, NY..........................................    0.8914
  Broome, NY                                                            
  Tioga, NY                                                             
1000  Birmingham, AL..........................................    0.9005
  Blount, AL                                                            
  Jefferson, AL                                                         
  St Clair, AL                                                          
  Shelby, AL                                                            
1010  Bismarck, ND............................................    0.7695
  Burleigh, ND                                                          
  Morton, ND                                                            
1020  Bloomington, IN.........................................    0.9128
  Monroe, IN                                                            
1040  Bloomington-Normal, IL..................................    0.8733
  McLean, IL                                                            
1080  Boise City, ID..........................................    0.8856
  Ada, ID                                                               
  Canyon, ID                                                            
1123  Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH........    1.1506
  Bristol, MA                                                           
  Essex, MA                                                             
  Middlesex, MA                                                         
  Norfolk, MA                                                           
  Plymouth, MA                                                          
  Suffolk, MA                                                           
  Worcester, MA                                                         
  Hillsborough, NH                                                      
  Merrimack, NH                                                         
  Rockingham, NH                                                        
  Strafford, NH                                                         
1125  Boulder-Longmont, CO....................................    1.0015
  Boulder, CO                                                           
1145  Brazoria, TX............................................    0.9341
  Brazoria, TX                                                          
1150  Bremerton, WA...........................................    1.0999
  Kitsap, WA                                                            
1240  Brownsville-Harlingen-San Benito, TX....................    0.8740
  Cameron, TX                                                           
1260  Bryan-College Station, TX...............................    0.8571
  Brazos, TX                                                            
1280  Buffalo-Niagara Falls, NY...............................    0.9272
  Erie, NY                                                              
  Niagara, NY                                                           
1303  Burlington, VT..........................................    1.0142
  Chittenden, VT                                                        
  Franklin, VT                                                          
  Grand Isle, VT                                                        
1310  Caguas, PR..............................................    0.4459
  Caguas, PR                                                            
  Cayey, PR                                                             
  Cidra, PR                                                             
  Gurabo, PR                                                            
  San Lorenzo, PR                                                       
1320  Canton-Massillon, OH....................................    0.8961
  Carroll, OH                                                           
  Stark, OH                                                             
1350  Casper, WY..............................................    0.9013
  Natrona, WY                                                           
1360  Cedar Rapids, IA........................................    0.8529
  Linn, IA                                                              
1400  Champaign-Urbana, IL....................................    0.8824
  Champaign, IL                                                         
1440  Charleston-North Charleston, SC.........................    0.8807
  Berkeley, SC                                                          
  Charleston, SC                                                        
  Dorchester, SC                                                        
1480  Charleston, WV..........................................    0.9142
  Kanawha, WV                                                           
  Putnam, WV                                                            
1520  Charlotte-Gastonia-Rock Hill, NC-SC.....................    0.9710
  Cabarrus, NC                                                          
  Gaston, NC                                                            
  Lincoln, NC                                                           
  Mecklenburg, NC                                                       
  Rowan, NC                                                             
  Stanly, NC                                                            
  Union, NC                                                             
  York, SC                                                              
1540  Charlottesville, VA.....................................    0.9051
  Albemarle, VA                                                         
  Charlottesville City, VA                                              
  Fluvanna, VA                                                          
  Greene, VA                                                            
1560  Chattanooga, TN-GA......................................    0.8658
  Catoosa, GA                                                           
  Dade, GA                                                              
  Walker, GA                                                            
  Hamilton, TN                                                          
  Marion, TN                                                            
1580  Cheyenne, WY............................................    0.7555
  Laramie, WY                                                           
1600  Chicago, IL.............................................    1.0860
  Cook, IL                                                              
  De Kalb, IL                                                           
  Du Page, IL                                                           
  Grundy, IL                                                            
  Kane, IL                                                              
  Kendall, IL                                                           
  Lake, IL                                                              
  McHenry, IL                                                           
  Will, IL                                                              
1620  Chico-Paradise, CA......................................    1.0429
  Butte, CA                                                             
1640  Cincinnati, OH-KY-IN....................................    0.9474
  Dearborn, IN                                                          
  Ohio, IN                                                              
  Boone, KY                                                             
  Campbell, KY                                                          
  Gallatin, KY                                                          
  Grant, KY                                                             
  Kenton, KY                                                            
  Pendleton, KY                                                         
  Brown, OH                                                             
  Clermont, OH                                                          
  Hamilton, OH                                                          
  Warren, OH                                                            
1660  Clarksville-Hopkinsville, TN-KY.........................    0.7852
  Christian, KY                                                         
  Montgomery, TN                                                        
1680  Cleveland-Lorain-Elyria, OH.............................    0.9804
  Ashtabula, OH                                                         
  Cuyahoga, OH                                                          
  Geauga, OH                                                            
  Lake, OH                                                              
  Lorain, OH                                                            
  Medina, OH                                                            
1720  Colorado Springs, CO....................................    0.9316
  El Paso, CO                                                           
1740  Columbia, MO............................................    0.9001
  Boone, MO                                                             
1760  Columbia, SC............................................    0.9192
  Lexington, SC                                                         
  Richland, SC                                                          
1800  Columbus, GA-AL.........................................    0.8288
  Russell, AL                                                           
  Chattanoochee, GA                                                     
  Harris, GA                                                            
  Muscogee, GA                                                          
1840  Columbus, OH............................................    0.9793
  Delaware, OH                                                          
  Fairfield, OH                                                         
  Franklin, OH                                                          
  Licking, OH                                                           
  Madison, OH                                                           
  Pickaway, OH                                                          
1880  Corpus Christi, TX......................................    0.8945
  Nueces, TX                                                            
  San Patricio, TX                                                      
1900  Cumberland, MD-WV.......................................    0.8822
  Allegany, MD                                                          
  Mineral, WV                                                           
1920  Dallas, TX..............................................    0.9703
  Collin, TX                                                            
  Dallas, TX                                                            
  Denton, TX                                                            
  Ellis, TX                                                             
  Henderson, TX                                                         
  Hunt, TX                                                              
  Kaufman, TX                                                           
  Rockwall, TX                                                          

[[Page 26278]]

                                                                        
1950  Danville, VA............................................    0.8146
  Danville City, VA                                                     
  Pittsylvania, VA                                                      
1960  Davenport-Moline-Rock Island, IA-IL.....................    0.8405
  Scott, IA                                                             
  Henry, IL                                                             
  Rock Island, IL                                                       
2000  Dayton-Springfield, OH..................................    0.9584
  Clark, OH                                                             
  Greene, OH                                                            
  Miami, OH                                                             
  Montgomery, OH                                                        
2020  Daytona Beach, FL.......................................    0.8375
  Flagler, FL                                                           
  Volusia, FL                                                           
2030  Decatur, AL.............................................    0.8286
  Lawrence, AL                                                          
  Morgan, AL                                                            
2040  Decatur, IL.............................................    0.7915
  Macon, IL                                                             
2080  Denver, CO..............................................    1.0386
  Adams, CO                                                             
  Arapahoe, CO                                                          
  Denver, CO                                                            
  Douglas, CO                                                           
  Jefferson, CO                                                         
2120  Des Moines, IA..........................................    0.8837
  Dallas, IA                                                            
  Polk, IA                                                              
  Warren, IA                                                            
2160  Detroit, MI.............................................    1.0825
  Lapeer, MI                                                            
  Macomb, MI                                                            
  Monroe, MI                                                            
  Oakland, MI                                                           
  St Clair, MI                                                          
  Wayne, MI                                                             
2180  Dothan, AL..............................................    0.8070
  Dale, AL                                                              
  Houston, AL                                                           
2190  Dover, DE...............................................    0.9303
  Kent, DE                                                              
2200  Dubuque, IA.............................................    0.8088
  Dubuque, IA                                                           
2240  Duluth-Superior, MN-WI..................................    0.9779
  St Louis, MN                                                          
  Douglas, WI                                                           
2281  Dutchess County, NY.....................................    1.0632
  Dutchess, NY                                                          
2290  Eau Claire, WI..........................................    0.8764
  Chippewa, WI                                                          
  Eau Claire, WI                                                        
2320  El Paso, TX.............................................    1.0123
  El Paso, TX                                                           
2330  Elkhart-Goshen, IN......................................    0.9081
  Elkhart, IN                                                           
2335  Elmira, NY..............................................    0.8247
  Chemung, NY                                                           
2340  Enid, OK................................................    0.7962
  Garfield, OK                                                          
2360  Erie, PA................................................    0.8862
  Erie, PA                                                              
2400  Eugene-Springfield, OR..................................    1.1435
  Lane, OR                                                              
2440  Evansville-Henderson, IN-KY.............................    0.8641
  Posey, IN                                                             
  Vanderburgh, IN                                                       
  Warrick, IN                                                           
  Henderson, KY                                                         
2520  Fargo-Moorhead, ND-MN...................................    0.8837
  Clay, MN                                                              
  Cass, ND                                                              
2560  Fayetteville, NC........................................    0.8734
  Cumberland, NC                                                        
2580  Fayetteville-Springdale-Rogers, AR......................    0.7461
  Benton, AR                                                            
  Washington, AR                                                        
2620  Flagstaff, AZ-UT........................................    0.9115
  Coconino, AZ                                                          
  Kane, UT                                                              
2640  Flint, MI...............................................    1.1171
  Genesee, MI                                                           
2650  Florence, AL............................................    0.7551
  Colbert, AL                                                           
  Lauderdale, AL                                                        
2655  Florence, SC............................................    0.8711
  Florence, SC                                                          
2670  Fort Collins-Loveland, CO...............................    1.0248
  Larimer, CO                                                           
2680  Ft Lauderdale, FL.......................................    1.0448
  Broward, FL                                                           
2700  Fort Myers-Cape Coral, FL...............................    0.8788
  Lee, FL                                                               
2710  Fort Pierce-Port St. Lucie, FL..........................    1.0257
  Martin, FL                                                            
  St. Lucie, FL                                                         
2720  Fort Smith, AR-OK.......................................    0.7769
  Crawford, AR                                                          
  Sebastian, AR                                                         
  Sequoyah, OK                                                          
2750  Fort Walton Beach, FL...................................    0.8765
  Okaloosa, FL                                                          
2760  Fort Wayne, IN..........................................    0.8901
  Adams, IN                                                             
  Allen, IN                                                             
  De Kalb, IN                                                           
  Huntington, IN                                                        
  Wells, IN                                                             
  Whitley, IN                                                           
2800  Forth Worth-Arlington, TX...............................    0.9979
  Hood, TX                                                              
  Johnson, TX                                                           
  Parker, TX                                                            
  Tarrant, TX                                                           
2840  Fresno, CA..............................................    1.0607
  Fresno, CA                                                            
  Madera, CA                                                            
2880  Gadsden, AL.............................................    0.8815
  Etowah, AL                                                            
2900  Gainesville, FL.........................................    0.9616
  Alachua, FL                                                           
2920  Galveston-Texas City, TX................................    1.0564
  Galveston, TX                                                         
2960  Gary, IN................................................    0.9633
  Lake, IN                                                              
  Porter, IN                                                            
2975  Glens Falls, NY.........................................    0.8386
  Warren, NY                                                            
  Washington, NY                                                        
2980  Goldsboro, NC...........................................    0.8443
  Wayne, NC                                                             
2985  Grand Forks, ND-MN......................................    0.8745
  Polk, MN                                                              
  Grand Forks, ND                                                       
2995 Grand Junction, CO.......................................    0.9090
  Mesa, CO                                                              
3000  Grand Rapids-Muskegon-Holland, MI.......................    1.0147
  Allegan, MI                                                           
  Kent, MI                                                              
  Muskegon, MI                                                          
  Ottawa, MI                                                            
3040  Great Falls, MT.........................................    0.8803
  Cascade, MT                                                           
3060  Greeley, CO.............................................    1.0097
  Weld, CO                                                              
3080  Green Bay, WI...........................................    0.9097
  Brown, WI                                                             
3120  Greensboro-Winston-Salem-High Point, NC.................    0.9351
  Alamance, NC                                                          
  Davidson, NC                                                          
  Davie, NC                                                             
  Forsyth, NC                                                           
  Guilford, NC                                                          
  Randolph, NC                                                          
  Stokes, NC                                                            
  Yadkin, NC                                                            
3150  Greenville, NC..........................................    0.9064
  Pitt, NC                                                              
3160  Greenville-Spartanburg-Anderson, SC.....................    0.9059
  Anderson, SC                                                          
  Cherokee, SC                                                          
  Greenville, SC                                                        
  Pickens, SC                                                           
  Spartanburg, SC                                                       
3180  Hagerstown, MD..........................................    0.9681
  Washington, MD                                                        
3200  Hamilton-Middletown, OH.................................    0.8767
  Butler, OH                                                            
3240  Harrisburg-Lebanon-Carlisle, PA.........................    1.0187
  Cumberland, PA                                                        
  Dauphin, PA                                                           
  Lebanon, PA                                                           
  Perry, PA                                                             
3283  Hartford, CT............................................    1.2562
  Hartford, CT                                                          
  Litchfield, CT                                                        
  Middlesex, CT                                                         
  Tolland, CT                                                           
3285  Hattiesburg, MS.........................................    0.7192
  Forrest, MS                                                           
  Lamar, MS                                                             
3290  Hickory-Morganton-Lenoir, NC............................    0.8686
  Alexander, NC                                                         
  Burke, NC                                                             
  Caldwell, NC                                                          
  Catawba, NC                                                           
3320  Honolulu, HI............................................    1.1816
  Honolulu, HI                                                          
3350  Houma, LA...............................................    0.7854
  Lafourche, LA                                                         
  Terrebonne, LA                                                        
3360  Houston, TX.............................................    0.9855
  Chambers, TX                                                          
  Fort Bend, TX                                                         
  Harris, TX                                                            
  Liberty, TX                                                           
  Montgomery, TX                                                        
  Waller, TX                                                            

[[Page 26279]]

                                                                        
3400  Huntington-Ashland, WV-KY-OH............................    0.9160
  Boyd, KY                                                              
  Carter, KY                                                            
  Greenup, KY                                                           
  Lawrence, OH                                                          
  Cabell, WV                                                            
  Wayne, WV                                                             
3440  Huntsville, AL..........................................    0.8485
  Limestone, AL                                                         
  Madison, AL                                                           
3480  Indianapolis, IN........................................    0.9848
  Boone, IN                                                             
  Hamilton, IN                                                          
  Hancock, IN                                                           
  Hendricks, IN                                                         
  Johnson, IN                                                           
  Madison, IN                                                           
  Marion, IN                                                            
  Morgan, IN                                                            
  Shelby, IN                                                            
3500  Iowa City, IA...........................................    0.9413
  Johnson, IA                                                           
3520  Jackson, MI.............................................    0.9052
  Jackson, MI                                                           
3560  Jackson, MS.............................................    0.7760
  Hinds, MS                                                             
  Madison, MS                                                           
  Rankin, MS                                                            
3580  Jackson, TN.............................................    0.8522
  Chester, TN                                                           
  Madison, TN                                                           
3600  Jacksonville, FL........................................    0.8969
  Clay, FL                                                              
  Duval, FL                                                             
  Nassau, FL                                                            
  St Johns, FL                                                          
3605  Jacksonville, NC........................................    0.6973
  Onslow, NC                                                            
3610  Jamestown, NY...........................................    0.7552
  Chautaqua, NY                                                         
3620  Janesville-Beloit, WI...................................    0.8824
  Rock, WI                                                              
3640  Jersey City, NJ.........................................    1.1412
  Hudson, NJ                                                            
3660  Johnson City-Kingsport-Bristol, TN-VA...................    0.9114
  Carter, TN                                                            
  Hawkins, TN                                                           
  Sullivan, TN                                                          
  Unicoi, TN                                                            
  Washington, TN                                                        
  Bristol City, VA                                                      
  Scott, VA                                                             
  Washington, VA                                                        
3680  Johnstown, PA...........................................    0.8378
  Cambria, PA                                                           
  Somerset, PA                                                          
3700 Jonesboro, AR............................................    0.7443
  Craighead, AR                                                         
3710  Joplin, MO..............................................    0.7510
  Jasper, MO                                                            
  Newton, MO                                                            
3720  Kalamazoo-Battlecreek, MI...............................    1.0668
  Calhoun, MI                                                           
  Kalamazoo, MI                                                         
  Van Buren, MI                                                         
3740  Kankakee, IL............................................    0.8653
  Kankakee, IL                                                          
3760  Kansas City, KS-MO......................................    0.9564
  Johnson, KS                                                           
  Leavenworth, KS                                                       
  Miami, KS                                                             
  Wyandotte, KS                                                         
  Cass, MO                                                              
  Clay, MO                                                              
  Clinton, MO                                                           
  Jackson, MO                                                           
  Lafayette, MO                                                         
  Platte, MO                                                            
  Ray, MO                                                               
3800  Kenosha, WI.............................................    0.9196
  Kenosha, WI                                                           
3810  Killeen-Temple, TX......................................    1.0252
  Bell, TX                                                              
  Coryell, TX                                                           
3840  Knoxville, TN...........................................    0.8831
  Anderson, TN                                                          
  Blount, TN                                                            
  Knox, TN                                                              
  Loudon, TN                                                            
  Sevier, TN                                                            
  Union, TN                                                             
3850  Kokomo, IN..............................................    0.8416
  Howard, IN                                                            
  Tipton, IN                                                            
3870  La Crosse, WI-MN........................................    0.8749
  Houston, MN                                                           
  La Crosse, WI                                                         
3880  Lafayette, LA...........................................    0.8206
  Acadia, LA                                                            
  Lafayette, LA                                                         
  St. Landry, LA                                                        
  St. Martin, LA                                                        
3920  Lafayette, IN...........................................    0.9174
  Clinton, IN                                                           
  Tippecanoe, IN                                                        
3960  Lake Charles, LA........................................    0.7776
  Calcasieu, LA                                                         
3980  Lakeland-Winter Haven, FL...............................    0.8806
  Polk, FL                                                              
4000  Lancaster, PA...........................................    0.9481
  Lancaster, PA                                                         
4040  Lansing-East Lansing, MI................................    1.0088
  Clinton, MI                                                           
  Eaton, MI                                                             
  Ingham, MI                                                            
4080  Laredo, TX..............................................    0.7325
  Webb, TX                                                              
4100  Las Cruces, NM..........................................    0.8646
  Dona Ana, NM                                                          
4120  Las Vegas, NV-AZ........................................    1.0592
  Mohave, AZ                                                            
  Clark, NV                                                             
  Nye, NV                                                               
4150  Lawrence, KS............................................    0.8608
  Douglas, KS                                                           
4200  Lawton, OK..............................................    0.9045
  Comanche, OK                                                          
4243  Lewiston-Auburn, ME.....................................    0.9536
  Androscoggin, ME                                                      
4280  Lexington, KY...........................................    0.8390
  Bourbon, KY                                                           
  Clark, KY                                                             
  Fayette, KY                                                           
  Jessamine, KY                                                         
  Madison, KY                                                           
  Scott, KY                                                             
  Woodford, KY                                                          
4320  Lima, OH................................................    0.9185
  Allen, OH                                                             
  Auglaize, OH                                                          
4360  Lincoln, NE.............................................    0.9231
  Lancaster, NE                                                         
4400  Little Rock-North Little Rock, AR.......................    0.8490
  Faulkner, AR                                                          
  Lonoke, AR                                                            
  Pulaski, AR                                                           
  Saline, AR                                                            
4420  Longview-Marshall, TX...................................    0.8613
  Gregg, TX                                                             
  Harrison, TX                                                          
  Upshur, TX                                                            
4480  Los Angeles-Long Beach, CA..............................    1.2232
  Los Angeles, CA                                                       
4520  Louisville, KY-IN.......................................    0.9507
  Clark, IN                                                             
  Floyd, IN                                                             
  Harrison, IN                                                          
  Scott, IN                                                             
  Bullitt, KY                                                           
  Jefferson, KY                                                         
  Oldham, KY                                                            
4600  Lubbock, TX.............................................    0.8400
  Lubbock, TX                                                           
4640  Lynchburg, VA...........................................    0.8228
  Amherst, VA                                                           
  Bedford City, VA                                                      
  Bedford, VA                                                           
  Campbell, VA                                                          
  Lynchburg City, VA                                                    
4680  Macon, GA...............................................    0.9227
  Bibb, GA                                                              
  Houston, GA                                                           
  Jones, GA                                                             
  Peach, GA                                                             
  Twiggs, GA                                                            
4720  Madison, WI.............................................    1.0055
  Dane, WI                                                              
4800  Mansfield, OH...........................................    0.8639
  Crawford, OH                                                          
  Richland, OH                                                          
4840  Mayaguez, PR............................................    0.4475
  Anasco, PR                                                            
  Cabo Rojo, PR                                                         
  Hormigueros, PR                                                       
  Mayaguez, PR                                                          
  Sabana Grande, PR                                                     
  San German, PR                                                        
4880  McAllen-Edinburg-Mission, TX............................    0.8371
  Hidalgo, TX                                                           
4890 Medford-Ashland, OR......................................    1.0354
  Jackson, OR                                                           
4900  Melbourne-Titusville-Palm Bay, FL.......................    0.8819
  Brevard, FL                                                           
4920  Memphis, TN-AR-MS.......................................    0.8589
  Crittenden, AR                                                        
  De Soto, MS                                                           
  Fayette, TN                                                           
  Shelby, TN                                                            
  Tipton, TN                                                            
4940  Merced, CA..............................................    1.0947
  Merced, CA                                                            

[[Page 26280]]

                                                                        
5000  Miami, FL...............................................    0.9859
  Dade, FL                                                              
5015  Middlesex-Somerset-Hunterdon, NJ........................    1.1059
  Hunterdon, NJ                                                         
  Middlesex, NJ                                                         
  Somerset, NJ                                                          
5080  Milwaukee-Waukesha, WI..................................    0.9819
  Milwaukee, WI                                                         
  Ozaukee, WI                                                           
  Washington, WI                                                        
  Waukesha, WI                                                          
5120  Minneapolis-St Paul, MN-WI..............................    1.0733
  Anoka, MN                                                             
  Carver, MN                                                            
  Chisago, MN                                                           
  Dakota, MN                                                            
  Hennepin, MN                                                          
  Isanti, MN                                                            
  Ramsey, MN                                                            
  Scott, MN                                                             
  Sherburne, MN                                                         
  Washington, MN                                                        
  Wright, MN                                                            
  Pierce, WI                                                            
  St Croix, WI                                                          
5160  Mobile, AL..............................................    0.8455
  Baldwin, AL                                                           
  Mobile, AL                                                            
5170  Modesto, CA.............................................    1.0794
  Stanislaus, CA                                                        
5190  Monmouth-Ocean, NJ......................................    1.0934
  Monmouth, NJ                                                          
  Ocean, NJ                                                             
5200  Monroe, LA..............................................    0.8414
  Ouachita, LA                                                          
5240  Montgomery, AL..........................................    0.7671
  Autauga, AL                                                           
  Elmore, AL                                                            
  Montgomery, AL                                                        
5280  Muncie, IN..............................................    0.9173
  Delaware, IN                                                          
5330  Myrtle Beach, SC........................................    0.8072
  Horry, SC                                                             
5345  Naples, FL..............................................    1.0109
  Collier, FL                                                           
5360  Nashville, TN...........................................    0.9182
  Cheatham, TN                                                          
  Davidson, TN                                                          
  Dickson, TN                                                           
  Robertson, TN                                                         
  Rutherford TN                                                         
  Sumner, TN                                                            
  Williamson, TN                                                        
  Wilson, TN                                                            
5380  Nassau-Suffolk, NY......................................    1.3807
  Nassau, NY                                                            
  Suffolk, NY                                                           
5483  New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT.....  1.2618  
  Fairfield, CT                                                         
  New Haven, CT                                                         
5523  New London-Norwich, CT..................................    1.2013
  New London, CT                                                        
5560  New Orleans, LA.........................................    0.9566
  Jefferson, LA                                                         
  Orleans, LA                                                           
  Plaquemines, LA                                                       
  St Bernard, LA                                                        
  St Charles, LA                                                        
  St James, LA                                                          
  St John The Baptist, LA                                               
  St Tammany, LA                                                        
5600  New York, NY............................................    1.4449
  Bronx, NY                                                             
  Kings, NY                                                             
  New York, NY                                                          
  Putnam, NY                                                            
  Queens, NY                                                            
  Richmond, NY                                                          
  Rockland, NY                                                          
  Westchester, NY                                                       
5640  Newark, NJ..............................................    1.1980
  Essex, NJ                                                             
  Morris, NJ                                                            
  Sussex, NJ                                                            
  Union, NJ                                                             
  Warren, NJ                                                            
5660  Newburgh, NY-PA.........................................    1.1283
  Orange, NY                                                            
  Pike, PA                                                              
5720  Norfolk-Virginia Beach-Newport News, VA-NC..............    0.8316
  Currituck, NC                                                         
  Chesapeake City, VA                                                   
  Gloucester, VA                                                        
  Hampton City, VA                                                      
  Isle of Wight, VA                                                     
  James City, VA                                                        
  Mathews, VA                                                           
  Newport News City, VA                                                 
  Norfolk City, VA                                                      
  Poquoson City, VA                                                     
  Portsmouth City, VA                                                   
  Suffolk City, VA                                                      
  Virginia Beach City VA                                                
  Williamsburg City, VA                                                 
  York, VA                                                              
5775  Oakland, CA.............................................    1.5068
  Alameda, CA                                                           
  Contra Costa, CA                                                      
5790  Ocala, FL...............................................    0.9032
  Marion, FL                                                            
5800  Odessa-Midland, TX......................................    0.8660
  Ector, TX                                                             
  Midland, TX                                                           
5880  Oklahoma City, OK.......................................    0.8481
  Canadian, OK                                                          
  Cleveland, OK                                                         
  Logan, OK                                                             
  McClain, OK                                                           
  Oklahoma, OK                                                          
  Pottawatomie, OK                                                      
5910  Olympia, WA.............................................    1.0901
  Thurston, WA                                                          
5920  Omaha, NE-IA............................................    0.9421
  Pottawattamie, IA                                                     
  Cass, NE                                                              
  Douglas, NE                                                           
  Sarpy, NE                                                             
  Washington, NE                                                        
5945  Orange County, CA.......................................    1.1605
  Orange, CA                                                            
5960  Orlando, FL.............................................    0.9397
  Lake, FL                                                              
  Orange, FL                                                            
  Osceola, FL                                                           
  Seminole, FL                                                          
5990  Owensboro, KY...........................................    0.7480
  Daviess, KY                                                           
6015  Panama City, FL.........................................    0.8337
  Bay, FL                                                               
6020  Parkersburg-Marietta, WV-OH.............................    0.8046
  Washington, OH                                                        
  Wood, WV                                                              
6080  Pensacola, FL...........................................    0.8193
  Escambia, FL                                                          
  Santa Rosa, FL                                                        
6120  Peoria-Pekin, IL........................................    0.8571
  Peoria, IL                                                            
  Tazewell, IL                                                          
  Woodford, IL                                                          
6160  Philadelphia, PA-NJ.....................................    1.1398
  Burlington, NJ                                                        
  Camden, NJ                                                            
  Gloucester, NJ                                                        
  Salem, NJ                                                             
  Bucks, PA                                                             
  Chester, PA                                                           
  Delaware, PA                                                          
  Montgomery, PA                                                        
  Philadelphia, PA                                                      
6200  Phoenix-Mesa, AZ........................................    0.9606
  Maricopa, AZ                                                          
  Pinal, AZ                                                             
6240  Pine Bluff, AR..........................................    0.7826
  Jefferson, AR                                                         
6280  Pittsburgh, PA..........................................    0.9725
  Allegheny, PA                                                         
  Beaver, PA                                                            
  Butler, PA                                                            
  Fayette, PA                                                           
  Washington, PA                                                        
  Westmoreland, PA                                                      
6323  Pittsfield, MA..........................................    1.0960
  Berkshire, MA                                                         
6340 Pocatello, ID............................................    0.9586
  Bannock, ID                                                           
6360  Ponce, PR...............................................    0.4589
  Guayanilla, PR                                                        
  Juana Diaz, PR                                                        
  Penuelas, PR                                                          
  Ponce, PR                                                             
  Villalba, PR                                                          
  Yauco, PR                                                             
6403  Portland, ME............................................    0.9627
  Cumberland, ME                                                        
  Sagadahoc, ME                                                         
  York, ME                                                              
6440  Portland-Vancouver, OR-WA...............................    1.1344
  Clackamas, OR                                                         
  Columbia, OR                                                          
  Multnomah, OR                                                         
  Washington, OR                                                        
  Yamhill, OR                                                           
  Clark, WA                                                             
6483  Providence-Warwick-Pawtucket, RI........................    1.1049
  Bristol, RI                                                           
  Kent, RI                                                              
  Newport, RI                                                           
  Providence, RI                                                        
  Washington, RI                                                        

[[Page 26281]]

                                                                        
6520  Provo-Orem, UT..........................................    1.0073
  Utah, UT                                                              
6560  Pueblo, CO..............................................    0.8450
  Pueblo, CO                                                            
6580  Punta Gorda, FL.........................................    0.8725
  Charlotte, FL                                                         
6600  Racine, WI..............................................    0.8934
  Racine, WI                                                            
6640  Raleigh-Durham-Chapel Hill, NC..........................    0.9818
  Chatham, NC                                                           
  Durham, NC                                                            
  Franklin, NC                                                          
  Johnston, NC                                                          
  Orange, NC                                                            
  Wake, NC                                                              
6660  Rapid City, SD..........................................    0.8345
  Pennington, SD                                                        
6680  Reading, PA.............................................    0.9516
  Berks, PA                                                             
6690  Redding, CA.............................................    1.1790
  Shasta, CA                                                            
6720  Reno, NV................................................    1.0768
  Washoe, NV                                                            
6740  Richland-Kennewick-Pasco, WA............................    0.9918
  Benton, WA                                                            
  Franklin, WA                                                          
6760  Richmond-Petersburg, VA.................................    0.9152
  Charles City County, VA                                               
  Chesterfield, VA                                                      
  Colonial Heights City, VA                                             
  Dinwiddie, VA                                                         
  Goochland, VA                                                         
  Hanover, VA                                                           
  Henrico, VA                                                           
  Hopewell City, VA                                                     
  New Kent, VA                                                          
  Petersburg City, VA                                                   
  Powhatan, VA                                                          
  Prince George, VA                                                     
  Richmond City, VA                                                     
6780  Riverside-San Bernardino, CA............................    1.1307
  Riverside, CA                                                         
  San Bernardino, CA                                                    
6800  Roanoke, VA.............................................    0.8402
  Botetourt, VA                                                         
  Roanoke, VA                                                           
  Roanoke City, VA                                                      
  Salem City, VA                                                        
6820  Rochester, MN...........................................    1.0502
  Olmsted, MN                                                           
6840  Rochester, NY...........................................    0.9524
  Genesee, NY                                                           
  Livingston, NY                                                        
  Monroe, NY                                                            
  Ontario, NY                                                           
  Orleans, NY                                                           
  Wayne, NY                                                             
6880  Rockford, IL............................................    0.9081
  Boone, IL                                                             
  Ogle, IL                                                              
  Winnebago, IL                                                         
6895  Rocky Mount, NC.........................................    0.9029
  Edgecombe, NC                                                         
  Nash, NC                                                              
6920  Sacramento, CA..........................................    1.2202
  El Dorado, CA                                                         
  Placer, CA                                                            
  Sacramento, CA                                                        
6960  Saginaw-Bay City-Midland, MI............................    0.9564
  Bay, MI                                                               
  Midland, MI                                                           
  Saginaw, MI                                                           
6980  St Cloud, MN............................................    0.9544
  Benton, MN                                                            
  Stearns, MN                                                           
7000  St Joseph, MO...........................................    0.8366
  Andrews, MO                                                           
  Buchanan, MO                                                          
7040  St Louis, MO-IL.........................................    0.9130
  Clinton, IL                                                           
  Jersey, IL                                                            
  Madison, IL                                                           
  Monroe, IL                                                            
  St Clair, IL                                                          
  Franklin, MO                                                          
  Jefferson, MO                                                         
  Lincoln, MO                                                           
  St Charles, MO                                                        
  St Louis, MO                                                          
  St Louis City, MO                                                     
  Warren, MO                                                            
  Sullivan City, MO                                                     
7080  Salem, OR...............................................    0.9935
  Marion, OR                                                            
  Polk, OR                                                              
7120  Salinas, CA.............................................    1.4513
  Monterey, CA                                                          
7160  Salt Lake City-Ogden, UT................................  0.9857  
  Davis, UT                                                             
  Salt Lake, UT                                                         
  Weber, UT                                                             
7200  San Angelo, TX..........................................    0.7780
  Tom Green, TX                                                         
7240  San Antonio, TX.........................................    0.8499
  Bexar, TX                                                             
  Comal, TX                                                             
  Guadalupe, TX                                                         
  Wilson, TX                                                            
7320  San Diego, CA...........................................    1.2193
  San Diego, CA                                                         
7360  San Francisco, CA.......................................    1.4180
  Marin, CA                                                             
  San Francisco, CA                                                     
  San Mateo, CA                                                         
7400  San Jose, CA............................................    1.4332
  Santa Clara, CA                                                       
7440  San Juan-Bayamon, PR....................................    0.4625
  Aguas Buenas, PR                                                      
  Barceloneta, PR                                                       
  Bayamon, PR                                                           
  Canovanas, PR                                                         
  Carolina, PR                                                          
  Catano, PR                                                            
  Ceiba, PR                                                             
  Comerio, PR                                                           
  Corozal, PR                                                           
  Dorado, PR                                                            
  Fajardo, PR                                                           
  Florida, PR                                                           
  Guaynabo, PR                                                          
  Humacao, PR                                                           
  Juncos, PR                                                            
  Los Piedras, PR                                                       
  Loiza, PR                                                             
  Luguillo, PR                                                          
  Manati, PR                                                            
  Morovis, PR                                                           
  Naguabo, PR                                                           
  Naranjito, PR                                                         
  Rio Grande, PR                                                        
  San Juan, PR                                                          
  Toa Alta, PR                                                          
  Toa Baja, PR                                                          
  Trujillo Alto, PR                                                     
  Vega Alta, PR                                                         
  Vega Baja, PR                                                         
  Yabucoa, PR                                                           
7460  San Luis Obispo-Atascadero-Paso Robles, CA..............    1.1374
  San Luis Obispo, CA                                                   
7480  Santa Barbara-Santa Maria-Lompoc, CA....................    1.0688
  Santa Barbara, CA                                                     
7485  Santa Cruz-Watsonville, CA..............................    1.4187
  Santa Cruz, CA                                                        
7490  Santa Fe, NM............................................    1.0332
  Los Alamos, NM                                                        
  Santa Fe, NM                                                          
7500  Santa Rosa, CA..........................................    1.2815
  Sonoma, CA                                                            
7510  Sarasota-Bradenton, FL..................................    0.9757
  Manatee, FL                                                           
  Sarasota, FL                                                          
7520  Savannah, GA............................................    0.8638
  Bryan, GA                                                             
  Chatham, GA                                                           
  Effingham, GA                                                         
7560  Scranton--Wilkes-Barre--Hazleton, PA....................    0.8539
  Columbia, PA                                                          
  Lackawanna, PA                                                        
  Luzerne, PA                                                           
  Wyoming, PA                                                           
7600  Seattle-Bellevue-Everett, WA............................    1.1339
  Island, WA                                                            
  King, WA                                                              
  Snohomish, WA                                                         
7610  Sharon, PA..............................................    0.8783
  Mercer, PA                                                            
7620  Sheboygan, WI...........................................    0.7862
  Sheboygan, WI                                                         
7640  Sherman-Denison, TX.....................................    0.8499
  Grayson, TX                                                           
7680  Shreveport-Bossier City, LA.............................    0.9381
  Bossier, LA                                                           
  Caddo, LA                                                             
  Webster, LA                                                           
7720  Sioux City, IA-NE.......................................    0.8031
  Woodbury, IA                                                          
  Dakota, NE                                                            
7760  Sioux Falls, SD.........................................    0.8712
  Lincoln, SD                                                           
  Minnehaha, SD                                                         
7800  South Bend, IN..........................................    0.9868
  St Joseph, IN                                                         
7840  Spokane, WA.............................................    1.0486
  Spokane, WA                                                           
7880  Springfield, IL.........................................    0.8713
  Menard, IL                                                            
  Sangamon, IL                                                          
7920  Springfield, MO.........................................    0.7989
  Christian, MO                                                         

[[Page 26282]]

                                                                        
  Greene, MO                                                            
  Webster, MO                                                           
8003  Springfield, MA.........................................    1.0740
  Hampden, MA                                                           
  Hampshire, MA                                                         
8050  State College, PA.......................................    0.9635
  Centre, PA                                                            
8080  Steubenville-Weirton, OH-WV.............................    0.8645
  Jefferson, OH                                                         
  Brooke, WV                                                            
  Hancock, WV                                                           
8120  Stockton-Lodi, CA.......................................    1.1496
  San Joaquin, CA                                                       
8140  Sumter, SC..............................................    0.7842
  Sumter, SC                                                            
8160  Syracuse, NY............................................    0.9464
  Cayuga, NY                                                            
  Madison, NY                                                           
  Onondaga, NY                                                          
  Oswego, NY                                                            
8200  Tacoma, WA..............................................    1.1016
  Pierce, WA                                                            
8240  Tallahassee, FL.........................................    0.8332
  Gadsden, FL                                                           
  Leon, FL                                                              
8280 Tampa-St Petersburg-Clearwater, FL.......................    0.9103
  Hernando, FL                                                          
  Hillsborough, FL                                                      
  Pasco, FL                                                             
  Pinellas, FL                                                          
8320  Terre Haute, IN.........................................    0.8614
  Clay, IN                                                              
  Vermillion, IN                                                        
  Vigo, IN                                                              
8360  Texarkana, AR-Texarkana, TX.............................    0.8664
  Miller, AR                                                            
  Bowie, TX                                                             
8400  Toledo, OH..............................................    1.0390
  Fulton, OH                                                            
  Lucas, OH                                                             
  Wood, OH                                                              
8440  Topeka, KS..............................................    0.9438
  Shawnee, KS                                                           
8480  Trenton, NJ.............................................    1.0380
  Mercer, NJ                                                            
8520  Tucson, AZ..............................................    0.9180
  Pima, AZ                                                              
8560  Tulsa, OK...............................................    0.8074
  Creek, OK                                                             
  Osage, OK                                                             
  Rogers, OK                                                            
  Tulsa, OK                                                             
  Wagoner, OK                                                           
8600  Tuscaloosa, AL..........................................    0.8187
  Tuscaloosa, AL                                                        
8640  Tyler, TX...............................................    0.9567
  Smith, TX                                                             
8680  Utica-Rome, NY..........................................    0.8398
  Herkimer, NY                                                          
  Oneida, NY                                                            
8720  Vallejo-Fairfield-Napa, CA..............................    1.3754
  Napa, CA                                                              
  Solano, CA                                                            
8735  Ventura, CA.............................................    1.0946
  Ventura, CA                                                           
8750  Victoria, TX............................................    0.8474
  Victoria, TX                                                          
8760  Vineland-Millville-Bridgeton, NJ........................    1.0110
  Cumberland, NJ                                                        
8780  Visalia-Tulare-Porterville, CA..........................    0.9924
  Tulare, CA                                                            
8800  Waco, TX................................................    0.7696
  McLennan, TX                                                          
8840  Washington, DC-MD-VA-WV.................................    1.0911
  District of Columbia, DC                                              
  Calvert, MD                                                           
  Charles, MD                                                           
  Frederick, MD                                                         
  Montgomery, MD                                                        
  Prince Georges, MD                                                    
  Alexandria City, VA                                                   
  Arlington, VA                                                         
  Clarke, VA                                                            
  Culpepper, VA                                                         
  Fairfax, VA                                                           
  Fairfax City, VA                                                      
  Falls Church City, VA                                                 
  Fauquier, VA                                                          
  Fredericksburg City, VA                                               
  King George, VA                                                       
  Loudoun, VA                                                           
  Manassas City, VA                                                     
  Manassas Park City, VA                                                
  Prince William, VA                                                    
  Spotsylvania, VA                                                      
  Stafford, VA                                                          
  Warren, VA                                                            
  Berkeley, WV                                                          
  Jefferson, WV                                                         
8920  Waterloo-Cedar Falls, IA................................    0.8640
  Black Hawk, IA                                                        
8940  Wausau, WI..............................................    1.0545
  Marathon, WI                                                          
8960  West Palm Beach-Boca Raton, FL..........................    1.0372
  Palm Beach, FL                                                        
9000  Wheeling, OH-WV.........................................    0.7707
  Belmont, OH                                                           
  Marshall, WV                                                          
  Ohio, WV                                                              
9040  Wichita, KS.............................................    0.9403
  Butler, KS                                                            
  Harvey, KS                                                            
  Sedgwick, KS                                                          
9080  Wichita Falls, TX.......................................    0.7646
  Archer, TX                                                            
  Wichita, TX                                                           
9140  Williamsport, PA........................................    0.8548
  Lycoming, PA                                                          
9160  Wilmington-Newark, DE-MD................................    1.1538
  New Castle, DE                                                        
  Cecil, MD                                                             
9200  Wilmington, NC..........................................    0.9322
  New Hanover, NC                                                       
  Brunswick, NC                                                         
9260  Yakima, WA..............................................    1.0102
  Yakima, WA                                                            
9270  Yolo, CA................................................    1.1431
  Yolo, CA                                                              
9280  York, PA................................................    0.9415
  York, PA                                                              
9320  Youngstown-Warren, OH...................................    0.9937
  Columbiana, OH                                                        
  Mahoning, OH                                                          
  Trumbull, OH                                                          
9340  Yuba City, CA...........................................    1.0324
  Sutter, CA                                                            
  Yuba, CA                                                              
9360  Yuma, AZ................................................    0.9732
  Yuma, AZ                                                              
------------------------------------------------------------------------


                 Table 2.I.--Wage Index for Rural Areas                 
------------------------------------------------------------------------
                                                                  Wage  
                         Nonurban area                            index 
------------------------------------------------------------------------
Alabama.......................................................    0.7260
Alaska........................................................    1.2302
Arizona.......................................................    0.7989
Arkansas......................................................    0.6995
California....................................................    0.9977
Colorado......................................................    0.8129
Connecticut...................................................    1.2617
Delaware......................................................    0.8925
Florida.......................................................    0.8838
Georgia.......................................................    0.7761
Hawaii........................................................    1.0229
Idaho.........................................................    0.8221
Illinois......................................................    0.7644
Indiana.......................................................    0.8161
Iowa..........................................................    0.7391
Kansas........................................................    0.7203
Kentucky......................................................    0.7772
Louisiana.....................................................    0.7383
Maine.........................................................    0.8468
Maryland......................................................    0.8617
Massachusetts.................................................    1.0718
Michigan......................................................    0.8923
Minnesota.....................................................    0.8179
Mississippi...................................................    0.6911
Missouri......................................................    0.7205
Montana.......................................................    0.8302
Nebraska......................................................    0.7401
Nevada........................................................    0.8914
New Hampshire.................................................    0.9717
New Jersey \1\................................................  ........
New Mexico....................................................    0.8070
New York......................................................    0.8401
North Carolina................................................    0.7937
North Dakota..................................................    0.7360
Ohio..........................................................    0.8434
Oklahoma......................................................    0.7072
Oregon........................................................    0.9975
Pennsylvania..................................................    0.8421
Puerto Rico...................................................    0.3939
Rhode Island \1\..............................................  ........
South Carolina................................................    0.7921
South Dakota..................................................    0.6983
Tennessee.....................................................    0.7353
Texas.........................................................    0.7404
Utah..........................................................    0.8926
Vermont.......................................................    0.9314
Virginia......................................................    0.7782
Washington....................................................    1.0221
West Virginia.................................................    0.7938
Wisconsin.....................................................    0.8471
Wyoming.......................................................   0.8247 
------------------------------------------------------------------------
\1\ All counties within the State are classified urban.                 


[[Page 26283]]

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

    Section 1814(a)(2)(B) of the Act provides that, in order for Part A 
to make payment under the extended care benefit, a physician, nurse 
practitioner, or clinical nurse specialist must initially certify (and 
periodically recertify) that the beneficiary needs a specific level of 
care, specifically, skilled nursing or rehabilitation services on a 
daily basis which, as a practical matter, can only be provided in an 
SNF on an inpatient basis. Longstanding administrative criteria for 
determining whether a beneficiary meets this statutory SNF level of 
care definition appear in regulations at Secs. 409.31 through 409.35 
and manual instructions in the Medicare Intermediary Manual, Part 3 
(MIM-3), Secs. 3132ff and the Skilled Nursing Facility Manual 
Secs. 214ff. These criteria entail a retrospective review that focuses 
primarily on a beneficiary's need for and receipt of specific, 
individual skilled services as indicators of the need for a covered SNF 
level of care. (The certification/recertification procedure itself is 
implemented in regulations at Sec. 424.20.)
    In this context, the RUG-III system serves three distinct but 
related purposes:
     Streamlining and simplifying the process for determining 
that a beneficiary meets the statutory criteria for an SNF level of 
care (which is a prerequisite for making program payment under the 
extended care benefit), by automatically classifying those 
beneficiaries assigned to any of the highest 26 of the 44 RUG-III 
groups as meeting the definition. (For those beneficiaries assigned to 
the lowest 18 groups, level of care determinations are performed on an 
individual basis, using the existing administrative criteria 
established for this purpose.)
     Determining the level of the Part A per diem payment under 
the SNF PPS, which varies with the resource intensity of the particular 
RUG-III group to which an individual beneficiary is assigned. In 
addition to developing a per diem payment rate for each of the RUG-III 
groups, we are also creating a default payment rate (as discussed 
previously in section II.B.11.) to address situations such as those in 
which the facility's failure to submit a completed assessment in a 
timely manner prevents the beneficiary from being assigned to a 
particular RUG-III group. In order to receive payment at the default 
rate in the absence of completing an assessment timely, the SNF would 
have to submit sufficient information to its Medicare fiscal 
intermediary (FI) to enable the FI to establish coverage under the 
existing administrative criteria.
     Providing an additional basis for making an administrative 
presumption (under regulations at Sec. 409.60(c)(2)) that an SNF 
resident who has exhausted Part A benefits continues to meet the 
skilled level of care definition in the SNF, since a resident assigned 
to any of the upper 26 RUG-III groups is automatically classified as 
meeting this definition. Such a resident continues to be considered an 
``inpatient'' of the SNF for purposes of prolonging his or her current 
benefit period under section 1861(a)(2) of the Act and 
Sec. 409.60(b)(2) of the regulations.
    As discussed below, we believe that certain specific modifications 
are appropriate in the existing administrative criteria that are used 
for making SNF level of care determinations, in order to achieve 
greater consistency between them and the RUG-III classification system. 
Under the demonstration, those beneficiaries assigned to any of the 
highest 26 of the 44 RUG-III groups have been defined as meeting the 
SNF level of care specified in the statute. Thus, the RUG-III 
classification system used under the demonstration and the existing 
administrative level of care criteria essentially represent two 
different approaches toward achieving the same objective--identifying 
those beneficiaries who meet the SNF level of care definition in 
section 1814(a)(2)(B) of the Act. Under the demonstration, RUG-III has 
been used as a means of qualifying beneficiaries for coverage, not 
disqualifying them. That is, those beneficiaries assigned to any of the 
upper 26 groups are automatically classified as meeting the SNF level 
of care definition while those beneficiaries assigned to any of the 
lower 18 groups are not automatically classified as either meeting or 
not meeting the definition, but instead receive an individual level of 
care determination using the existing administrative criteria. This 
procedure will continue under the new SNF PPS. Thus, a beneficiary who 
is assigned to one of the upper 26 RUG-III groups is automatically 
designated as meeting the SNF level of care definition, and the 
required initial certification under Sec. 424.20(a) regarding such a 
beneficiary's general need for an SNF level of care would, in effect, 
simply serve to confirm the correctness of this designation. 
Accordingly, we are amending the regulations at Sec. 424.20(a) to 
provide that, at the option of the individual completing it, the 
initial certification for a beneficiary who is assigned to one of the 
upper 26 RUG-III groups can either consist of the existing content 
described in that provision or, alternatively, can state simply that 
the beneficiary's assignment to that particular RUG-III group is 
correct.
    Under this type of framework, it is not essential for the RUG-III 
system to conform exactly to the existing administrative criteria, 
since any beneficiary who does not initially meet the criteria for 
coverage under the former will then receive an individual level of care 
determination under the latter. Nevertheless, it is desirable from a 
programmatic standpoint to reconcile, whenever possible, any specific 
inconsistencies that may exist between these two approaches in their 
treatment of particular conditions and circumstances. Further, for the 
reasons discussed below, we believe that resolving these 
inconsistencies in favor of the approach taken under RUG-III would also 
help bring the existing administrative criteria more into line with the 
current state of clinical practice. We note that these changes in the 
existing administrative criteria will become effective with the 
introduction of the Part A SNF PPS and its RUG-III classification 
system (that is, for cost reporting periods beginning on or after July 
1, 1998), and will be implemented on a prospective basis only. 
Accordingly, we will advise Medicare contractors that any beneficiary 
who, upon the effective date of these changes, is currently in a 
covered SNF stay will not have his or her coverage terminated on the 
basis of these revisions for the duration of that covered stay.
    The existing administrative criteria for making SNF level of care 
determinations focus primarily on the use of specific, individual 
skilled services as indicators of a beneficiary's need for a covered 
level of care. The particular services identified in these criteria 
date back to the Senate Finance Committee Report language (S. Rep. No. 
92-1230, pp. 282-285) that accompanied the Social Security Amendments 
of 1972 (Public Law 92-603). However, in the 25 years since that 
legislation was enacted, the state of clinical practice for the nursing 
home population has advanced dramatically, to the point where some of 
the specific types of services cited in the Committee Report either 
have fallen largely into disuse or have now become routinely available 
in less intensive settings. Accordingly, with the passage of time, some 
of the individual services identified as skilled in the existing 
administrative criteria no longer, in themselves, represent valid 
indicators of

[[Page 26284]]

the need for a covered SNF level of care. Consequently, while such 
services might still be considered ``skilled'' in a technical sense (in 
that they may arguably require rendition by skilled personnel in order 
to be furnished safely and effectively), we believe that they are no 
longer appropriate for inclusion in the SNF level of care criteria.
    For example, we believe that from a clinical as well as 
programmatic standpoint, it is no longer necessary or appropriate to 
include ``hypodermoclysis'' (injection of fluids into the subcutaneous 
tissues to supply the body with liquids quickly) in the list of 
examples of skilled nursing services at Sec. 409.33(b). Medically, this 
service is equivalent to giving fluids in an intravenous infusion. As 
more SNFs have become proficient in the administration of intravenous 
medications and fluids, the number of cases in which this service would 
be appropriate becomes extremely small. Although there may be a very 
small number of beneficiaries who cannot be hydrated with intravenous 
fluids, it is likely that they would be sufficiently medically complex 
as to be classified into one of the top 26 RUG-III categories, 
regardless of the use of hypodermoclysis.
    We also believe that the ordering of subcutaneous injections can no 
longer be considered sufficient in itself to justify the designation of 
a covered SNF level of care. We note that the most frequently 
administered type of subcutaneous medication is insulin, which has long 
been defined as a nonskilled service with respect to any beneficiary 
who is capable of self-administration. Further, with the evolving state 
of clinical practice over time, the administration of a subcutaneous 
injection has now become commonly accepted as a nonskilled service even 
in less intensive settings such as physician offices and home health 
agencies, making its continued categorization as a skilled service in 
the SNF context increasingly anomalous. In the RUG-III classifications, 
an insulin-dependent diabetic beneficiary who is clinically unstable 
enough to have had two physician order changes within the preceding 7 
days would be assigned to one of the top 26 groups and, thus, would 
automatically be classified as meeting the standard for a covered level 
of care. By contrast, a beneficiary who has stabilized and continues to 
receive subcutaneous injections on a chronic basis will, in all 
likelihood, have already exhausted the 100 days of available SNF 
coverage per benefit period at that point. In this situation, 
categorizing the injections as a nonskilled service would actually work 
to the beneficiary's advantage, as it would enable such a beneficiary 
to end that benefit period in the SNF under regulations at 
Sec. 409.60(b)(2).
    The vast majority of urinary catheters are placed in the urethra, 
but a few are suprapubic. The current administrative criteria also 
identify the insertion into the urethra and sterile irrigation of 
urinary catheters as a skilled nursing service. However, RUG-III does 
not consider any of these catheters in assigning patients to a RUG-III 
category. Further, we believe that it may well be inherently 
undesirable to specify the use of urinary catheters as a criterion that 
effectively governs SNF coverage determinations, because of the risk 
that this creates of providing an unwarranted incentive for the 
inappropriate use of urinary catheters. It is widely recognized that 
there is a significant amount of unnecessary use of catheters for the 
convenience of care givers, with the potential to place beneficiaries 
at increased risk of infection. Nevertheless, we also recognize that a 
catheter can be medically necessary, especially in those particular 
situations where obstruction is present. Accordingly, we are not 
deleting this particular procedure from the administrative criteria at 
this time. We invite comments on whether the care of suprapubic 
catheters should be considered skilled.
    The RUG-III groups recognize enteral feeding as a criterion for 
patient classification only if it is providing the patient with more 26 
percent of his or her calories and at least 501 milliliters of 
hydration daily. Historically, the administrative criteria have only 
required the mere presence of a ``Levin tube'' (now referred to as a 
nasogastric tube) or a gastrostomy tube for enteral feeding. We note 
that, in recent years, gastrostomy tube feedings have become the more 
commonly used procedure, as the chronic use of nasogastric tubes has 
been replaced because of the increased risk of pneumonia from 
aspirating fluid into the lungs. The demonstration took a more 
specifically defined approach because a few beneficiaries in all the 
demonstration states were found to have had feeding tubes retained even 
though they were no longer used (or even usable), with the only 
apparent purpose being to maintain the beneficiary's ``skilled'' 
status. Because we believe that it is clearly inappropriate for such a 
practice to serve as an indicator of the need for a covered level of 
care, we are revising the administrative criteria to adopt the RUG-III 
system's more specific approach. That approach incorporates specific 
criteria (that is, comprising at least 26 per cent of daily calorie 
requirements and providing at least 501 milliliters of fluid per day) 
that effectively limit the recognition of enteral feeding as a skilled 
service (regardless of whether administered by nasogastric, 
gastrostomy, or gastro-jejunostomy tube) to those instances in which it 
currently is clinically relevant to the beneficiary. We note that this 
particular change would not result in removing enteral feeding 
altogether from the list of skilled nursing services in Sec. 409.33(b), 
but merely would provide more specific, objective criteria for ensuring 
that coverage determinations take this particular procedure into 
account only in those instances where its use is, in fact, reasonable 
and necessary in accordance with section 1862(a)(1) of the Act.
    Under the existing administrative criteria, ``management and 
evaluation of a care plan,'' ``observation and assessment,'' and 
``patient education'' needed to teach a patient self-maintenance during 
the initial stages of treatment would be sufficient in themselves to 
justify the need for skilled nursing services. The RUG-III system uses 
nursing rehabilitation frequency of physician visits and number of days 
on which physician orders change as criteria to assign patients. 
``Nursing rehabilitation'' is defined in the Long Term Care Resident 
Assessment Manual. The services considered to be nursing rehabilitation 
in the PPS system include, but are not limited to, teaching self-care 
for diabetic management, self-administration of medications, and ostomy 
care.
    It is our experience in the demonstration that these criteria 
effectively serve as proxies to the existing categories of ``management 
and evaluation of a care plan,'' ``observation and assessment,'' and 
``patient education'' (see the preceding discussion on the RUG-III 
Clinically Complex category). Observation and assessment 
(Sec. 409.33(a)(2)) involves a medically fragile beneficiary who 
(although not presently receiving any specific skilled services) could 
potentially undergo a sudden and rapid decline at any time and, 
consequently, may require skilled expertise on the part of facility 
staff in order to recognize and respond quickly to the earliest signs 
of an impending change in condition.
    Because the category of observation and assessment is, by 
definition, limited to a beneficiary whose condition is potentially 
unstable, the RUG-III criteria for frequency of physician visits and 
number of order changes clearly represent appropriate proxies in this 
situation. They similarly serve as appropriate proxies for the category 
of

[[Page 26285]]

skilled management and evaluation (Sec. 403.33(a)(1)) of an aggregate 
of nonskilled services (which is generally invoked only during the 
first few days of a beneficiary's SNF stay, until more specific skilled 
care needs can be identified through the completion of the resident 
assessment) and of patient education (Sec. 409.33(a)(3), which involves 
teaching self-maintenance during the initial stages of treatment), 
since these categories are generally confined to the initial portion of 
the SNF stay, typically before the beneficiary's condition has 
stabilized. Accordingly, because we anticipate that essentially all 
patients falling into these categories will be assigned to one of the 
highest 26 RUG-III groups, we believe that it is no longer necessary to 
retain these particular categories in the administrative criteria.
    As noted above, the dramatic advances in the state of medical and 
nursing practice that have occurred over the past 25 years have 
necessitated a reevaluation of some of the specific elements in the 
existing SNF level of care criteria. These advances in clinical 
practice have also been accompanied by a significant improvement in the 
ability to collect and utilize clinical data for program purposes, as 
exemplified by the MDS and RUG-III. Therefore, we believe it may be 
appropriate to consider the feasibility of ultimately moving beyond the 
limited, incremental adjustments in the existing SNF level of care 
criteria discussed above, in favor of a more fundamental change in the 
overall process of performing SNF level of care determinations 
themselves. Specifically, it may be possible to eliminate the use of 
the existing administrative criteria altogether, by utilizing RUG-III 
as the exclusive means for making these determinations rather than as a 
mere adjunct to the administrative criteria.
    We believe that the RUG-III system's basic approach, which provides 
for an ongoing evaluation of an entire cluster of patient indicators, 
may well represent a more predictable and reliable way of making 
accurate SNF level of care determinations than the existing 
administrative criteria's primary focus on reviewing claims information 
retrospectively for the presence or absence of individual skilled 
services. Besides being a far simpler procedure from an administrative 
standpoint, we believe that basing SNF level of care determinations 
exclusively on the RUG-III system would represent a significant 
improvement over certain aspects of the existing criteria:
     Greater reliability in predicting in advance whether a 
particular beneficiary will qualify for coverage. Under the current 
process of determining Medicare coverage with the existing 
administrative criteria based on a retrospective claims review, it can 
be difficult to predict with certainty whether a particular 
beneficiary's SNF care will be covered. One early attempt to address 
the resulting problem of retroactive coverage denials was the enactment 
of the ``presumed coverage'' provision in section 228(a) of Public Law 
92-603, which was designed to grant periods of SNF coverage 
prospectively on the basis of a beneficiary's diagnosis. However, in 
section 941 of the Omnibus Reconciliation Act of 1980 (Public Law 96-
499), the Congress ultimately repealed this provision as unworkable. 
Thus, while the subsequently-enacted hospital PPS was able to use 
diagnosis successfully as a predictor of resource intensity for acute 
care, the long-term care setting required the development of indicators 
that were more sensitive to the particular characteristics of patients 
in this setting. We believe that in the RUG-III classification system, 
we have now developed such an instrument, with the potential to bring 
greater reliability and predictability to the SNF coverage 
determination process.
     Increased consistency and uniformity among different 
contractors in making level of care determinations. The process of 
retrospective claims review conducted under the existing administrative 
criteria inherently relies upon the medical judgment of the individual 
reviewer. Thus, it would be possible for two claims with essentially 
identical sets of facts to be adjudicated differently by different 
contractors. By contrast, RUG-III utilizes a unified set of specific 
clinical criteria that is more coherent and objective, thus diminishing 
the potential for variation based on differences in individual 
judgment.
    It is worth noting that even the existing criteria implicitly 
acknowledge the limitations of an approach that looks solely at the 
presence or absence of individual skilled services. As mentioned 
previously, the existing criteria have historically recognized 
situations that may require skilled overall management and evaluation 
of the care plan of a beneficiary who receives only an aggregate of 
unskilled services, or that may require skilled observation and 
assessment of changes in the condition of an extremely unstable and 
medically fragile beneficiary, even though the beneficiary does not 
presently receive any specific skilled services. Further, RUG-III's 
approach of evaluating a broad cluster of services and other patient 
indicators is consistent with the recent Medicare trend of grouping 
individual services into increasingly larger bundles for program 
purposes, as exemplified by the SNF PPS and Consolidated Billing 
provisions.
    Another reason that it may now be feasible to rely exclusively on 
the RUG-III system in making level of care determinations is that the 
upper 26 RUG-III categories and the existing administrative criteria 
(as now modified) should serve to identify increasingly similar sets of 
patients as meeting the SNF level of care definition. We also note a 
steady decline over the course of the demonstration in the proportion 
of covered days for those beneficiaries assigned to any of the lower 18 
RUG-III groups (which initially represented approximately 15 percent of 
total covered days), to the point where such beneficiaries ultimately 
accounted for only about 5 to 8 percent of total covered days. Thus, 
one possible approach might be simply to establish that beneficiaries 
assigned to the highest 26 groups meet the SNF level of care 
definition, while those assigned to the lowest 18 groups do not, and we 
specifically solicit comments on the feasibility of this approach. 
However, we also solicit comments on the possible extent and specific 
nature of situations in which beneficiaries who are assigned to one of 
the lower 18 RUG-III groups might nonetheless meet the statutory 
standard for an SNF level of care, including information on their 
clinical profiles as well as the specific basis on which they would 
qualify for Medicare SNF coverage.
    We are also creating a new, rebuttable presumption of an SNF 
resident's continued ``inpatient'' status for benefit period purposes, 
based on his or her assignment to one of the upper 26 RUG-III groups. 
We are adding this new administrative presumption to paragraph (c)(2) 
of Sec. 409.60 rather than to paragraph (c)(1) since, unlike the 
presumptions included in paragraph (c)(1), it is not limited to 
instances in which a claim for Medicare SNF benefits is actually filed. 
Thus, a benefit period determination under this presumption could be 
rebutted by presenting evidence establishing that the beneficiary 
should have been assigned to one of the lower 18 RUG-III groups which, 
in turn, would permit a determination that the beneficiary was not 
actually receiving a covered level of care.

III. Three-Year Transition Period

    Under sections 1888(e) (1) and (2) of the Act, during a facility's 
first three

[[Page 26286]]

cost reporting periods that begin on or after July 1, 1998 (transition 
period), the facility's PPS rate will be equal to the sum of a 
percentage of an adjusted facility-specific per diem rate and a 
percentage of the adjusted Federal per diem rate. After the transition 
period, the PPS rate will equal the adjusted Federal per diem rate. The 
transition period payment method will not apply to SNFs that first 
received Medicare payments (interim or otherwise) on or after October 
1, 1995 under present or previous ownership; these facilities will be 
paid based on 100 percent of the Federal rate.
    The facility-specific per diem rate is the sum of the facility's 
total allowable Part A Medicare costs and an estimate of the amounts 
that would be payable under Part B for covered SNF services for cost 
reporting periods beginning in fiscal year 1995 (base year). The base 
year cost report used to compute the facility-specific per diem rate in 
the transition period must be the latest available cost report. It may 
be settled (either tentative or final) or as-submitted for Medicare 
payment purposes. Under section 1888(e)(3) of the Act, any adjustments 
to the base year cost report made as a result of settlement or other 
action by the fiscal intermediary, including cost limit exceptions/
exemptions, results of an appeal, etc., will result in a retroactive 
adjustment to the facility-specific per diem rate. The instructions 
below should be used to calculate the facility-specific per diem rate.

A. Determination of Facility-Specific Per Diem Rates

1. Part A Cost Determination
    The facility-specific per diem rate reflects the total allowable 
Part A Medicare cost (routine, ancillary, and capital-related) incurred 
during a facility's cost reporting period beginning in Federal fiscal 
year 1995 (base year). The facility-specific per diem rate will be 
adjusted to account for the amounts of (1) exceptions granted to the 
inpatient routine services cost limits under Sec. 413.30(f), and (2) 
new provider exemptions from the cost limits under Sec. 413.30(e), only 
to the extent that routine service costs do not exceed 150 percent of 
applicable unadjusted cost limits.
    Part A Medicare costs associated with approved educational 
activities, as defined in Sec. 413.85, are not included in the 
facility-specific per diem rate. A facility's actual reasonable costs 
of approved educational activities will be separately identified and 
apportioned to the Medicare program for payment purposes on the 
Medicare cost report effective for cost reporting periods beginning on 
or after July 1, 1998.
    Under section 1888(e)(3)(B)(ii) of the Act, for facilities 
participating in the Nursing Home Case-Mix and Quality Demonstration 
(RUG-III), the Part A Medicare costs used to compute the facility-
specific per diem rate will be the aggregate RUG-III payment received 
for services furnished in the cost reporting period beginning calendar 
year 1997 plus the routine capital costs and ancillary costs (other 
than occupational therapy, physical therapy, and speech pathology 
costs) as reported on the facility's Medicare cost report that begins 
in calendar year 1997.
    For those low volume SNFs that received a prospectively determined 
payment rate for SNF routine services, under section 1888(d) of the Act 
and part 413, subpart I, the facility-specific per diem rate will be 
the applicable prospectively determined payment rate plus Medicare 
ancillary cost per diem.
    Calculations to determine Medicare Part A costs are to be made as 
follows:
    a. Freestanding Skilled Nursing Facilities. (1) Skilled Nursing 
Facilities Without an Exception for Medical and Paramedical Education 
(Sec. 413.30(f)(4)) or a New Provider Exemption in the Base Year.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2540-92, worksheet D-1, line 23 
or HCFA-2540-96, worksheet D-1, line 25).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B, part I, line 16, column 14 divided by total patient days 
(Worksheet S-3, line 1, column 7) then multiplied by total Medicare 
days (Worksheet S-3, line 1, column 4).
    Step 3. Subtract amount in Step 2. from amount in Step 1. above.
    Step 4. Compare amount in Step 3. above to the inpatient routine 
service cost limitation, including exception amounts other than Medical 
and Paramedical Education: see (2) below (HCFA-2540-92, worksheet D-1, 
line 24 or HCFA-2540-96, worksheet D-1, line 27) and take the lesser of 
the two amounts.
    Step 5. Add the amount in Step 4. to the program capital related 
cost (HCFA-2540-92, worksheet D-1, line 20 or HCFA-2540-96, worksheet 
D-1, line 22).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2540-92 or HCFA-2540-96, Worksheet E, part I, line 1).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I, calculate separately each line 21-33, dividing 
column 14 by column 18. Multiply the resulting percentage by the 
corresponding line (lines 21-33) on worksheet D, column 4. Total the 
resulting amounts calculated for lines 21-33.
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
iii. Part A cost Equals the Amount in i.Step 5. Plus the Amount in 
ii.Step 3. Above
    (2) Skilled Nursing Facilities With an Exception for Medical and 
Paramedical Education in the Base Year.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2540-92, worksheet D-1, line 23 
or HCFA-2540-96, worksheet D-1, line 25).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B, part I, line 16, column 14 divided by total patient days 
(Worksheet S-3, line 1, column 7) then multiplied by total Medicare 
days (Worksheet S-3, line 1, column 4).
    Step 3. Subtract the amount in Step 2. from the amount in Step 1. 
above
    Step 4. From the inpatient routine service cost limitation, 
including all exception amounts granted, (HCFA-2540-92, worksheet D-1, 
line 24 or HCFA-2540-96, worksheet D-1, line 27) subtract the exception 
amount granted for medical and paramedical education costs.
    Step 5. Compare amount in Step 3. above with the amount in Step 4. 
above and take the lesser of the two amounts.
    Step 6. Add amount in Step 5. to the program capital related cost 
(HCFA-2540-92, worksheet D-1, line 20 or HCFA-2540-96, worksheet D-1, 
line 22).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2540-92 or HCFA-2540-96, Worksheet E, part I, line 1).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I, calculate separately each line 21-33, dividing 
column 14 by column 18. Multiply the resulting percentage by the 
corresponding line (lines 21-33) on worksheet D, column 4. Total the 
amounts calculated for lines 21-33.
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.

[[Page 26287]]

iii. Part A cost Equals the Amount in i.Step 6. Plus the Amount in 
ii.Step 3. Above
    (3) Skilled Nursing Facilities With New Provider Exemptions From 
the Cost Limits in the Base Year.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2540-92, worksheet D-1, line 23 
or HCFA-2540-96, worksheet D-1, line 25).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B, part I, line 16, column 14 divided by total patient days 
(Worksheet S-3, line 1, column 7) then multiplied by total Medicare 
days (Worksheet S-3, line 1, column 4).
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
    Step 4. Multiply the unadjusted inpatient routine service cost 
limitation (the cost limit amount had the SNF not received an 
exemption, which is normally reported on HCFA-2540-92, worksheet D-1, 
line 24 or HCFA-2540-96, worksheet D-1, line 27) by 1.5.
    Step 5. Compare amount in Step 3. above with the amount in Step 4. 
above and take the lesser of the two amounts.
    Step 6. Add to the amount in Step 5. the program capital related 
cost (HCFA-2540-92, worksheet D-1, line 20 or HCFA-2540-96, worksheet 
D-1, line 22).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2540-92 or HCFA-2540-96, Worksheet E, part I, line 1).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I, calculate separately each line 21-33, dividing 
column 14 by column 18. Multiply the resulting percentage by the 
corresponding line (lines 21-33) on worksheet D, column 4. Total the 
amounts calculated for lines 21-33.
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
iii. Part A Cost Equals the Amount in i. Step 6. Plus the Amount in 
ii.Step 3. Above
    b. Hospital-based skilled nursing facilities. (1) Skilled Nursing 
Facilities Without an Exception for Medical and Paramedical Education 
or a New Provider Exemption.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2552-92 or HCFA-2552-96, 
worksheet D-1, part III, line 76).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B part I, line 34, sum of columns 21 and 24 (only amounts 
that are for approved education programs), divided by total patient 
days (worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96) column 6) then multiplied by total Medicare days 
(worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96), column 4).
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
    Step 4. Compare amount in Step 3. above to the inpatient routine 
service cost limitation, including exception amounts other than Medical 
and Paramedical education; see (2) below, (HCFA-2552-92 or HCFA-2552-
96, worksheet D-1, part III, line 78) and take the lesser of the two 
amounts.
    Step 5. Add to amount in Step 4. The program capital related cost 
(HCFA-2552-92 or HCFA-2552-96, worksheet D-1, part III, line 73).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2552-92 or HCFA-2552-96, worksheet D-1, part III, line 80).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I, (calculate separately each line 37-59 ), dividing 
the sum of columns 21 and 24 (approved programs only) by column 27. 
Multiply the resulting percentage by the corresponding line (lines 37-
59) on worksheet D-4 (SNF), column 3. Total the amounts calculated for 
lines 37-59.
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
iii. Part A Cost Equals the Amount in i.Step 5. Plus the Amount in 
ii.Step 3. Above
    (2) Skilled Nursing Facilities With an Exception for Medical and 
Paramedical Education in the Base Year.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2552-92 or HCFA-2552-96, 
worksheet D-1, part III, line 76).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B part I, line 34, sum of columns 21 and 24 (only amounts 
that are for approved education programs), divided by total patient 
days (worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96) column 6) then multiplied by total Medicare days 
(worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96), column 4).
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
    Step 4. From the inpatient routine service cost limitation, 
including all exception amounts granted, (HCFA-2552-92 or HCFA-2552-96, 
worksheet D-1, part III, line 78) subtract the exception amount granted 
for medical and paramedical education costs.
    Step 5. Compare amount in Step 3. above with the amount in Step 4. 
above and take the lesser of the two amounts.
    Step 6. Add to the amount in Step 5. the program capital related 
cost (HCFA-2552-92 or HCFA-2552-96, worksheet D-1, part III, line 73).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2552-92 or HCFA-2552-96, worksheet D-1, part III, line 80).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I (calculate separately each line 37-59), dividing 
the sum of columns 21 and 24 (approved programs only) by column 27. 
Multiply the resulting percentage by the corresponding line (lines 37-
59) on worksheet D-4 (SNF), column 3. Total the amounts calculated for 
lines 37-59.
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
iii. Part A Cost Equals the Amount in i.Step 6. plus the amount in 
ii.Step 3. Above
    (3) Skilled Nursing Facilities with exemptions from the cost limits 
in the base year.
i. Routine Costs
    Step 1. Determine total program routine service costs for 
comparison to the cost limitation (HCFA-2552-92 or HCFA-2552-96, 
worksheet D-1, part III, line 76).
    Step 2. Determine Medicare Routine medical education costs--
worksheet B, part I, line 34, sum of columns 21 and 24 (only amounts 
that are for approved education programs), divided by total patient 
days (worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96), column 6) then multiplied by total Medicare days 
(worksheet S-3, part I, line 11 (HCFA-2552-92) or part I, line 15 
(HCFA-2552-96), column 4).
    Step 3. Subtract amount in Step 2. from the amount in Step 1. 
above.
    Step 4. Multiply the unadjusted inpatient routine service cost 
limitation (the cost limit amount had the SNF not received an 
exemption, which is normally reported on HCFA-2552-92 or HCFA-2552-96, 
worksheet D-1, part III, line 78) by 1.5.

[[Page 26288]]

    Step 5. Compare amount in Step 3. above with the amount in Step 4. 
above and take the lesser of the two amounts.
    Step 6. Add to the amount in Step 4. the program capital related 
cost (HCFA-2552-92 or HCFA-2552-96, worksheet D-1, part III, line 73).
ii. Part A Ancillary Costs
    Step 1. Determine total program inpatient ancillary services (HCFA-
2552-92 or HCFA-2552-96, worksheet D-1, part III, line 80).
    Step 2. Determine Medicare Ancillary medical education costs--
worksheet B, part I (calculate separately each line 37-59), dividing 
the sum of columns 21 and 24 (approved programs only) by column 27. 
Multiply the resulting percentage by the corresponding line (lines 37-
59) on worksheet D-4 (SNF), column 3. Total the amounts calculated for 
lines 37-59.
    Step 3. Subtract the amount in Step 2. from the amount in Step 1. 
above.
iii. Part A Cost Equals the Amount in i.Step 6. Plus the Amount in 
ii.Step 3. Above
    c. Medicare low volume Skilled Nursing Facilities electing 
prospectively determined payment rate (fewer than 1500 Medicare days).
    (1) Providers Filing HCFA-2540-S-87.
    Step 1. Determine inpatient ancillary services Part A (HCFA-2540-S-
87, worksheet E, part A, line 1).
    Step 2. Determine inpatient routine PPS amount (HCFA-2540-S-87, 
worksheet E, part A, line 6).
    Step 3. Part A cost equals the amount in Step 1. plus the amount in 
Step 2. above.
    (2) Providers Filing HCFA-2540 or HCFA-2552.
    Step 1. Determine the prospective payment amount is used as the 
routine cost.
    Step 2. Follow the steps under a.(1)(ii) if you are a freestanding 
SNF or b.(1)(ii) if you are a hospital-based SNF to calculate the 
ancillary costs.
    Step 3. Part A cost equals the amount in Step 1. plus the amount in 
Step 2. above.
    d. Providers participating in the multistate nursing home case-mix 
and quality demonstration--calculation of the prospective payment 
system rate. For providers that received payment under the RUGs-III 
demonstration during a cost reporting period that began in calendar 
year 1997, we will determine their facility-specific per diem rate 
using the methodology described below. It is possible that some 
providers participated in the demonstration but did not have a cost 
reporting period that began in calendar year 1997. For those providers, 
we will determine their facility-specific per diem rate by using the 
calculations in (a), (b), or (c) above. As with the facility-specific 
per diem applicable to other providers, the allowable costs will be 
subject to change based on the settlement of the cost report used to 
determine the total payment under the demonstration. In addition, we 
derive a special market basket inflation factor to adjust the 1997 
costs to the midpoint of the rate setting period (July 1, 1998 to 
September 30, 1999).
    Step 1. Determine the aggregate payment during the cost reporting 
period that began in calendar year 1997--RUGs-III payment plus routine 
capital costs plus ancillary costs (other than Occupational Therapy, 
Physical Therapy, and Speech Pathology).
    Step 2. Divide the amount in Step 1. by the applicable total 
inpatient days for the cost reporting period.
    Step 3. Adjust the amount in Step 2. by 1.031532 (inflation 
factor)--Do not use Table 4.F.
    The amount in Step 3 is the facility-specific rate that is 
applicable for the facility's first cost reporting period beginning 
after July 1, 1998. A separate calculation for Part B services is not 
required.
    e. Base period cost reports that are adjusted for exception amounts 
or other post settlement adjustments. Intermediaries will calculate a 
provider's Medicare Part A costs, as described above, using the latest 
available version of the cost report in the settlement process. 
Adjustments made in subsequent cost report versions, through the 
settlement or reopening process, will result in a revision to the 
facility-specific rate. Examples of these adjustments include exception 
amounts or other post-settlement adjustments.

B. Determination of the Part B Estimate

    HCFA will supply each intermediary with the estimated Part B 
charges for each provider that it serves. As explained above, the BBA 
1997 requires that the facility-specific per diem rates reflect items 
and services (other than those specifically excluded) for which, prior 
to July 1, 1998, payment had been made under Part B but furnished to 
SNF residents during a Part A covered stay. Accordingly, it was 
necessary to determine the Part B allowable charges (including 
coinsurance) associated with the SNFs contained in the cost report data 
base. This was accomplished by matching 100 percent of the Medicare 
Part B SNF claims associated with Part A covered SNF stays related to 
the SNF cost reporting periods beginning in the 1995 base year. The 
matched Part B allowable charges were computed at a facility level by 
the appropriate cost report cost center (for example, laboratory 
services, supplies) with the cost report data.

C. Calculation of the Facility-Specific Per Diem Rate

    The facility-specific per diem rate is equal to the sum of Medicare 
Part A costs as determined in section III.A above and the Medicare Part 
B estimate described in section III.B above.
    Example: The rules as shown under b.(2) above will be used in this 
example.
    ABC SNF is a hospital-based SNF which received an exception of 
$10,000 of which $5,000 was for Medical and Paramedical Education costs 
in accordance with the rules at Sec. 413.30(f)(4) in its base year. ABC 
SNF filed its cost report using HCFA-2552-96. ABC's facility-specific 
per diem rate for its first cost reporting period beginning in the 
transition period is calculated as follows:
    Step 1. ABC SNF reported program routine service costs for 
comparison to the cost limits on worksheet D-1, part III, line 76 of 
$200,000.
    Step 2. Total (all patients) routine medical education costs 
(approved programs) from worksheet B, part I, line 34, the sum of 
columns 21 and 24 totaled $25,000. Total patient days from worksheet S-
3, part I, line 15, column 6 were 5,000 and total Medicare days 
(worksheet S-3, part I, line 15, column 4) were 1,000. Dividing the 
total costs of $25,000 by the total days of 5,000 gives you a cost per 
day of $5.00. Multiply the cost per day by the Medicare days of 1,000, 
which results in the total Medicare routine medical education cost of 
$5,000.
    Step 3. Subtract the amount in Step 2. ($5,000) from the amount in 
Step 1. ($200,000) or $195,000 ($195.00 per Medicare day).
    Step 4. ABC SNF's inpatient routine service cost limitation amount 
without any exception amounts is $180,000, the amount with all 
exception amounts including the $5,000 exception amount for medical and 
paramedical education costs from worksheet D-1, part III, line 78 is 
$190,000 ($180,000 plus $10,000). Subtract the exception amount for 
medical and paramedical education of $5,000 to equal $185,000.
    Step 5. Determine the lesser amount in Step 3. and Step 4. above--
$185,000.
    Step 6. Add the program capital-related cost of $20,000 from 
worksheet D-1, part III, line 73 to the amount in Step 5 above to equal 
$205,000.
    Step 7. ABC SNF has total program inpatient ancillary services 
costs on

[[Page 26289]]

worksheet D-1, part III, line 80 of $350,000.
    Step 8. Determine Medicare ancillary medical education costs 
(approved programs) from worksheet B, part I, lines 37-59. Calculating 
each line (separately calculate each line) by taking the sum of columns 
21 and 24 and dividing by column 27 (approved programs only). Multiply 
this percentage by the corresponding line (lines 37-59) on worksheet D-
4 (SNF), column 3. Totaling the amounts calculated for lines 37-59 ABC 
SNF had Medicare ancillary medical education costs of $35,000.
    Step 9. Subtract amount in Step 8 ($35,000) from line 7 ($350,000) 
or $315,000.
    Step 10. Determine the estimated Part B amount supplied by HCFA for 
ABC. Assume, for this example, that this amount is $50,000.
    Step 11. Add amounts in Step 6 ($205,000), Step 9 ($315,000), and 
Step 10 ($50,000) to determine the facility-specific per diem rate of 
$570.00 ($570,000 divided by 1,000 Medicare days).

D. Computation of the Skilled Nursing Facility Prospective Payment 
System Rate During the Transition

    For the first three cost reporting periods beginning on or after 
July 1, 1998 (transition period), an SNF's payment under the PPS is the 
sum of a percentage of the facility-specific per diem rate and a 
percentage of the Federal per diem rate. Under section 1888(e)(2)(C) of 
the Act, for the first cost reporting period in the transition period, 
the SNF payment will be the sum of 75 percent of the facility-specific 
per diem rate and 25 percent of the Federal per diem rate. For the 
second cost reporting period, the SNF payment will be the sum of 50 
percent of the facility-specific per diem rate and 50 percent of the 
Federal per diem rate. For the third cost reporting period, the SNF 
payment will be the sum of 25 percent of the facility-specific per diem 
rate and 75 percent of the Federal per diem rate. For all subsequent 
cost reporting periods beginning after the transition period, the SNF 
payment will be equal to 100 percent of the Federal per diem rate. See 
the example below.
    Example of computation of adjusted PPS rates and SNF payment:
    Using the ABC SNF described in this section, the following shows 
the adjustments made to the facility-specific per diem rate and the 
Federal per diem rate to compute the provider's actual per diem PPS 
payment in the transition period. ABC's 12-month cost reporting period 
begins July 1, 1998.
    Step 1.
    Compute:

Facility-specific per diem rate..........................        $570.00
Market Basket Adjustment (Table 4.F).....................   x           
                                                                 1.05149
                                                          --------------
Adjusted facility-specific rate..........................  ..    $599.35
                                                                        

    Step 2.
    Compute Federal per diem rate:
    SNF ABC from above is located in State College, PA with a wage 
index of 0.9635.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Labor                    Adjusted     Nonlabor     Adjusted     Medicare              
                          RUG group                              portion*    Wage index     labor       portion*       rate         days       Payment  
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVC..........................................................      $224.74       0.9635      $216.54       $71.41      $287.95           50      $14,398
RHC..........................................................       206.06        .9635       198.54        65.47       264.01          100       26,401
                                                              ------------------------------------------------------------------------------------------
      Total..................................................  ...........  ...........  ...........  ...........  ...........          150      40,799 
--------------------------------------------------------------------------------------------------------------------------------------------------------
*From Table 2.G.                                                                                                                                        

    Step 3.
    Apply transition period percentages:

Facility-specific per diem rate $599.35 x 150 days=              $89,903
Times transition percentage (75 percent).....................      x .75
Actual facility-specific PPS payment.........................    $67,427
Federal PPS payment..........................................    $40,799
Times transition percentage (25 percent).....................      x .25
                                                              ----------
Actual Federal PPS payment...................................    $10,200
                                                                        

    Step 4.
    Compute total PPS payment

ABC's total PPS payment ($67,427+$10,200)....................    $77,627
                                                                        

IV. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires the Secretary to 
establish an SNF market basket index that reflects changes over time in 
the prices of an appropriate mix of goods and services included in the 
SNF PPS. Accordingly, as described below, we have developed an SNF 
market basket index that encompasses the most commonly used cost 
categories for SNF routine services, ancillary services, and capital-
related expenses.

A. Rebasing and Revising of the Skilled Nursing Facility Market Basket

1. Background
    Effective for cost reporting periods beginning on or after October 
1, 1979, we developed and adopted a routine SNF input price index, that 
is, the SNF market basket using data from 1977 as the base year.
    Although ``market basket'' technically describes the mix of goods 
and services needed to produce SNF care, this term is also commonly 
used to denote the input price index that includes both weights (mix of 
goods and services) and price factors. Accordingly, the term ``market 
basket'' used in this rule refers to the SNF input price index.
    The 1977-based routine SNF market basket was for routine costs 
(ancillary services and capital-related costs were excluded). The 
percentage change in the 1977-based routine market basket reflects the 
average change in the price of a fixed set of goods and services 
purchased by SNFs to furnish routine services. We first used the market 
basket to adjust SNF cost limits to reflect the average increase in the 
prices of the goods and services used to furnish routine reasonable 
costs for SNF care. This approach linked the increase in the cost 
limits to the efficient utilization of resources. For background 
information, see the August 31, 1979 Federal Register (44 FR 51542).
    For purposes of SNF PPS, the total cost SNF market basket is a 
fixed-weight (Laspeyres type) price index constructed in three steps. 
First, a base period is selected and total base period expenditure for 
cost shares is estimated for mutually exclusive and exhaustive spending 
categories. Total costs for routine services, ancillary costs, and 
capital-related costs are used. These proportions are called ``cost'' 
or ``expenditure'' weights. The second step essential for developing an 
input price index is to match each expenditure category to a price/wage 
variable, called a price proxy. These price proxy variables are drawn 
from publicly

[[Page 26290]]

available statistical series published on a consistent schedule, 
preferably at least quarterly. In the final step, the price level for 
each spending category is multiplied by the expenditure weight for that 
category. The sum of these products (that is, weights multiplied by 
proxy index levels) for all cost categories yields the composite index 
level in the market basket for a given quarter or year. Repeating the 
third step for other quarters and years produces a time series of 
market basket index levels. Dividing one index level by an earlier 
index level produces rates of growth in the input price index.
    The market basket is described as a fixed-weight index because it 
answers the question of how much more or less it would cost, at a later 
time, to purchase the same mix of goods and services that was purchased 
in the base period. The effects on total expenditures resulting from 
changes in the quantity or mix of goods and services purchased 
subsequent or prior to the base period are, by design, not considered.
    To implement section 1888(e)(5)(A) of the Act, it is necessary to 
revise and rebase the routine cost market basket so the cost weights 
and price proxies reflect the mix of goods and services that SNFs 
purchase for all costs (routine, ancillary, and capital-related) 
encompassed by SNF PPS. The current SNF routine cost weights (excluding 
ancillary costs and capital-related costs) are from calendar year 1977. 
To the extent feasible, the data used to revise and rebase the SNF 
market basket are from fiscal year 1992. If data from an earlier period 
supplement fiscal year 1992 data, they have been aged forward for price 
changes.
2. Rebasing and Revising the Skilled Nursing Facility Market Basket
    The terms ``rebasing'' and ``revising,'' while often used 
interchangeably, actually denote different activities. Rebasing means 
moving the base year for the structure of costs of an input price index 
(for example, for this rule, we have moved the base year cost structure 
from calendar year 1977 to fiscal year 1992). Revising means changing 
data sources, cost categories, and/or price proxies used in the input 
price index.
    To implement section 1888(e)(5)(A) of the Act, we are rebasing and 
revising the routine SNF market basket (excluding ancillary and 
capital-related costs) to reflect 1992 total cost data (routine, 
ancillary, and capital-related), the latest available relatively 
complete data on the structure of SNF costs; and to modify certain 
variables used as the price proxies for some of the cost categories.
    In developing the revised market basket, we reviewed SNF 
expenditure data for the market basket cost categories. We reviewed 
Medicare Cost Reports for PPS-9 for each freestanding SNF that had 
Medicare expenses greater than 1 percent of total expenses. PPS-9 cost 
reports are those with cost reporting periods beginning after September 
30, 1991 and before October 1, 1992. Data on SNF expenditures for six 
major expense categories (wages and salaries, employee benefits, 
contract labor, pharmaceuticals, capital-related, and a residual ``all 
other'') were edited and tabulated. After totals for these main cost 
categories were calculated, we then determined the proportion of total 
costs that each category represented. The proportions represent the 
revised and rebased major market basket weights for total costs 
including routine, ancillary, and capital-related costs.
    Relative weights within the six categories were derived using U.S. 
Department of Commerce data for the nursing home industry. Relative 
cost shares from the Bureau of the Census' 1992 Asset and Expenditure 
Survey and the Bureau of Economic Analysis' (BEA) 1992 Input-Output 
Tables were used to disaggregate and allocate costs within the six 
categories from the 1992 SNF Medicare Cost Reports. The BEA Input-
Output database, which is updated at 5-year intervals, was most 
recently described in the Survey of Current Business, ``Benchmark 
Input-Output Accounts for the U.S. Economy, 1992'' (November 1997).
    We developed the capital-related portion of the rebased and revised 
SNF PPS market basket using the same overall methodology used to 
develop the hospital PPS capital input price index. The methodology for 
hospitals is described in full detail in the May 31, 1996 (61 FR 27466) 
and the August 30, 1996 (61 FR 46196) Federal Register publications. 
The strength of this HCFA methodology is that it reflects the vintage 
nature of capital, which is the acquisition and use of capital over 
time. Price levels are determined for capital acquired in current and 
prior years and vintage-weighted based on historical capital 
acquisition patterns. These vintage-weighted price changes reflect the 
price changes associated with the capital acquisition process.
    Because there are fewer data on capital-related costs for the SNF 
industry than for the hospital industry, we developed a methodology 
that makes the maximum use of the existing SNF data. We have developed 
a framework that integrates existing SNF capital data with related data 
sources and assumptions. We determined that reasonable changes in the 
capital-related assumptions have little impact on the overall SNF 
market basket (routine costs, capital-related costs, and ancillary 
costs). We also compared the price changes from the capital-related 
component of the SNF market basket to the price changes in the hospital 
PPS capital input price index and other price indexes. The comparison 
showed that the changes in the different indexes were reasonable in 
relation to changes with the SNF capital-related component. A detailed 
explanation of how both the cost category weights and the vintage 
weights were determined, which price proxies were chosen, the effect of 
using different assumptions, and a comparison of capital-related 
components of the rebased SNF PPS market basket to other price indexes 
is given in the Appendix.
    Our work resulted in 21 separate categories for the rebased and 
revised total market basket. The 1977-based routine cost SNF market 
basket had 12 separate cost categories. Detailed descriptions of each 
cost category and respective price proxy in the 1992-based market 
basket are provided in the Appendix to this rule. The six major 
categories for the revised and rebased cost categories and weights 
derived from SNF Medicare Cost Reports are summarized in Table 4.A 
below.

    Table 4.A--1992 Skilled Nursing Facility Market Basket Major Cost   
            Categories and Weights From Medicare Cost Reports           
------------------------------------------------------------------------
                                                            1992-based  
                                                              skilled   
                                                              nursing   
                     Cost categories                         facility   
                                                           market basket
                                                              weights   
                                                             (percent)  
------------------------------------------------------------------------
Wages and Salaries......................................          47.805
Employee Benefits.......................................          10.023
Contract Labor..........................................          12.852
Pharmaceuticals.........................................           2.531
Capital-related Costs...................................           9.777
All Other Costs.........................................          17.012
                                                         ---------------
Total Costs.............................................         100.000
------------------------------------------------------------------------

    After the 21 cost weights for the revised and rebased SNF market 
basket were developed, we selected the most appropriate wage and price 
proxies currently available to monitor the rate of increase for each 
expenditure category. With three exceptions (all for the Capital-
Related Expenses cost category), the wage and price proxies are based 
on Bureau of Labor Statistics (BLS) data and are grouped into one of 
the following BLS categories:
     Employment Cost Indexes--Employment Cost Indexes (ECIs)

[[Page 26291]]

measure the rate of change in employee wage rates and employer costs 
for employee benefits per hour worked. These indexes are fixed-weight 
indexes and strictly measure the change in wage rates and employee 
benefits per hour. They are not affected by shifts in occupation or 
industry mix. ECIs were not available when we developed the calendar 
year 1977-based routine SNF market basket. ECIs are superior to Average 
Hourly Earnings (AHEs) as price proxies for input price indexes for two 
reasons: (1) they measure pure price change, and (2) they are available 
by occupational groups, not just by industry.
     Consumer Price Indexes--Consumer Price Indexes (CPIs) 
measure change in the prices of final goods and services bought by 
consumers. CPIs were only used when the purchases were similar to those 
of retail consumers rather than purchases at the wholesale level, or if 
no appropriate Producer Price Index (PPI) were available.
     Producer Price Indexes--PPIs are used to measure price 
changes for goods sold in other than retail markets. For example, a PPI 
for movable equipment was used, rather than a CPI for equipment.
    The contract labor weight of 12.852 was reallocated to (1) wages 
and salaries, (2) employee benefits, and (3) the all other expenses 
cost category so that the same price proxies that were used for direct 
labor and nonlabor costs could be applied to contract costs. The 
rebased and revised cost categories, weights, and price proxies for the 
1992-based SNF market basket are listed in Table 4.B below.

    Table 4.B--1992-Based Cost Categories, Weights, and Price Proxies   
------------------------------------------------------------------------
                                   1992-based                           
         Cost category            market basket        Price proxy      
                                     weight                             
------------------------------------------------------------------------
Operating Expenses.............          90.223                         
Compensation...................          67.059                         
Wages and Salaries.............          54.262  ECI for Wages and      
                                                  Salaries for Private  
                                                  Nursing Homes         
Employee benefits..............          12.797  ECI for Benefits for   
                                                  Private Nursing Homes 
Nonmedical professional fees...           1.916  ECI for Compensation   
                                                  for Private           
                                                  Professional,         
                                                  Technical and         
                                                  Specialty workers     
Utilities......................           2.500                         
    Electricity................           1.626  PPI for Commercial     
                                                  Electric Power        
    Fuels, nonhighway..........           0.332  PPI for Commercial     
                                                  Natural Gas           
    Water and sewerage.........           0.542  CPI-U for Water and    
                                                  Sewerage              
Other Expenses.................          18.747                         
Other Products.................          10.964                         
    Pharmaceuticals............           2.531  PPI for Prescription   
                                                  Drugs                 
    Food.......................           3.353                         
        Food, wholesale                   2.577  PPI for Processed Foods
         purchase.                                                      
        Food, retail purchase..           0.776  CPI-U for Food Away    
                                                  From Home             
    Chemicals..................           0.720  PPI for Industrial     
                                                  Chemicals             
    Rubber and plastics........           1.529  PPI for Rubber and     
                                                  Plastic Products      
    Paper products.............           1.005  PPI for Converted Paper
                                                  and Paperboard        
    Miscellaneous products.....           1.826  PPI for Finished Goods 
Other Services.................           7.783                         
    Telephone Services.........           0.385  CPI-U for Telephone    
                                                  Services              
    Labor-intensive Services...           3.686  ECI for Compensation   
                                                  for Private Service   
                                                  Occupations           
    Non labor-intensive                   3.713  CPI-U for All Items    
     services.                                                          
Capital-related Expenses.......           9.777                         
Total Depreciation.............           5.915                         
    Building & Fixed Equipment.           4.118  Boeckh Institutional   
                                                  Construction Index    
    Movable Equipment..........           1.797  PPI for Machinery &    
                                                  Equipment             
Total Interest.................           3.189                         
    Government & Nonprofit SNFs           1.658  Average Yield Municipal
                                                  Bonds (Bond Buyer     
                                                  Index-20 bonds)       
    For-Profit SNFs............           1.531  Average Yield Moody's  
                                                  AAA Bonds             
Other Capital-related Expenses.           0.674  CPI-U for Residential  
                                                  Rent                  
        Total..................       * 100.000                         
------------------------------------------------------------------------
* may not add due to rounding                                           

    In the 1992-based total costs market basket, the labor-related 
share is 75.888 percent, while the non-labor-related share is 24.112 
percent. The labor-related share for the 1977-based routine cost market 
basket (81.2 percent) included wages and salaries, employee benefits, 
health services, business services, and miscellaneous costs, while the 
labor-related share of the 1992 total cost market basket (75.888 
percent) includes wages and salaries, employee benefits, professional 
fees, labor-intensive services, and a 33 percent share of capital-
related expenses as shown on Table 4.C below. The share of labor-
related costs in 1992 reflects the change from only routine costs to 
total costs (routine, ancillary, and capital-related) and the changing 
mix of SNF services between 1977 and 1992.
    The labor-related share for capital-related expenses was determined 
to be 33 percent of capital-related expenses, or 3.227 percent of the 
total PPS SNF market basket. This share was estimated from a 
statistical analysis of individual SNF Medicare Cost Reports for 1993 
since nearly all reports from this year were settled. The statistical 
analysis was necessary because the proportion of capital-related 
expenses related to local area wage costs cannot be directly determined 
from the SNF capital-related market basket as it can for operating and 
ancillary costs.
    We performed regression analysis with capital-related costs per day 
in SNFs as the dependent variable and relevant explanatory variables 
for size, complexity, efficiency, age of capital, and local wage 
variation. To account for

[[Page 26292]]

these factors, we used number of beds, case-mix indexes, occupancy 
rate, ownership, age of assets, length of stay, FTEs per bed, and the 
wage index values based on hospital wage index (wages and employee 
benefits) as independent variables. The regression statistics showed 
each variable was statistically significant and an adjusted r-square 
that was acceptable given the large number of observations. The 
independent variable most relevant for our purpose is the wage index 
values based on hospital wage data, since this index is being used to 
adjust payments under SNF PPS for geographic variation in local labor 
costs. The regressions use log transformations for the dependent and 
independent variables, hence the coefficients can be interpreted as 
elasticities. The coefficient for the wage index value was 0.33 with a 
t-value of 4.3. The interpretation of this coefficient as an elasticity 
is that a 10 percent increase in the wage index value leads to a 3.3 
percent increase in capital-related costs per day. This coefficient is 
equivalent to the portion of capital-related expenses in the SNF market 
basket that are considered to be labor-related. Multiplying the 0.33 by 
the capital-related share of 9.777 yields a labor-related share for 
capital of 3.227 percent of the total SNF market basket.
    Conceptually it seems appropriate that capital-related expenses 
would vary less with local wages than would operating expenses for 
SNFs. Operating expenses for SNFs are determined in large part from the 
labor inputs for relatively low-skilled employees that are tightly 
linked to local wage levels in local labor markets. Wages, salaries, 
and benefits constitute a majority of the operating costs of providing 
SNF services; the labor-related share of operating expenses is 80.6 
percent. For capital-related expenses, however, annual costs in the 
current year are for capital purchased over time. Capital-related 
expenses are determined in some proportion by local area costs (such as 
construction worker wages and building materials costs) that are 
reflected in the price of the capital asset. However, many other inputs 
that determine capital costs are not related to local area wage costs, 
such as equipment prices and interest rates. We found a similar lower 
share for capital-related expenses in hospitals.
    We also conducted regression analyses with operating and total 
costs per day for SNFs as the dependent variable. The findings of our 
analysis of SNF operating and total costs per day are consistent with 
the PPS SNF market basket weights and structure. For operating costs 
per day, the regression analysis yielded a coefficient nearly the same 
as the operating labor-related share from the SNF market basket. The 
regression of total costs per day yielded a coefficient of 0.74 
percent, nearly the same as the total labor-related share (operating 
and capital-related) from the SNF market basket. We also conducted a 
similar regression analysis on hospital costs per case and determined 
the results to be consistent with the PPS hospital market basket.
    Approaching the labor-related share several different ways 
validated the appropriateness of using regression analysis. Therefore, 
we are using this analysis in determining the labor-related share for 
PPS SNF capital-related expenses.

                Table 4.C--1992-Based Labor-Related Share               
------------------------------------------------------------------------
                                                              1992-based
                                                                market  
                       Cost category                            basket  
                                                                weight  
------------------------------------------------------------------------
Wages and Salaries.........................................       54.262
Employee Benefits..........................................       12.797
Nonmedical Professional Fees...............................        1.916
Labor-intensive Services...................................        3.686
Capital-related............................................        3.227
                                                            ------------
    Total..................................................       75.888
------------------------------------------------------------------------

    All price proxies for the rebased SNF market basket are listed in 
Table 4.B and summarized in the Appendix to this rule. A comparison of 
the yearly historical percent changes from 1994 through 1996 for the 
current 1977-based routine costs market basket and the 1992-based total 
cost market basket is shown below in Table 4.D.

Table 4.D--Comparison of the 1977-Based Skilled Nursing Facility Routine
  Costs Market Basket and the 1992-Based Skilled Nursing Facility Total 
            Costs Market Basket, Percent Changes, 1994-1996*            
------------------------------------------------------------------------
                                                  Skilled      Skilled  
                                                  Nursing      nursing  
                                                  Facility     facility 
      Fiscal years  beginning  October 1          Routine     total cost
                                                   Market       market  
                                                 Basket, CY   basket, FY
                                                 1977 base    1992 base 
------------------------------------------------------------------------
Historical:                                                             
    October 1993, FY 1994.....................          3.6          3.2
    October 1994, FY 1995.....................          2.8          3.0
    October 1995, FY 1996.....................          2.6          2.7
Historical Average: 1994-1996.................          3.0         3.0 
------------------------------------------------------------------------
* Note: The 1992 total cost market basket is measuring a different cost 
  concept than the 1977 routine cost market basket. Differences between 
  the two indexes are expected.                                         
Source: Standard & Poor's DRI HCC, 4th QTR, 1997; @USSIM/TREND25YR1197  
  @CISSIM/CONTROL974.                                                   
Released by HCFA, OACT, National Health Statistics Group.               

Note that the historical average rate of growth for 1994 through 1996 
for the SNF 1992-based total cost market basket is equal to that of the 
1977-based routine market basket. We believe that the 1992-based SNF 
total cost market basket provides a more current measure of the annual 
increases in total cost care than the 1977-based SNF market basket 
because: (1) the cost structure includes routine, ancillary, and 
capital-related costs, not just routine cost, (2) the cost structure 
reflects the structure of costs for the most recent year for which 
there are relatively complete data, and (3) superior new wage-price 
variables have been incorporated into the 1992-based index. The 
forecasted rates of growth used to compute the projected SNF market 
basket percentages, described in the next section, are shown below in 
Table 4.E.

Table 4.E--Skilled Nursing Facility Total Cost Market Basket, Forecasted
                            Change, 1997-2000                           
------------------------------------------------------------------------
                                                               Skilled  
                                                               Nursing  
                                                               facility 
             Fiscal years beginning  October 1               total  cost
                                                                market  
                                                                basket  
------------------------------------------------------------------------
October 1996, FY 1997......................................          2.4
October 1997, FY 1998......................................          2.8
October 1998, FY 1999......................................          3.0
October 1999, FY 2000......................................          3.1
Forecasted Average: 1997-2000..............................         2.8 
------------------------------------------------------------------------
Source: Standard & Poor's DRI HCC, 4th QTR, 1997; @USSIM/TREND25YR1197  
  @CISSIM/CONTROL974.                                                   
Released by HCFA, OACT, National Health Statistics Group.               


[[Page 26293]]

    We are considering a mechanism to adjust future SNF PPS rates for 
forecast errors. The forecasted SNF total cost market basket changes 
shown in Table 4.E are based on historical trends and relationships 
ascertainable at the time the update factor is established for the 
upcoming rate setting period. In any given year, there may be 
unanticipated price fluctuations that may result in differences between 
the actual increases in prices faced by SNFs and the forecast used in 
calculating the update factors. We are reviewing the analytical 
framework for updating the standard Federal rate under the hospital PPS 
to account for forecast errors. If this framework is chosen to update 
the SNF PPS rate, an adjustment would be made only if the forecasted 
market basket percentage change for any year differs from the actual 
percentage change by 0.25 percentage points or more. There would be a 
2-year lag between the forecast and the measurement of the forecast 
error. Thus, for example, we would adjust for an error in forecasting 
the 1997 market basket percentage used to compute the PPS rates 
effective with this interim final rule through an adjustment to the 
fiscal year 1999 update to the SNF PPS rates.

B. Use of the Skilled Nursing Facility Market Basket Percentage

    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index, 
described in the previous section, from the midpoint of the prior 
fiscal year (or period) to the midpoint of the fiscal year (or other 
period) involved. The facility-specific portion and Federal portion of 
the SNF PPS rates effective with this rule are based on cost reporting 
periods beginning in Federal fiscal year 1995 (base year). The 
percentage increases in the SNF market basket index will be used to 
compute the update factors to reflect cost increases occurring between 
the cost reporting periods represented in the base year and the 
midpoint of the fiscal year (or other period). We used the Standard & 
Poor's DRI CC, 4th quarter 1997 historical and forecasted percentage 
increases of the revised and rebased SNF market basket index for 
routine, ancillary, and capital-related expenses, described in the 
previous section, to compute the update factors. The update factors, as 
described below, will be used to adjust the base year costs for 
computing the facility-specific portion and Federal portion of the SNF 
PPS rates.
1. Facility-Specific Rate Update Factor
    Under section 1888(e)(3)(D)(i) of the Act, for the facility-
specific portion of the SNF PPS rate, we will update a facility's base 
year costs up to the facility's first cost reporting period beginning 
on or after July 1, 1998 and before October 1, 1999 (initial period) by 
the SNF market basket percentage, reduced by one percentage point. We 
took the following steps to develop the 12-month cost reporting period 
facility-specific rate update factors shown in Table 4.F.
    Step 1. Determine the cumulative growth from the average market 
basket level for each 12-month cost report period to the average market 
basket level for its corresponding 12-month period beginning on or 
after July 1, 1998.
    Step 2. From the cumulative growth in Step 1, determine the average 
annual rate of growth for the period from each beginning 12-month 
period's average market basket index level to its corresponding 12-
month period beginning on or after July 1, 1998.
    Step 3. Subtract 1.0 percentage point from each average annual rate 
of growth calculated in Step 2.
    Step 4. Determine what the revised cumulative growth for each 12-
month's period average index level would have been, using the revised 
average annual rates of growth from Step 3. The resulting update 
factors are shown in Table 4.F.

 TAble 4.F--Update Factors \1\ for Facility-Specific Portion of the SNF 
  PPS Rates--Adjust to 12-Month Cost Reporting Periods Beginning on or  
  After July 1, 1998 and Before October 1, 1999 [(Initial Period) from  
        Cost Reporting Periods Beginning in FY 1995 (Base Year)]        
------------------------------------------------------------------------
                                    Adjust from 12-month                
 If 12-month cost reporting period     cost reporting      Using update 
     in initial period begins        period in base year     factor of  
                                         that begins                    
------------------------------------------------------------------------
July 1, 1998......................  July 1, 1995........         1.05149
August 1, 1998....................  August 1, 1995......         1.05197
September 1, 1998.................  September 1, 1995...         1.05253
October 1, 1998...................  October 1, 1994.....         1.07116
November 1, 1998..................  November 1, 1994....         1.07125
December 1, 1998..................  December 1, 1994....         1.07126
January 1, 1999...................  January 1, 1995.....         1.07143
February 1, 1999..................  February 1, 1995....         1.07176
March 1, 1999.....................  March 1, 1995.......         1.07226
April 1, 1999.....................  April 1,1995........         1.07270
May 1, 1999.......................  May 1, 1995.........         1.07308
June 1, 1999......................  June 1, 1995........         1.07340
July 1, 1999......................  July 1, 1995........         1.07381
August 1, 1999....................  August 1, 1995......         1.07428
September 1, 1999.................  September 1, 1995...         1.07484
------------------------------------------------------------------------
\1\ Source: Standard & Poor's DRI, 4th Qtr 1997;                        
@USSIM/TREND25YR1197@CISSIM/CONTROL974                                  

    A 12-month cost reporting period that begins on July 1, August 1, 
or September 1 will have two cost reporting periods within the initial 
period. Table 4.F provides update factors for these three beginning 
dates for 1998 and 1999. The 1998 cost reporting period is considered 
the first cost reporting period for the purposes of applying the 
facility-specific percentage in the transition period. The 1999 cost 
reporting period, for the same provider, is considered the second cost 
reporting period for the purposes of applying the facility-specific 
percentage in the transition period. The transition period percentages 
are presented elsewhere in this rule.

[[Page 26294]]

    SNFs may have cost reporting periods that are fewer than 12 months 
in duration (short period). This may occur, for example, when a 
provider enters the Medicare program after its selected fiscal year has 
already begun, or when a provider experiences a change of ownership 
before the end of the cost reporting period. Since short periods affect 
a small number of providers, relative to the total number of SNFs, and 
the facility-specific portion of the SNF PPS rate is subject to a 
transition period, we do not believe consideration of computing a 
``short period specific'' update factor is warranted. Accordingly, we 
will apply the following rules to short periods.
    a. Short period in base year. First, select the later short period 
in the base year for the affected provider. Second, if necessary, 
adjust the beginning or end of the short period as follows. Short 
periods may not necessarily begin on the first of the month or end on 
the last day of the month. In order to simplify the process of 
determining the short period update factor, if the short period begins 
before the 16th of the month, it will be adjusted to a beginning date 
of the 1st of that month. If the short period begins on or after the 
16th of the month, it will be adjusted to the beginning of the next 
month. Also, if the short period ends before the 16th of the month, it 
will be adjusted to the end of the preceding month, or, if the short 
period ends on or after the 16th of the month, it will be adjusted to 
the end of that month. Third, determine the midpoint of the short 
period. Fourth, use the following midpoint guidelines to determine 
which 12-month update factor to use from Table 4.F.

------------------------------------------------------------------------
 If the midpoint of short period falls     Use factor for this 12-month 
                between                               period            
------------------------------------------------------------------------
March 16, 1995-April 15, 1995..........  October 1994-September 1995    
April 16, 1995-May 15, 1995............  November 1994-October 1995     
May 16, 1995-June 15, 1995.............  December 1994-November 1995    
June 16, 1995-July 15, 1995............  January 1995-December 1995     
July 16, 1995-August 15, 1995..........  February 1995-January 1996     
August 16, 1995-September 15, 1995.....  March 1995-February 1996       
September 16, 1995-October 15, 1995....  April 1995-March 1996          
October 16, 1995-November 15, 1995.....  May 1995-April 1996            
November 16, 1995-December 15, 1995....  June 1995-May 1996             
December 16, 1995-January 15, 1996.....  July 1995-June 1996            
January 16, 1996-February 15, 1996.....  August 1995-July 1996          
February 16, 1996-March 15, 1996.......  September 1995-August 1996     
------------------------------------------------------------------------

    b. Short period in initial period. Providers with short periods 
that begin on or after July 1, 1998 and before October 1, 1999 (initial 
period) should use the instructions above to adjust the beginning date 
of the short period and then use the 12-month factor that corresponds 
to the beginning date of the ``adjusted to period'' in Table 4.F. The 
first short period in the initial period is considered the first cost 
reporting period for the purposes of applying the facility-specific 
percentage in the transition period. Each subsequent short period, for 
the same provider, of any duration is considered the second or third 
cost reporting period for the purposes of applying the facility-
specific percentage in the transition period. The transition period 
percentages are presented elsewhere in this rule.
    c. Short period between base year and initial period. A provider 
may experience a change of ownership or may receive proper approval to 
change its cost reporting period between the base year cost reporting 
period and the initial period. If this occurs, the base year cost 
reporting period may begin on a date that is different than that of the 
initial period. In these instances, use the beginning date of the 
initial period to determine the 12-month factor that corresponds to the 
beginning date of the ``adjusted to period'' in Table 4.F.
2. Federal Rate Update Factor
    To develop the Federal rates, we updated each facility's base year 
costs up to the midpoint of the initial period by the SNF market basket 
percentages, reduced by one percentage point. We developed the Federal 
rate adjustment factors using the following methodology:
    Step 1. Determine the cumulative growth from the average market 
basket level for each 12-month cost reporting period to the average 
market basket level for the 15-month common period.
    Step 2. From the cumulative growth in Step 1., determine the 
average annual rate of growth for the period from each beginning 12-
month period's average market basket index level to the average market 
basket index level of the ending 15-month common period.
    Step 3. Subtract 1.0 percentage point from each average annual rate 
of growth calculated in Step 2.
    Step 4. Determine what the revised cumulative growth for each 
period's average index level would have been, using the revised average 
annual rates of growth from Step 3.
    Step 5. Apply the revised cumulative percentage growth to the 
average market basket index level for the beginning cost reporting 
period, which yields revised 15-month average index levels for the 
common ending period.
    Step 6. Using the revised 15-month average index levels determined 
in Step 5, calculate the ratio of each revised average index level to 
the original average common period index level.
    Step 7. To determine the revised factors to apply to SNF cost 
reporting periods beginning between October 1, 1994 and September 30, 
1995, multiply each factor for adjusting cost reports to the common 
period by the ratios determined in Step 6. This yields revised factors 
that reflect an average annual rate equal to the SNF market basket 
percentage minus 1 percentage point.
    These revised update factors were used to compute the Federal 
portion of the SNF PPS rate shown in Tables 2.A and 2.B.

V. Consolidated Billing

A. Background of the Skilled Nursing Facility Consolidated Billing 
Provision

    Section 4432(b) of the BBA 1997 amended the Social Security Act to 
establish a requirement for SNF Consolidated Billing, effective for 
items and services furnished on or after July 1, 1998. SNF Consolidated 
Billing is a comprehensive billing requirement (similar to the one that 
has been in effect for inpatient hospital services for well over a 
decade), under which the SNF itself is responsible for billing Medicare 
for virtually all of the services that its residents receive. SNF 
Consolidated Billing is necessary for a number of reasons.

[[Page 26295]]

    Historically, an SNF could choose to furnish services to its 
residents either directly with its own resources, or under an 
``arrangement'' with an outside source; in either instance, the SNF 
itself was responsible for submitting the bill for the service to its 
Medicare fiscal intermediary (FI). However, the SNF has also had the 
additional option of ``unbundling'' a service altogether; that is, 
permitting an outside supplier to furnish the service directly to an 
SNF resident and to submit a bill independently to the carrier under 
Part B, in lieu of any actual involvement by the SNF itself. The 
ability on the part of suppliers to submit separate bills directly to 
the carrier for these unbundled services has been extremely problematic 
in several ways.
    First, it has created a potential for duplicate billing. For 
example, an SNF might include a particular service in its bill to the 
FI under Part A at the same time that an outside supplier is improperly 
submitting a Part B claim to the carrier for the identical service. 
Unless the Medicare contractors detect this inappropriate duplication 
in billing, the program ultimately pays twice for the same service.
    Further, even in instances where only the supplier bills for the 
service, the practice of unbundling has resulted in additional out-of-
pocket liability for the beneficiary. Under Part A, an SNF resident's 
only financial liability during a covered stay is for the SNF 
coinsurance that begins after the 20th day of the stay. The SNF 
coinsurance amount is set at a flat rate per day (which, by law, 
represents \1/8\ of the current inpatient hospital deductible amount), 
and this amount does not vary with the number of services that the 
resident actually receives from one day to the next. This means that 
even if the SNF furnishes some additional services on a given day, the 
resident's daily coinsurance amount under Part A does not increase. 
However, if the SNF decides instead to unbundle those services to an 
outside supplier which then bills the carrier under Part B, this causes 
the resident to incur an additional out-of-pocket liability for any 
unmet deductible under Part B, as well as for Part B's 20 percent 
coinsurance.
    Finally, along with the potential for duplicate billing and for 
subjecting the beneficiary to needless expense, unbundling has raised 
quality of care and program integrity concerns for SNF residents--
including those who are not in a covered Part A stay--by dispersing the 
responsibility for providing resident care among a myriad of outside 
suppliers. This fragmentation in the provision and billing of services 
has diminished the SNF's own capacity to oversee, coordinate, and 
account for the total package of care that its residents receive, and 
has rendered the SNF less able to guard against inappropriate billing 
practices and utilization.
    For years, HCFA pursued legislative proposals to prohibit the 
practice of unbundling in SNFs, but without success. As with inpatient 
hospital services, the event that finally brought about a comprehensive 
billing requirement for SNF services was the creation of a PPS for 
SNFs. In order to have a prospective payment that includes all of the 
medically necessary services that an SNF resident receives, it is 
essential to tie all of those services into a single facility package, 
by prohibiting unbundling. Otherwise, the Medicare program would once 
again be faced with potentially paying twice for the same service--once 
to the SNF under the Part A prospective payment, and again to an 
outside supplier under Part B.

B. Skilled Nursing Facility Consolidated Billing Legislation

    Under the SNF Consolidated Billing requirement established by 
section 4432(b) of the BBA 1997, the SNF itself has the Medicare 
billing responsibility for virtually all of the Medicare-covered 
services that its residents receive. The following is a discussion of 
the specific provisions of the legislation.
1. Specific Provisions of the Legislation
     Section 4432(b)(1) of the BBA 1997 adds a new paragraph 
(18) to section 1862(a) of the Act, which prohibits Medicare coverage 
of services furnished to an SNF resident (other than those services 
that are specifically excluded from the SNF Consolidated Billing 
requirement) unless they are furnished or arranged for by the SNF 
itself.
     Section 4432(b)(2) of the BBA 1997 adds a new paragraph 
(E) to section 1842(b)(6) of the Act, which specifies that, for any 
such services that are covered under Part B, Medicare makes payment to 
the SNF rather than to the beneficiary.
     Section 4432(b)(3) of the BBA 1997 adds to section 1888(e) 
of the Act a new paragraph (9), which requires that the payment amount 
for Part B services furnished to an SNF resident shall be the amount 
prescribed in the otherwise applicable fee schedule, and a new 
paragraph (10), which requires the SNF's Part B bills to identify all 
items and services through a uniform coding system to be specified by 
the Secretary. Under this authority, we are specifying the HCFA Common 
Procedure Coding System (HCPCS) as the coding system to be used. The 
HCPCS coding requirement is intended to enable the Medicare contractor 
to identify individual items and services more readily on the claim; 
this, in turn, will help enable the contractor to limit the amounts it 
pays the SNF to any applicable Part B fee schedule amounts in 
accordance with section 1888(e)(9) of the Act.
     Section 4432(b)(4) of the BBA 1997 adds a new paragraph 
(t) to section 1842 of the Act, which requires physicians to include 
the SNF's Medicare provider number on bills for physician services 
furnished to SNF residents that are separately billable to the Part B 
carrier (see discussion in section V.B.2. below).
     Section 4432(b)(5) of the BBA 1997 includes a series of 
conforming amendments. The SNF Consolidated Billing provision requires 
an SNF to furnish virtually all services to its residents, either 
directly or under ``arrangements'' with an outside source in which the 
SNF itself bills Medicare. Accordingly, section 4432(b)(5)(D) amends 
section 1861(h) of the Act to expand the scope of SNF services that 
Part A can cover under the extended care benefit to include services 
furnished under arrangements between the SNF and an outside source, as 
discussed in section VI. below. Section 4432(b)(5)(F) adds a new clause 
(ii) to section 1866(a)(1)(H) of the Act to make compliance with the 
SNF Consolidated Billing provision a specific requirement under the 
terms of an SNF's Medicare provider agreement.
2. Types of Services That Are Subject to the Provision
    Like the SNF PPS itself, SNF Consolidated Billing applies 
comprehensively to the ``covered skilled nursing facility services'' 
described in section 1888(e)(2)(A)(i) of the Act when furnished to SNF 
residents, except for those services that appear on a short list of 
exclusions described in section 1888(e)(2)(A)(ii) of the Act. However, 
in practical terms, the SNF Consolidated Billing and PPS provisions 
encompass slightly different sets of services, since the SNF PPS 
includes a few individual services that are not subject to the 
Consolidated Billing provision. This is because the SNF PPS encompasses 
the entire range of Part A extended care services that are coverable 
under section 1861(h) of the Act when furnished or arranged for by the 
SNF itself, including an extremely small number of such services (for 
example, dialysis services) that section 1888(e)(2)(A)(ii) of the Act 
specifically identifies as alternatively being billable separately 
under Part B.

[[Page 26296]]

    Similarly, the Consolidated Billing provision encompasses a small 
number of services that are not coverable under Part A or includable in 
the PPS payment, even though furnished or arranged for by the SNF 
itself during a covered Part A stay. This is because the services 
included in the SNF PPS payment are, by definition, limited to the 
range of diagnostic and therapeutic services that are coverable under 
the Part A extended care benefit, while the Consolidated Billing 
provision encompasses not only those types of services, but also 
certain preventive and screening services that are not considered 
diagnostic or therapeutic in nature and, thus, are coverable only under 
Part B. (See the portion of section 1861(h) of the Act following 
paragraph (7), which limits the scope of coverage under the Part A 
extended care benefit to those ``diagnostic and therapeutic'' services 
that are coverable under the inpatient hospital benefit, and section 
1862(a)(1) of the Act, which describes preventive services to avoid the 
occurrence of a medical condition altogether (paragraph (B)) and 
screening services to detect the presence of a medical condition while 
it is still in an asymptomatic state (paragraph (F)) as being separate 
and distinct categories from services to diagnose or treat a condition 
that has already manifested itself (paragraph (A)). Thus, for example, 
if an SNF resident receives a vaccination for pneumococcal pneumonia or 
hepatitis B in the course of a covered Part A stay, this would not 
represent a diagnostic or therapeutic service that could be covered 
under the Part A extended care benefit, but a preventive service that 
is coverable only as one of the ``medical and other health services'' 
included under Part B (see section 1861(s)(10) of the Act). 
Accordingly, while the SNF's Part A PPS payment would not include this 
service, the Consolidated Billing provision would still require the SNF 
itself to submit the bill for the service to Part B.
    The statutory list of excluded services in section 
1888(e)(2)(A)(ii) of the Act consists of a number of specific service 
categories. These include several types of practitioner services that 
are exempt from the Consolidated Billing requirement and, thus, are 
still to be billed separately to the Part B carrier. These exempt 
practitioner services include the following:
     Physicians' services furnished to individual SNF residents 
(section 4432(b)(4) of the BBA 1997 requires such bills to include the 
SNF's Medicare provider number).
     Physician assistants working under a physician's 
supervision.
     Nurse practitioners and clinical nurse specialists working 
in collaboration with a physician.
     Certified nurse-midwives.
     Qualified psychologists.
     Certified registered nurse anesthetists.
    In addition to these exempt categories of practitioner services, 
section 1888(e)(2)(A)(ii) of the Act also excludes the following types 
of services:
     Home dialysis supplies and equipment, self-care home 
dialysis support services, and institutional dialysis services and 
supplies as described in section 1861(s)(2)(F) of the Act;
     Erythropoietin (EPO) for certain dialysis patients as 
described in section 1861(s)(2)(O) of the Act, subject to methods and 
standards established by the Secretary in regulations for its safe and 
effective use (see Secs. 405.2163(g) and (h)); and
     For services furnished during 1998 only: The 
transportation costs of electrocardiogram equipment for 
electrocardiogram test services (HCPCS Code R0076) furnished during 
1998. This reflects section 4559 of the BBA 1997, which temporarily 
restores separate Part B payment for the transportation of portable 
electrocardiogram equipment used in furnishing tests during 1998.
    Further, we note that hospice care (as defined in section 1861(dd) 
of the Act) is not subject to Consolidated Billing when an SNF resident 
elects to receive care under the Medicare hospice benefit, since the 
hospice (rather than the SNF) assumes the overall responsibility for 
those care needs relating to the beneficiary's terminal condition, 
while the SNF itself retains responsibility only for those aspects of 
the beneficiary's care needs that are not related to the terminal 
condition (see further discussion in section V.B.4. below). In 
addition, as discussed in section V.B.4. below, we are clarifying that 
in terms of ambulance services, the Consolidated Billing provision 
applies only to ambulance transportation furnished during the SNF stay, 
and not to an ambulance trip that occurs at either the beginning or end 
of the stay.
    With regard to the services of physicians and other practitioners, 
even though the SNF Consolidated Billing requirement generally does not 
apply to the specific types of practitioners listed above, it does 
apply to certain particular subcategories of their services, which must 
be billed by and paid to the SNF. Section 1888(e)(2)(A)(ii) of the Act 
specifies that physical, occupational, and speech-language therapy 
services furnished to SNF residents are subject to Consolidated Billing 
and, therefore, must be billed by the SNF itself, regardless of whether 
these services are furnished by (or under the supervision of) a 
physician or other health care professional. In effect, this statutory 
provision converts the coverage of what would otherwise be practitioner 
services into provider (that is, SNF) services. Thus, those 
practitioner services that fall within the categories of physical, 
occupational, or speech language therapy services must be billed by the 
SNF to its FI, and the practitioner cannot submit a separate bill to 
the Part B carrier. (We note that the Physicians' Current Procedural 
Terminology (CPT) coding used on physician and other practitioner bills 
enables the Part B carrier to identify those services that are 
physical, occupational, and speech-language therapy services.)
    Further, with respect to physicians' services, we are providing--
consistent with the longstanding policy under the bundling requirement 
for inpatient hospital services--that the SNF Consolidated Billing 
provision excludes only those particular physicians' services that meet 
the criteria described in Sec. 415.102(a) for payment on a fee schedule 
basis. Essentially, these are services (ordinarily requiring 
performance by a physician) that the physician personally furnishes to 
an individual beneficiary, which contribute directly to that 
beneficiary's diagnosis or treatment and, in the case of radiology or 
laboratory services, meet the additional requirements specified in 
Secs. 415.120 and 415.130, respectively. By contrast, this exclusion of 
the types of physicians' services described in Sec. 415.102(a) does not 
extend to more generalized physician functions that typically occur in 
the provider setting (such as quality control activities), which are 
performed not for an individual beneficiary but for the overall benefit 
of the provider's entire patient population, and are considered a 
provider cost under Secs. 415.55 and 415.60.
    In addition, the Consolidated Billing requirement does not exempt 
those types of nonphysician services that would otherwise be billed to 
the Part B carrier in conjunction with related physician services and 
paid under a single, global fee. For example, payment for diagnostic 
radiology services is sometimes made through a global fee that includes 
both a technical component (for the diagnostic test itself) and a 
professional component (for the physician's interpretation of the 
test). However, under Consolidated Billing,

[[Page 26297]]

when such services are furnished to an SNF resident, only the 
professional (physician) component is billed separately as a 
physician's service, while the technical (nonphysician) component must 
be billed by the SNF itself.
    Also, while the SNF Consolidated Billing provision does not apply 
to the professional services that a physician or other exempt 
practitioner performs personally, it does apply to those services that 
are furnished to an SNF resident by someone other than the 
practitioner, as an incident to the practitioner's professional 
service. This position is consistent with the approach that has long 
been taken under the hospital bundling requirement, as well as with 
section 1888(e)(2)(A)(ii) of the Act, which specifically identifies 
``physicians'' services'' themselves as the service category that is 
excluded from SNF Consolidated Billing. Physicians' services, in turn, 
are covered by Part B under section 1861(s)(1) of the Act and are 
defined in section 1861(q) as being performed by a physician, while 
``incident to'' services are covered under a separate statutory 
authority (section 1861(s)(2)(A) of the Act) and are, by definition, 
not performed by a physician. Similarly, for the other types of 
practitioner services that are exempt from the SNF Consolidated Billing 
requirement, we are specifying that this exemption applies only to the 
professional services that the practitioner performs personally, and 
that services furnished by others as an incident to the practitioner's 
professional service are themselves subject to the Consolidated Billing 
requirement.
    We believe that to do otherwise with regard to these ``incident 
to'' services would effectively create a loophole through which a 
potentially broad and diverse array of services could be unbundled, 
merely by virtue of being furnished under the general auspices of such 
practitioners. This, in turn, would ultimately defeat the very purpose 
of the SNF Consolidated Billing provision--that is, to make the SNF 
itself responsible for billing Medicare for essentially all of its 
residents' services, other than those identified in a small number of 
narrow and specifically delimited exclusions. Further, as noted above, 
both the Consolidated Billing and SNF PPS provisions employ the same 
statutory list of excluded services. Thus, the approach we are adopting 
with regard to the limited range of services that qualify for exclusion 
is essential not only to safeguard the integrity of the Consolidated 
Billing requirement, but also that of the SNF PPS itself.
    Finally, we note that laboratory services are subject to the SNF 
Consolidated Billing requirement. Thus, when an outside laboratory 
performs tests for SNF residents, the Medicare billing must be done by 
the SNF itself rather than by the outside laboratory. However, it will 
be necessary for the Congress to make a conforming change in section 
1833(h)(5)(A) of the Act, in order to resolve a technical inconsistency 
in the text of that provision. The current wording of that section of 
the Act generally allows Part B to make payment for clinical diagnostic 
laboratory tests only to the person or entity that actually performs 
(or supervises the performance of) the test. This provision already 
contains a specific exception at section 1833(h)(5)(A)(iii) of the Act 
that permits a hospital to receive Part B payment for laboratory 
services that the hospital obtains under arrangements made with an 
outside laboratory. As mentioned previously, hospitals have long had a 
comprehensive Medicare billing requirement, which served as a model for 
the one now being established for SNFs. Accordingly, we believe that 
the BBA 1997's lack of a conforming change that explicitly extends the 
payment provision's existing hospital exception to SNFs is merely an 
inadvertent oversight, and we plan to pursue a technical amendment to 
make an appropriate conforming change in the text of section 
1833(h)(5)(A) of the Act.
3. Facilities That Are Subject to the Provision
    In terms of facilities (as explained in the following discussion of 
SNF ``resident'' status), the Consolidated Billing requirement applies 
to Medicare-participating SNFs, including distinct part SNFs. 
Consolidated Billing does not apply to a nursing home that has no 
Medicare certification whatsoever, such as a nursing home that does not 
participate at all in either the Medicare or Medicaid programs, or a 
nursing home that exclusively participates only in the Medicaid program 
as a nursing facility (NF). However, Consolidated Billing does apply to 
services furnished to residents in any nursing home of which a distinct 
part is a Medicare-participating SNF. This means that if any portion of 
a nursing home has Medicare SNF certification, Consolidated Billing 
applies to the entire nursing home. (This avoids creating a perverse 
incentive for SNFs to set aside a nonparticipating section in which 
they could otherwise circumvent the Consolidated Billing requirement 
for those residents who are not in a covered Part A stay.)
    Thus, when a nursing home limits its Medicare participation as an 
SNF to only a distinct part of the overall institution--
     In terms of program payment, Part A coverage under the 
extended care benefit is limited to the portion of the nursing home 
that actually participates in Medicare as an SNF; and
     In terms of Medicare billing responsibility, the 
Consolidated Billing requirement applies to the entire nursing home.
    We note that if the surrounding institution that houses a Medicare 
distinct part SNF includes an entity other than a nursing home (that 
is, a hospital, or a domiciliary or ``board and care'' home), then the 
Consolidated Billing requirement would not apply to that entity, but 
would apply only to the nursing home itself (including the nursing 
home's participating distinct part SNF along with any nonparticipating 
remainder).
4. Skilled Nursing Facility ``Resident'' Status for Purposes of This 
Provision
    For purposes of determining program payment in the specific context 
of the Part A extended care benefit, section 1861(h) of the Act limits 
coverage to those beneficiaries who reside in an SNF, which section 
1819(a) of the Act defines as an institution (or a distinct part of an 
institution) that is actually certified as meeting the SNF requirements 
for participation. However, in excluding Medicare coverage for 
unbundled services furnished to SNF residents, section 4432(b)(1) of 
the BBA 1997 further specifies that this provision applies to services 
furnished to any beneficiary who ``* * * is a resident of a skilled 
nursing facility or of a part of a facility that includes a skilled 
nursing facility (as determined under regulations) * * * .'' This 
statutory language establishes that, for purposes of the SNF 
Consolidated Billing provision, the Congress intended:
     That the definition of an SNF resident should include not 
only those beneficiaries who reside in the certified area of a nursing 
home, but also (as discussed in the preceding section) those who reside 
in the nonparticipating portion of any nursing home that also includes 
a Medicare-certified distinct part SNF; and
     To grant the Secretary the specific authority to define 
the concept of ``services furnished to SNF residents'' further in 
regulations.
    Accordingly, for purposes of the SNF Consolidated Billing 
provision, we are

[[Page 26298]]

defining an SNF ``resident'' in the regulations as including 
beneficiaries who reside in Medicare-certified SNFs, as well as those 
beneficiaries who reside anywhere within a nursing home if that nursing 
home includes a distinct part that is a Medicare-certified SNF.
    We note that the SNF Consolidated Billing legislation defines the 
scope of this provision in terms of a comprehensive package of services 
furnished to an SNF resident. For example, in terms of ambulance 
services, the initial ambulance trip that first brings a beneficiary to 
the SNF would not be subject to the Consolidated Billing provision 
(since the beneficiary, at that point, has not yet been admitted to the 
SNF as a resident). Similarly, an ambulance trip that occurs at the end 
of an SNF stay, in connection with one of the events that (as discussed 
below) ends a beneficiary's status as an SNF resident for Consolidated 
Billing purposes, would not be subject to the Consolidated Billing 
provision. By contrast, ambulance transportation furnished during an 
SNF stay is subject to the SNF Consolidated Billing provision.
    As noted above, the Consolidated Billing requirement is intended to 
encompass a comprehensive package of services furnished to an SNF 
resident. Accordingly, we believe that it is necessary to prevent a 
facility from being able to circumvent this requirement and unbundle 
particular services that would otherwise be an integral part of the 
package, merely by temporarily discontinuing a beneficiary's status as 
a ``resident'' of the SNF just long enough to receive the services (for 
example, by briefly sending the beneficiary offsite to receive them as 
a hospital or clinic outpatient), and immediately thereafter 
reinstating the beneficiary's status as an SNF ``resident.'' Therefore, 
we are providing that a beneficiary's departure from the facility does 
not automatically end his or her status as an SNF ``resident'' for 
Consolidated Billing purposes. Rather, the beneficiary's status as an 
SNF resident in this context would end when one of the following events 
occurs--
     The beneficiary is admitted as an inpatient to a Medicare-
participating hospital or critical access hospital (CAH, formerly 
referred to as a rural primary care hospital (RPCH)) or as a resident 
to another SNF;
     The beneficiary receives services, under a plan of care, 
from a Medicare-participating home health agency;
     The beneficiary receives outpatient services from a 
Medicare-participating hospital or CAH (but only with respect to those 
services that are not furnished pursuant to the resident assessment or 
the comprehensive care plan required under Sec. 483.20); or
     The beneficiary is formally discharged or otherwise 
departs from the SNF (for example, on a leave of absence), unless 
readmitted to that or another SNF within 24 consecutive hours. This 
means that the facility's responsibilities under the Consolidated 
Billing provision (including its responsibility to furnish or make 
arrangements for needed care and services) remain in effect until the 
beneficiary's status as an SNF ``resident'' ends due to the occurrence 
of one of the events described above.
    We are providing that, for purposes of determining the 
applicability of the SNF Consolidated Billing requirement, a 
beneficiary's status as an SNF resident ends at the point when the 
beneficiary is admitted as an inpatient to a participating hospital or 
CAH, or as a resident to another SNF, even if the beneficiary 
subsequently returns to the original SNF within 24 hours of departure. 
This is because these settings all represent situations in which 
another provider has assumed the ongoing responsibility for the 
beneficiary's comprehensive care needs. For the same reason, we are 
including the receipt of services from a participating home health 
agency under a plan of care as another event that would end a 
beneficiary's status as an SNF ``resident'' for Consolidated Billing 
purposes. We note that these situations are distinct, however, from one 
in which a terminally ill SNF resident elects to receive care under the 
Medicare hospice benefit, since a hospice assumes responsibility only 
for those care needs that relate to the beneficiary's terminal 
condition, while the SNF itself remains responsible for any care needs 
that are unrelated to the terminal condition. This is equally true 
whether an SNF resident receives the hospice care while still in the 
SNF or during a temporary absence from the facility. Accordingly, an 
SNF resident's election to receive care under the Medicare hospice 
benefit would not result in a blanket exclusion of all services 
furnished to that resident from the Consolidated Billing requirement; 
rather, as discussed previously in section V.B.2., only the specific 
aspects of such a resident's care that are actually provided under the 
hospice benefit are excluded from the Consolidated Billing provision, 
while care that is unrelated to the resident's terminal condition 
remains subject to the provision.
    Similarly, when an SNF resident receives outpatient services at a 
hospital, the hospital does not necessarily assume any ongoing 
responsibility for the resident's comprehensive care needs beyond the 
outpatient visit itself, which often may represent nothing more than a 
single, isolated encounter. We do not believe that such an event, when 
followed shortly thereafter by the resident's return to the SNF, should 
serve to relieve the SNF categorically of any Medicare billing 
responsibility for services furnished during the outpatient visit, 
especially with respect to those types of services that SNFs would 
ordinarily include within the comprehensive package of care furnished 
to a resident (such as physical, occupational, and speech-language 
therapy, or types of medical supplies and diagnostic tests that are 
routinely furnished or arranged for by SNFs).
    At the same time, however, we recognize that there are certain 
types of intensive diagnostic or invasive procedures that are specific 
to the hospital setting and that are well beyond the normal scope of 
SNF services. Further, we note that Medicare's longstanding 
comprehensive billing or ``bundling'' requirement for inpatient 
hospital services under section 1862(a)(14) of the Act was subsequently 
expanded to apply to outpatient hospital services as well, and that 
section 4523 of the BBA 1997 provides for the establishment of a PPS 
for these outpatient hospital services. Thus, when an SNF resident is 
sent to a hospital to receive outpatient services, it is necessary to 
delineate the respective areas of responsibility for the SNF under the 
Consolidated Billing provision, and for the hospital under the 
outpatient bundling provision, with regard to these services.
    Accordingly, we are providing that in situations where a 
beneficiary receives outpatient services from a Medicare-participating 
hospital or CAH while temporarily absent from the SNF, the beneficiary 
continues to be considered an SNF resident specifically with regard to 
those services that are furnished pursuant to the comprehensive care 
plan required under the regulations at Sec. 483.20(d), which is 
developed to address the resident's care needs identified in the 
comprehensive assessment under Sec. 483.20(b). Such services are, 
therefore, subject to the SNF Consolidated Billing provision, while 
those other services that, under commonly accepted standards of medical 
practice, lie exclusively within the purview of hospitals rather than 
SNFs, are not subject to SNF Consolidated Billing, but are instead 
bundled to the hospital (for example,

[[Page 26299]]

cardiac catheterization, CT scans, magnetic resonance imaging, 
ambulatory surgery involving the use of an operating room). We believe 
that it is appropriate to specify the resident's comprehensive care 
plan as the basis for defining the extent of the SNF's responsibility 
in this situation, since it is this same resident assessment and care 
planning process that provides the basis for establishing SNF coverage 
and determining the actual level of Part A payment under the SNF PPS. 
In effect, this defines the SNF's responsibility in terms of the scope 
of services included under the extended care benefit, as explained 
below. This same scope of services would effectively define the extent 
of the SNF's responsibility with regard to a beneficiary who has 
resided exclusively in the institution's nonparticipating portion 
which, under the law, is subject to the SNF Consolidated Billing 
provision but not to the SNF requirements for participation regarding 
resident assessment and care planning.
    As indicated in Sec. 483.20(d)(1), the resident assessment must 
thoroughly identify the resident's medical, nursing, and mental and 
psychosocial needs, and the plan of care must describe in a 
comprehensive manner the services that the SNF itself assumes the 
responsibility to furnish, or make arrangements for, in order to 
address these needs. However,the comprehensive care plan does not 
typically address emergency services (which, by their nature, cannot be 
anticipated and planned in advance) or those types of intensive 
diagnostic or invasive procedures that, as discussed previously, 
appropriately lie within the purview of hospitals rather than SNFs. By 
contrast, the care plan must address the beneficiary's need for the 
broad categories of services that section 1861(h) of the Act identifies 
as being included within the scope of the extended care benefit, such 
as nursing care and associated room and board (sections 1861(h)(1) and 
(2) of the Act); physical, occupational, and speech-language therapy 
(section 1861(h)(3) of the Act); medical social services (section 
1861(h)(4) of the Act); drugs, biologicals, supplies, appliances, and 
equipment that represent an ordinary part of the facility's inpatient 
care and treatment (section 1861(h)(5) of the Act); and services that 
an SNF furnishes through its transfer agreement hospital (section 
1861(h)(6) of the Act).
    As amended by the BBA 1997, section 1861(h)(7) of the Act also 
includes coverage of other types of services that SNFs generally 
provide, either directly or under arrangements with outside sources. As 
discussed in section VI. below with regard to the conforming revisions 
in regulations at Sec. 409.27, longstanding administrative policy has 
also included within this category most of the medical and other health 
services described in section 1861(s) of the Act, with certain 
exceptions. For example, physician services (section 1861(s)(1) of the 
Act) cannot be regarded as services that are ``generally provided'' by 
SNFs, since they are not within the scope of the inpatient hospital 
benefit (see section 1861(b)(4) of the Act) and, accordingly, are also 
not within the scope of the extended care benefit (see section 1861(h) 
of the Act following paragraph (7)). In addition, as discussed 
previously in section V.B.2., preventive services such as vaccines for 
pneumococcal pneumonia or hepatitis B (section 1861(s)(10) of the Act) 
and screening services such as screening mammographies or pap smears 
(sections 1861(s)(13) and (14) of the Act, respectively) are not within 
the scope of the extended care benefit, since they are not considered 
reasonable and necessary for the diagnosis or treatment of a condition 
that has already manifested itself. Finally, the extended care benefit 
does not include the types of acute or emergent services discussed 
above as being exclusively within the purview of hospitals rather than 
SNFs, since these are types of services that SNFs themselves do not 
generally provide, either directly or under arrangements.
    We specifically invite comments on the treatment of outpatient 
hospital services furnished to SNF residents under the SNF Consolidated 
Billing provision, including other possible ways to exempt those 
particular outpatient hospital procedures that are clearly beyond the 
scope of SNF services while preserving the integrity of the SNF service 
package itself. We also note that further refinements in this policy 
may eventually become necessary, in order to ensure consistency with 
the new outpatient hospital PPS as its specific characteristics are 
developed.
    In addition, effective January 1, 1999, section 4541 of the BBA 
1997 imposes an annual per beneficiary limit of $1,500 on all 
outpatient physical therapy services (including speech-language therapy 
services), and imposes a similar limit on all outpatient occupational 
therapy services, but specifically excludes services furnished by a 
hospital's outpatient department from each of these annual limits. We 
note that this exclusion of hospital outpatient department services 
does not apply to services furnished to a beneficiary who is an SNF 
resident for Consolidated Billing purposes. For an SNF resident who is 
not in a covered stay and has reached the annual $1,500 limit, this 
avoids creating a perverse incentive to have a hospital outpatient 
department furnish therapy services that the resident could 
appropriately receive from the SNF itself. We will specifically address 
this point in the regulations that we are currently developing to 
implement section 4541 of the BBA 1997.
    Another event that would generally end a beneficiary's ``resident'' 
status for SNF Consolidated Billing purposes would be the beneficiary's 
formal discharge from the SNF, or a departure from the SNF without a 
formal discharge (for example, for a trial visit home on a leave of 
absence), unless followed within 24 consecutive hours by a readmission 
to that or another SNF. We are using a 24-hour timeframe for 
readmission following any discharge or other departure from the SNF 
because we believe that this duration should generally be sufficient to 
preclude situations in which the beneficiary is temporarily sent 
outside the SNF for only a brief period to receive a service offsite 
(for example, through an outpatient visit to a hospital or clinic), 
merely to circumvent the SNF Consolidated Billing requirement. Further, 
as indicated above, we believe that in most situations where a 
beneficiary with comprehensive care needs is absent from the SNF for 24 
consecutive hours, another provider will have already assumed the 
ongoing responsibility for those comprehensive care needs by that point 
in time.
    In addition, we note that section 1886(a)(4) of the Act includes a 
preadmission ``payment window'' provision for hospitals, under which 
certain Part B services furnished by a hospital or by an entity wholly 
owned or operated by the hospital within 3 days (or, for non-PPS 
hospitals, within 1 day) before an inpatient admission to that hospital 
are included in the Medicare Part A payment for the hospital admission 
itself (see Secs. 412.2(c)(5) (for PPS hospitals) and 413.40(c)(2) (for 
non-PPS hospitals)). Further, section 1833(d) of the Act prohibits 
payment under Part B for any services for which Part A can make 
payment. Thus, if a hospital inpatient has spent a portion of the 
preadmission period as a resident of an SNF that is wholly owned or 
operated by the admitting hospital, this would preclude coverage (and 
SNF billing) under Part B for diagnostic services and other admission-
related services received as an SNF resident during the

[[Page 26300]]

preadmission period, since those services would be included in the 
hospital's Part A payment for the subsequent inpatient admission.
5. Effects of This Provision
    For those services that are subject to the SNF Consolidated Billing 
requirement, Medicare will no longer permit ``unbundling'' (that is, 
Medicare billing by any entity other than the SNF itself). Rather, the 
SNF itself will have to furnish the services--either directly, or under 
arrangements with an outside supplier in which the SNF itself (rather 
than the supplier) bills Medicare. Section 1861(w)(1) of the Act 
defines ``arrangements'' as those in which the SNF's receipt of 
Medicare payment for a beneficiary's covered service discharges the 
liability of the beneficiary or any other person to pay for the 
service. Further, longstanding manual instructions at MIM-3, Sec. 3007 
and Sec. 206 of the Medicare SNF Manual provide that in making such 
arrangements, an SNF should not act merely as a billing conduit, but 
should also exercise professional responsibility over the arranged-for 
services. However, the requirement for the SNF to furnish under 
``arrangements'' any services that it obtains from an outside supplier 
does not mandate the SNF itself to meet the applicable supplier 
standards for that service, but merely to select an outside supplier 
that meets them. For example, when an SNF bills for ambulance services 
furnished to its residents under arrangements with an outside supplier, 
this does not make the SNF itself responsible for meeting the ambulance 
regulations' standards regarding vehicles and vehicle staffing (see 
Sec. 410.40(a)), but merely for selecting an outside supplier that 
itself meets these standards. Similarly, under the requirements for 
participation at Sec. 483.75(k)(1)(ii), if an SNF elects to provide 
portable x-ray services under arrangements with an outside supplier, 
the SNF is responsible only for selecting a portable x-ray supplier 
that itself meets the applicable Medicare conditions for coverage (see 
subpart C of part 486); under Sec. 483.75(k)(1)(i), an SNF must itself 
meet the applicable provider standards for diagnostic radiology 
services (at Sec. 482.26) only if the SNF elects to provide such 
services directly with its own resources.
    When the SNF furnishes services under an arrangement with an 
outside supplier, the outside supplier must look to the SNF instead of 
to Medicare Part B for payment, and the terms of the supplier's payment 
by the SNF are established exclusively through contractual agreements 
negotiated between the two parties themselves, rather than being 
prescribed for them by the Medicare program. For a resident in a 
covered Part A stay, all services furnished by the SNF (either 
directly, or under arrangements with an outside supplier) are included 
in the SNF's Part A bill. For a resident who is not in a covered Part A 
stay (Part A benefits exhausted, posthospital or level of care 
requirements not met, etc.), the SNF itself submits all bills to Part 
B.
    We note that while new section 1888(e)(9) of the Act provides that 
the amount of Part B payment shall be the amount provided under the 
applicable fee schedule for an SNF's services--including those services 
provided under arrangements with an outside supplier--the law is silent 
with regard to how much (if any) of this fee schedule amount the SNF 
itself can retain when it pays the supplier. If an outside supplier 
agrees to furnish services to the SNF for less than the applicable fee 
schedule amount, we are concerned that allowing the SNF to retain the 
difference for each service billed to Part B is likely to create a 
financial incentive for the SNF to provide unnecessary services. The 
approach that we favor as a means of solving this problem would be to 
request legislation to limit the SNF's Part B payment to the lower of 
the applicable fee schedule amount or the amount that the supplier 
actually charges the SNF. Another option--which we did not select--
would be to require that the SNF pay to the supplier the entire fee 
schedule payment amount, less a reasonable charge for administration. 
We specifically invite comments on the extent to which this problem may 
arise and on the advisability of pursuing our suggested legislative 
approach or other approaches.
    While the SNF Consolidated Billing requirement prohibits Medicare 
billing by any entity other than the SNF, we note that this does not 
preclude an SNF from engaging the services of an outside entity to 
assist the SNF in performing the specific tasks involved in actually 
completing and sending in the bill itself. This practice, known as 
``contract billing,'' is permissible as long as the billing takes place 
under the SNF's Medicare provider number, and the SNF itself remains 
the legally responsible billing party. However, an SNF is precluded 
from relinquishing or reassigning to any other party the actual legal 
responsibility for and control over a claim. This reflects the Medicare 
law's general prohibitions with regard to the reassignment of claims at 
sections 1815(c) and 1842(b)(6) of the Act and regulations at subpart F 
of part 424, as well as the specific prohibitions on reassignment of 
provider claims discussed in the manual instructions at MIM-3, 
Secs. 3488ff.
    The changes introduced by the Consolidated Billing provision will 
bring about a number of significant program improvements. First, this 
requirement provides an essential foundation for the new Part A SNF 
PPS, by bundling into a single facility package those services that the 
PPS payment is intended to capture. Second, it spares beneficiaries who 
are in covered Part A stays from incurring out-of-pocket liability for 
Part B deductibles and coinsurance. Third, it eliminates the potential 
for duplicative billings for the same service to the FI by the SNF and 
to the carrier by an outside supplier. Fourth, this requirement will 
help promote greater quality of care, by enhancing the SNF's capacity 
to meet its existing responsibility to oversee and coordinate the 
entire package of care that each of its residents receives. Finally, by 
making the SNF itself more directly accountable for this overall 
package of care and services, the Consolidated Billing requirement may 
help restrain certain inappropriate billing practices, while at the 
same time helping to ensure that each resident actually receives those 
services for which there is a legitimate medical need.

C. Effective Date for Consolidated Billing

    Unlike the SNF PPS itself, the effective date of the Consolidated 
Billing requirement is not tied to the start of the individual SNF's 
first cost reporting period that begins on or after July 1, 1998. 
Rather, the Consolidated Billing provision is effective for services 
furnished on or after July 1, 1998. We note that in April 1998, HCFA 
issued Program Memorandum (PM) No. AB-98-18, which contains operational 
instructions for Medicare contractors on the implementation of 
consolidated billing. The PM provides that, for individual facilities 
that lack the capability to perform consolidated billing as of the July 
1 effective date, the SNF must begin consolidated billing with respect 
to items and services furnished on or after the earlier of (1) January 
1, 1999 or (2) the date the facility comes under the PPS.

VI. Changes in the Regulations

    As discussed below, we are making a number of revisions in the 
regulations in order to implement both the prospective payment system 
and the SNF Consolidated Billing provision and

[[Page 26301]]

its conforming statutory changes. First, we are revising the 
regulations in 42 CFR part 410, subpart I, which deal with payment of 
benefits under Part B, in order to implement section 1842(b)(6)(E) of 
the Act, as amended by section 4432(b)(2) of the BBA 1997. 
Specifically, we are adding a new paragraph (b)(14) to Sec. 410.150, 
which specifies that for those services subject to the SNF Consolidated 
Billing requirement, Medicare makes Part B payment to the SNF rather 
than to the beneficiary. We are also making certain conforming changes 
to provisions in part 410, subpart B, which describe Part B coverage of 
individual medical and other health services, such as outpatient 
hospital services (Sec. 410.27(a)(1)(i)), hospital or CAH diagnostic 
tests (Sec. 410.28(a)(1)), diagnostic tests (Sec. 410.32(e)), and 
ambulance services (Sec. 410.40(b)).
    In addition, we are revising the regulations in part 411, subpart 
A, which deal with exclusions from Medicare coverage, in order to 
implement section 1862(a)(18) of the Act, as amended by section 
4432(b)(1) of the BBA 1997. Specifically, we are adding a new paragraph 
(p)(1) to Sec. 411.15, which excludes from coverage any service 
furnished to an SNF resident (other than those individual services 
listed in new paragraph (p)(2) of this section) by an entity other than 
the SNF itself. In addition, a new paragraph (p)(3) will set out the 
definition of an SNF ``resident'' for purposes of this provision, as 
discussed previously in section V.B.4.
    We are revising the regulations in part 413, which deal with 
Medicare payment to providers of services. Section 413.1 establishes 
that providers are generally paid on the basis of reasonable cost, and 
then sets out several specific exceptions to this general principle. 
Currently, the only exception for SNFs is at Sec. 413.1(g), with regard 
to the existing Part A PPS under section 1888(d) of the Act, which 
applies exclusively to low volume SNFs. However, under sections 4432(a) 
and (b)(5)(H) of the BBA 1997, the existing SNF Part A payment 
methodologies (that is, on a reasonable cost basis, or under a PPS 
established specifically for low volume SNFs) will be superseded by the 
new PPS for SNFs generally, effective with cost reporting periods 
beginning on or after July 1, 1998. Accordingly, we are revising 
Sec. 413.1(g) as follows, to reflect the BBA 1997 provisions for a 
general SNF PPS, as well as its related conforming changes. In 
paragraph (g)(1), we clarify that the previous SNF payment methodology 
(that is, either on a reasonable cost basis or under the low volume SNF 
PPS) is effective only for those cost reporting periods beginning 
before July 1, 1998. In paragraph (g)(2)(i), we provide that effective 
with cost reporting periods beginning on or after July 1, 1998, payment 
for services furnished during a covered Part A stay will be made in 
accordance with the new SNF PPS under section 1888(e) of the Act, as 
implemented by regulations in the new subpart J of part 413. This new 
subpart will set forth the regulatory framework of the new PPS. It 
specifically discusses the scope and basis of the PPS rates as well as 
the methodology for computing them. It also describes the transition 
phase of the PPS and related rules.
    In paragraph (g)(2)(ii), we implement section 1888(e)(9) of the Act 
(as amended by section 4432(b)(3) of the BBA 1997), which provides that 
the payment amount for services that are not furnished during a covered 
Part A stay shall be the amount provided under the otherwise applicable 
Part B fee schedule. Unlike the new Part A PPS for SNFs, the effective 
date for the Part B fee schedule provision is not tied to the beginning 
of an individual SNF's cost reporting period, but rather, is effective 
for all services furnished on or after July 1, 1998. Consequently, we 
note that there is a potential overlap between this provision and the 
reasonable cost provision described in paragraph (g)(1), during the 
period of time running from July 1, 1998, until the conclusion of an 
individual SNF's last cost reporting period beginning prior to that 
date. Accordingly, we are revising the beginning of paragraph (g)(1), 
to clarify that Part B payment during that period of time is made 
according to the new fee schedule provision rather than the previous 
payment methodology. Finally, we are implementing a conforming change 
in section 4432(b)(5)(A) of the BBA 1997 by revising paragraph (b)(4) 
of Sec. 483.20, to indicate that the frequency of resident assessments 
specified in that section of the regulations is subject to the 
timeframes prescribed under the SNF PPS in new subpart J of part 413.
    We are revising the portion of part 424 dealing with the prescribed 
certification and recertification (Sec. 424.20) that the requirements 
for a covered SNF level of care are met, along with that portion of 
part 409 that sets out the level of care requirements themselves (at 
Sec. 409.30), to reflect the use of the RUG-III groups, as discussed 
previously in section II.D. of this preamble. We are also revising 
certain portions of part 424 that deal with claims for payment. 
Specifically, we are revising Sec. 424.32(a)(2) to require the 
inclusion of an SNF's Medicare provider number on claims for physician 
services furnished to an SNF resident. We are also adding to 
Sec. 424.32(a) the requirement for an SNF to include HCPCS coding on 
its Part B claims.
    We are also revising the regulations in part 489, subpart B (which 
deal with the basic requirements of Medicare provider agreements), in 
order to implement section 1866(a)(1)(H)(ii) of the Act, as amended by 
section 4432(b)(5)(F) of the BBA 1997. Specifically, we are adding a 
new paragraph (s) to Sec. 489.20, which will require a participating 
SNF, under the terms of its provider agreement, to furnish all services 
that are subject to the Consolidated Billing provision, either directly 
or under an arrangement with an outside source in which the SNF itself 
bills Medicare.
    In addition, we are making a number of conforming changes in part 
409, subpart C of the regulations, as discussed below. Section 1861(h) 
of the Act describes coverage of ``extended care'' (that is, Part A 
SNF) services. In addition to the specific service categories set out 
in paragraphs (1) through (6) of section 1861(h), paragraph (7) 
provides for coverage of other services that are generally provided in 
this setting. Prior to the BBA 1997, coverage of services ``generally 
provided by'' SNFs under this statutory authority required not only for 
a particular service to be ``generally provided'' (that is, for the 
provision of that type of service to be the prevailing practice among 
SNFs nationwide), but also for the service to be provided directly 
``by'' the SNF itself. However, section 4432(b)(5)(D) of the BBA 1997 
has now expanded section 1861(h)(7) of the Act to include coverage of 
services that are generally provided ``under arrangements . . . made 
by'' SNFs with outside sources. As a result, the extended care benefit 
now covers the full range of services that SNFs generally provide, 
either directly or under arrangements with outside sources. For 
example, the services of respiratory therapists have until now been 
specifically coverable as extended care services only when provided 
directly by those therapists who are employees of the SNF's transfer 
agreement hospital under section 1861(h)(6) of the Act. Since these are 
services that SNFs historically have ``generally provided'' (albeit in 
the limited context of the transfer agreement hospital provision), we 
are now revising the regulations at Sec. 409.27 to permit coverage of 
respiratory therapy services under amended section 1861(h)(7) of the 
Act when provided under an arrangement between the SNF and a

[[Page 26302]]

respiratory therapist, regardless of whether the therapist is employed 
by the SNF's transfer agreement hospital.
    We are also revising this section of the regulations to incorporate 
longstanding manual instructions in MIM-3, Sec. 3133.9.A and in 
Sec. 230.10.A. of the SNF Manual, which specify that the medical and 
other health services identified in section 1861(s) of the Act are 
considered to be generally furnished by SNFs and, therefore, coverable 
under the Part A extended care benefit. We specify that such coverage 
would be subject to any applicable limitations or exclusions. For 
example, the Part A extended care benefit cannot include coverage of 
those services (such as physician services) that are not within the 
scope of the inpatient hospital benefit. As discussed previously in 
section V.B.2., the preventive and screening procedures specified in 
section 1861(s) of the Act are not coverable as extended care services, 
since they are not considered to be reasonable and necessary for 
diagnosing or treating a condition that has already manifested itself. 
Finally, coverage under this provision does not include specific types 
of services (such as the intensive or emergency types of hospital 
services discussed previously in section V.B.4.) that SNFs themselves 
do not generally provide, either directly or under arrangements.
    In addition to specifically revising the regulations at Sec. 409.27 
to reflect the recent BBA 1997 amendment of section 1861(h)(7) of the 
Act, we are also taking this opportunity to revise the overall 
organization of subpart C of part 409 so that it more accurately 
reflects the format of its statutory authority, section 1861(h) of the 
Act. As a result, we are making the following revisions in this 
subpart:
     We are renumbering the provisions in Sec. 409.20(a) to 
conform more closely to the numbering used in the corresponding 
statutory authority at section 1861(h) of the Act.
     A new Sec. 409.21, entitled ``Nursing care,'' corresponds 
to section 1861(h)(1) of the Act, which authorizes coverage under the 
extended care benefit of nursing care provided by or under the 
supervision of a registered professional nurse. This new section also 
includes a more direct statement of the policy with regard to coverage 
of private duty nurses in SNFs, which until now has been reflected in 
Sec. 409.20(b)(1) when read in combination with Sec. 409.12(b).
     A new Sec. 409.24, entitled ``Medical social services,'' 
corresponds to section 1861(h)(4) of the Act, which authorizes coverage 
under the extended care benefit of medical social services. This new 
section incorporates the services described in longstanding manual 
instructions at Sec. 3133.4 of MIM-3 and Sec. 230.4 of the Medicare SNF 
Manual, and which also appear (in the context of Comprehensive 
Outpatient Rehabilitation Facility (CORF) services) in existing 
regulations at Sec. 410.100(h) of this chapter.
     The material previously contained in Secs. 409.24 (``Drugs 
and biologicals'') and 409.25 (``Supplies, appliances, and equipment'') 
is combined into a new Sec. 409.25, entitled ``Drugs, biologicals, 
supplies, appliances, and equipment,'' which corresponds to section 
1861(h)(5) of the Act.
     The material previously contained in Secs. 409.26 
(``Services furnished by an intern or a resident-in-training'') and 
409.27 (``Other diagnostic or therapeutic services'') is combined into 
a new Sec. 409.26, entitled ``Transfer agreement hospital services,'' 
which corresponds to section 1861(h)(6) of the Act. We are also 
clarifying that the references in this context to an institution that 
has a swing-bed approval apply specifically to those services that the 
institution furnishes to its own SNF-level inpatients under its swing 
bed approval.
     A new Sec. 409.27, entitled ``Other services generally 
provided by (or under arrangements made by) SNFs,'' corresponds to 
section 1861(h)(7) of the Act, as amended by section 4432(b)(5)(D) of 
the BBA 1997. We are also including a conforming change in the section 
heading and text of Sec. 409.20(b)(2).
    Further, in view of the previously discussed statutory change to 
allow Part A coverage of the full range of services that SNFs generally 
provide, either directly or under arrangements with outside sources, we 
are making a conforming change to the long-term care facility 
requirements for participation at Sec. 483.75(h) of this chapter. 
Previously, Sec. 483.75(h) provided for the furnishing of any services 
by outside sources under either an ``arrangement'' (which, by 
definition, makes the facility itself responsible for billing the 
program) or an ``agreement'' (which does not necessarily mandate this 
result). We are now revising this provision so that it more accurately 
reflects the statutory authority at section 1819(b)(4)(A) of the Act, 
as well as revised section 1861(h)(7). Section 1819(b)(4)(A) of the 
Act, which specifies the range of services that a nursing home must 
furnish in order to participate in the Medicare program as an SNF, 
allows for ``agreements'' only with respect to dental services (for 
which virtually no coverage exists under the Medicare program), and 
provides that all other required services must be furnished either 
directly by the SNF itself or under ``arrangements'' with an outside 
source in which the SNF itself bills Medicare.
    Finally, as discussed in section II.D., we are making certain 
specific modifications in the existing SNF level of care criteria 
contained in part 409, subpart D. Further, we are also adding to 
subpart F of part 409 a new administrative presumption with regard to 
the ending of a benefit period in an SNF, at Sec. 409.60(c)(2).

VII. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, when we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

VIII. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on the proposed rule. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed, and the terms and substance 
of the proposed rule or a description of the subjects and issues 
involved. This procedure can be waived, however, if an agency finds 
good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest, and incorporates a 
statement of the finding and its reasons in the rule. We find that the 
circumstances surrounding this rule make it impracticable to pursue a 
process of notice-and-comment rulemaking before the provisions of this 
rule take effect.
    The BBA 1997 was enacted on August 5, 1997. As discussed earlier in 
this rule, the effective date for the SNF PPS is for cost reporting 
periods beginning on or after July 1, 1998. In addition, section 
4432(a) of the BBA 1997 requires publication of the prospective payment 
rates prior to May 1, 1998. The resulting timeframe allowed HCFA 9 
months to complete the process of development and review of the 
regulations to implement the PPS and related changes. The immense scope 
of SNF PPS development combined with this limited time period made it 
impracticable to conduct notice-and-comment rulemaking before the 
statutory effective date of the PPS. In addition to the normal length 
of time needed to develop and review a

[[Page 26303]]

regulation of this magnitude, the time schedule associated with the 
completion of development of a number of critical components of the PPS 
made it impossible to complete the calculation of the payment rates in 
time to promulgate a notice of proposed rulemaking. For example, the 
national case-mix indices and SNF market basket index, set forth 
earlier in this rule, had to be developed. As discussed earlier, these 
indices are an essential element of the case-mix payment and rate 
setting methodology. In addition, these indices are essential for 
standardizing and updating the Federal payment rates as required by the 
BBA 1997. Also, the redesign and validation of the MEDPAR analog, 
development of the Part B estimate included in the PPS rates, and 
research related to application of the case-mix adjustment to certain 
ancillary services (for example, drugs, laboratory services, medical 
supplies) were important components of the rate setting methodology, 
which required much time to develop.
    We believe it evident that HCFA could not compute payment rates and 
complete the numerous components of the PPS and Consolidated Billing 
requirements that are described in this rule until immediately prior to 
the publication date required by statute and, therefore, it was 
impracticable to complete notice-and-comment rule making before May 1. 
Therefore, we find good cause to waive the notice of proposed 
rulemaking and to issue this final rule on an interim final basis. We 
are providing a 60-day comment period for public comment.

Effect of the Contract with America Advancement Act, Pub. L. 104-121

    This rule has been determined to be a major rule as defined in 
Title 5, United States Code, section 804(2). Ordinarily, under 5 U.S.C. 
801, as added by section 251 of Pub. L. 104-121, major rule shall take 
effect 60 days after the later of (1) the date a report on the rule is 
submitted to the Congress or (2) the date the rule is published in the 
Federal Register. However, section 808(2) of Title 5, United States 
Code, provides that, notwithstanding 5 U.S.C. 801, a major rule shall 
take effect at such time as the Federal agency promulgating the rule 
determines if for good cause the agency finds that notice and public 
procedure are impracticable, unnecessary, or contrary to the public 
interest. As indicated above, for good cause we find that it was 
impracticable to complete notice and comment procedures before 
publication of this rule. Accordingly, pursuant to 5 U.S.C. 808(2), 
these regulations are effective on July 1, 1998.

IX. Regulatory Impact Statement

    We have examined the impacts of this interim final rule as required 
by Executive Order 12866, the Unfunded Mandates Reform Act of 1995, and 
the Regulatory Flexibility Act (RFA) (Public Law 96-354). 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). A regulatory impact analysis (RIA) 
must be prepared for major rules with economically significant effects 
($100 million or more annually). The payment changes set forth in this 
interim final rule due to the BBA 1997 will result in projected savings 
for fiscal years 1999 through 2002 in excess of $100 million per year. 
Because the projected savings resulting from this interim final rule 
are expected to exceed $100 million, it is considered a major rule.
    The Unfunded Mandates 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 the 
private sector, of $100 million. This interim final rule does not 
mandate any requirements for State, local, or tribal governments. We 
believe the private sector costs of this rule fall below these 
thresholds, as well.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations and governmental agencies. 
Most SNFs and suppliers are considered small entities, either by 
nonprofit status or by having revenues of $5 million or less annually. 
Intermediaries and carriers are not considered to be small entities.

A. Background

    This interim final rule sets forth a schedule of prospectively 
determined per diem rates to be used for payments under the Medicare 
program as well as a Consolidated Billing requirement. Section 
1888(e)(4)(H) of the Act requires that the Secretary establish and 
publish prospectively determined per diem rates at least 60 days prior 
to the beginning of the period to which such rates are to be applied.
    As required under section 1888(e)(4)(H), this interim final rule 
sets forth the first schedule of unadjusted Federal per diem rates, to 
be used for payment beginning July 1, 1998.
    While section 1888(e) specifies the base year and certain other 
components of computing the payment rates, the statute does allow us 
broad authority in the establishment of several key elements of the 
system, and HCFA had some opportunity to consider alternatives for 
these elements. These include the case-mix methodology (including the 
assessment schedule), market basket index, wage index, and urban/rural 
distinction used in the development and/or adjustment of the Federal 
rates. In addition, the incorporation of the case mix methodology into 
the coverage requirements involved discretion on HCFA's part. Most of 
these elements, and the alternatives that were considered, were 
discussed in detail earlier in the preamble of this rule. Several that 
may warrant some additional discussion include the case mix system and 
associated assessment schedule.
    Regarding the case mix system, as we have noted in the background 
portion of the preamble, we are aware of a variety of case-mix systems 
used by various States in the administration of their Medicaid payment 
systems for nursing homes. However, due to the different range of 
covered services furnished by Medicaid nursing homes and differences in 
approaches taken by the unique State systems, none of these case-mix 
systems met our needs. As a classification and weighting system, the 
only case-mix system that was suited for the Medicare patient 
population is the RUG-III methodology we are implementing as part of 
this PPS.
    With regard to the assessment schedule, the schedule adopted in 
this rule was the result of analysis of information from our Multistate 
Nursing Home Case-Mix and Quality Demonstration. In developing this 
schedule, we weighed the need for the payment system to capture changes 
in patient condition against the burden on SNFs and their staffs. The 
resulting schedule is designed to balance these competing 
considerations.

B. Impact of This Interim Final Rule

    Below, the impact of this rule is discussed in terms of its fiscal 
impact on the budget and in terms of its impact on providers and 
suppliers. The estimated fiscal impact of this rule is discussed first.

[[Page 26304]]

1. Budgetary Impact
    The effect of this rule is that the rates will result in estimated 
5-year annual savings ranging from $30 million to $4.28 billion, as 
shown in Table IX.1 below. (It should also be noted that Table IX.1 
shows the impact for FYs 2000 through 2002 even though an update to 
this rule will go out effective October 1, 1999 (and every subsequent 
fiscal year) that will set forth a new schedule of rates to be used for 
FY 2000. These numbers are shown to provide a full picture of the 
impact of this new payment system once it is fully phased in to 100 
percent of the Federal rate.) These savings include both the savings to 
Medicare fee-for-service and managed care payments. The managed care 
savings make up approximately 25 percent of the total savings.
    This table takes into account the behaviors that we believe SNFs 
will engage in order to minimize any perceived adverse effects of 
section 4432 of the BBA 1997 on their payments. We believe these 
behavioral offsets might include an increase in the number of covered 
days and an increase in the average case-mix for each facility. We 
believe that, on average, these behavioral offsets will result in a 45 
percent reduction in the effects these rates might otherwise have on an 
individual SNF.

                                   Table IX.1--Savings to the Medicare Program                                  
                                            [In millions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                      (A)                            (B)          (C)          (D)          (E)          (F)    
----------------------------------------------------------------------------------------------------------------
                FY                   Transition   Inflation      Other        Part A       Part B       Total   
----------------------------------------------------------------------------------------------------------------
1998..............................            0           30          -20           10           20           30
1999..............................           90         1500          -70         1520           60         1580
2000..............................          240         2880          -80         3040           60         3100
2001..............................          410         3480          -80         3810           70         3880
2002..............................          610         3690          -90         4210           70         4280
----------------------------------------------------------------------------------------------------------------

    Column (A) shows the savings from the transition to the Federal 
rate. This reflects the effect of eliminating exceptions and limiting 
exemptions as required by the Act and discussed earlier in this rule. 
This was estimated by calculating the effect for a sample of SNFs which 
had exceptions and exemptions and extrapolating the results to the 
entire SNF industry. It also reflects the effect of applying a lower 
weight to the higher per diem costs of hospital-based SNFs in computing 
the Federal rates as required by the Act as amended by the BBA 1997 and 
described earlier in this rule. Column (B) shows the savings from using 
the statutorily determined update factor, which will result in lower 
payment increases than allowed under the current cost-based system. 
These payment increases under the cost-based system were computed using 
historical trends of these increases and projecting a continuation of 
those trends into the future. As can be seen from the table, most of 
the savings are the result of this provision. As noted, this component 
of the rate setting methodology is required by statute and does not 
allow for our consideration of any alternatives. Column (C) shows the 
cost of shifting the Consolidated Billing piece into Part A of 
Medicare. Column (D) shows the total savings to Part A of Medicare. It 
is column (A) plus column (B) plus column (C). Column (E) shows the 
total savings to Part B of Medicare resulting from the Consolidated 
Billing provisions. The sum of column (E) and Column (C) represents the 
impact of the Consolidated Billing provision on the Part B coinsurance. 
Column (F) is the total savings from this rule and is column (D) plus 
column (E).
2. Impact on Providers and Suppliers
    Table IX.2 below shows the number of facilities projected to 
experience a decrease in Medicare SNF payments under the new 
prospective payment rates and the percentage change for the type of 
facility.

                                       Table IX.2--Impact on SNFs by Type                                       
----------------------------------------------------------------------------------------------------------------
                                                                                                   (C) Estimated
                                                                                   (B) Number of      average   
                           Type of SNF                               (A) Total       SNFs with      percentage  
                                                                  number of SNFs   lower payment   reduction in 
                                                                                                     payments   
----------------------------------------------------------------------------------------------------------------
MSA Freestanding................................................            5617            5568              17
MSA Hospital Based..............................................             683             676              19
Non-MSA Freestanding............................................            2204            2185              17
Non-MSA Hospital Based..........................................             533             529              18
        Total...................................................            9037            8958              17
----------------------------------------------------------------------------------------------------------------

Specifically, column (A) of the table shows the total number of SNFs in 
the data base for FY 1995 cost reporting periods. Column (B) shows the 
number of SNFs whose payment rate for cost reporting periods beginning 
July 1, 1998 would be lower than the payment they would have received 
under the former cost-based methodology for cost reporting periods 
beginning July 1, 1998. We estimated the payments received under the 
new system based on a facility level case-mix score developed using the 
case-mix indices and the MEDPAR analog described earlier in this rule. 
We estimated the payments received under the former system by using the 
same average inflation factor from the 1995 data for each facility. 
Column (C) shows the expected reduction in payments between the two 
payment methodologies on a percentage basis.
    The results listed in Table IX.2 should be viewed with caution and 
as illustrative of broad groupings of SNFs. The effects of these 
provisions on

[[Page 26305]]

individual SNFs are unknown. As stated previously, in developing these 
estimates, we assumed each facility would increase costs at the 
national average rate. This national average increase includes the 
higher costs of new facilities entering the program. Therefore this 
increase is slightly higher than the true amount for existing 
facilities. We do, however, expect total payments to SNFs to decrease 
compared to payments that would have occurred under the former cost-
based methodology. The effects of this decrease in payments to any 
individual SNF will depend on that SNF's ability to operate under the 
new payment methodology and on the proportion of its revenues that 
comes from the Medicare program.
    Under the RFA, an economic impact is significant if the annual 
total costs or revenues of a substantial number of entities will 
increase or decrease by at least 3 percent. Medicare payments generally 
do not account for a high proportion of SNF revenue (about 10 percent 
on average) and this rule reduces those payments by approximately 17 
percent on average. Therefore, total revenues for SNFs will be reduced 
by about 1.7 percent. As stated above we are unable to determine the 
effects on individual SNFs and therefore are unable to determine if the 
new SNF per diem rates will result in a substantial number of SNFs 
experiencing significant decreases in their total revenues.
    We do not expect suppliers of items and services to SNFs to be 
significantly affected economically by the Consolidated Billing 
provisions. Total Medicare reimbursement to suppliers is about $4 
billion each year. As shown in Table IX.1, column (E), the 
reimbursement for these items and services is about $60 million each 
year. Therefore, Consolidated Billing related to the services provided 
to patients in Part A SNF stays should have a minimal impact on 
suppliers, generally. The majority of ancillary services are provided 
directly by SNFs or under arrangements with suppliers and are, 
therefore, already billed to Medicare by the SNFs. While there is a 
possibility that, for those services now being consolidated, a sizeable 
number of these suppliers would likely be reimbursed at rates lower 
than the rates at which they were reimbursed under the previous system, 
this is highly dependent on the reaction each individual supplier has 
to the new payment system.
    In addition, with regard to Consolidated Billing related to 
services provided to SNF patients who are not in a covered Part A stay, 
to the extent that these services have been necessary in the past, they 
will still be required and provided to these patients by suppliers. 
Accordingly, it is anticipated that the total impact on suppliers will 
be minimal. However, determining the effect on individual suppliers is 
not possible due to a lack of data. Therefore we are not able to 
determine if these new SNF per diem rates will result in a substantial 
number of suppliers experiencing significant decreases in their total 
revenues.
    Our experience with the inpatient hospital PPS has been that 
providers will now have incentives to provide the most cost efficient 
care possible while still providing the level of care necessary for the 
patient. The SNF PPS system provides some of the same incentives as 
does the hospital DRG/PPS system, and many of the changes that have 
taken place in the inpatient hospital system can be expected for these 
providers.

C. Rural Hospital Impact Statement

    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds.
    We have not prepared a rural impact statement since we have 
determined, and the Secretary certifies, that this rule will not have a 
significant economic impact on the operations of a substantial number 
of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

X. Collection of Information Requirements

Emergency Clearance: Public Information Collection Requirements 
Submitted to the Office of Management and Budget

    Pursuant to sections 3506(c)(2)(A) and 3507(j) of the Paperwork 
Reduction Act of 1995 (PRA), the Health Care Financing Administration 
(HCFA), Department of Health and Human Services (DHHS), has submitted 
to the Office of Management and Budget (OMB) a request for emergency 
review. We are requesting an emergency review because the collection of 
information described below is needed prior to the expiration of the 
time limits under OMB's regulations at 5 CFR, Part 1320. The Agency 
cannot reasonably comply with the normal clearance procedures because 
of the statutory requirement, as set forth in section 4432 of the BBA 
1997, to implement these requirements on July 1, 1998.
    HCFA is requesting OMB review and approval of this collection 
within 11 working days, with a 180-day approval period. Written 
comments from the public will be accepted and considered if received by 
the individuals designated below, within 10 working days of publication 
of this regulation in the Federal Register. During this 180-day period, 
HCFA will pursue OMB clearance of this collection under 5 CFR 1320.5.
    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:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirements discussed below.

Section 413.343  Resident Assessment Data

    SNFs are required to submit the resident assessment data as 
described at Sec. 483.20 of this chapter in the manner necessary to 
administer the payment rate methodology described in Sec. 413.337. 
Pursuant to sections 4204(b) and 4214(d) of OBRA 1987, the current 
requirements related to the submission and retention of resident 
assessment data are not subject to the PRA, but it has been determined 
that the new requirement to maintain performance of patient assessment 
data for the 5th, 30th, and 60th days following admission, necessary to 
administer the payment rate methodology described in Sec. 413.337, is 
subject to the PRA. The burden associated with this requirement is the 
time required to maintain MDS data submitted electronically to a State 
agency or an agent of the State. We do not believe there is any 
additional burden associated with the transmission of the data itself, 
since the supplemental data will be submitted as part of the routine 
monthly transfer of provider MDS data.

[[Page 26306]]

    There are an estimated 17,000 facilities that will be required to 
maintain the minimum data set. It is estimated that it will require 5 
minutes per facility, per month, to electronically store the additional 
MDS data for a total annual burden of 1 hour per facility.

Section 424.32  Basic Requirements For All Claims

    The requirements of this section, currently approved under OMB 
number 0938-0008, are being modified to require that a claim for 
services furnished to an SNF resident under Sec. 411.15(p)(2)(i) of 
this chapter must also include the SNF's Medicare provider number and a 
Part B claim filed by an SNF must include appropriate HCPCS coding.
    The burden associated with these requirements is the time required 
to include the two data elements, as necessary, on a Medicare claim. 
Given that the burden is minimal and is captured during the completion 
of a HCFA-1500 common claim form, approved under OMB number 0938-0008, 
we are assigning 1 token-hour for the annual burden per facility 
associated with these new requirements. We will include these 
requirements as part of the supporting requirements for the HCFA-1500, 
when we resubmit the HCFA-1500 to OMB for reapproval.
    We have submitted a copy of this rule to OMB for its review of the 
information collection requirements above. To obtain copies of the 
supporting statement and any related forms for the proposed paperwork 
collections referenced above, e-mail your request, including your 
address, phone number, and HCFA regulation identifier HCFA-1913, to 
P[email protected], or call the Reports Clearance Office on (410) 786-
1326.
    As noted above, comments on these information collection and record 
keeping requirements must be mailed and/or faxed to the designee 
referenced below, within 10 working days of publication of this 
collection in the Federal Register:

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: John Burke HCFA-1913; Fax Number: (410) 
786-1415

    And,

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Allison Herron Eydt, HCFA Desk Officer; Fax Number: (202) 
395-6974 or (202) 395-5167.

List of Subjects

42 CFR Part 409

    Health facilities, Medicare.

42 CFR Part 410

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

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 413

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

42 CFR Part 424

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

42 CFR Part 483

    Grant programs-health, Health facilities, Health professions, 
Health records, Medicaid, Medicare, Nursing homes, Nutrition, Reporting 
and recordkeeping requirements, Safety.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

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

PART 409--HOSPITAL INSURANCE BENEFITS

    A. Part 409 is amended as set forth below:
    1. The authority citation for part 409 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act 
(U.S.C. 1302 and 1895hh).

Subpart C--Posthospital SNF Care

    2. In Sec. 409.20, the introductory text to paragraph (a) is 
revised, paragraphs (a)(6) and (a)(7) are revised, paragraph (a)(8) is 
removed, and paragraph (b)(2) is revised to read as follows:


Sec. 409.20  Coverage of services.

    (a) Included services. Subject to the conditions and limitations 
set forth in this subpart and subpart D of this part, ``posthospital 
SNF care'' means the following services furnished to an inpatient of a 
participating SNF, or of a participating hospital or critical access 
hospital (CAH) that has a swing-bed approval.
* * * * *
    (6) Services furnished by a hospital with which the SNF has a 
transfer agreement in effect under Sec. 483.75(n) of this chapter; and
    (7) Other services that are generally provided by (or under 
arrangements made by) SNFs.
    (b) Excluded services--
* * * * *
    (2) Services not generally provided by (or under arrangements made 
by) SNFs. Except as specifically listed in Secs. 409.21 through 409.27, 
only those services generally provided by (or under arrangements made 
by) SNFs are considered as posthospital SNF care. For example, a type 
of medical or surgical procedure that is ordinarily performed only on 
an inpatient basis in a hospital is not included as ``posthospital SNF 
care,'' because such procedures are not generally provided by (or under 
arrangements made by) SNFs.
* * * * *
    3. A new Sec. 409.21 is added to read as follows:


Sec. 409.21  Nursing care.

    (a) Basic rule. Medicare pays for nursing care as posthospital SNF 
care when provided by or under the supervision of a registered 
professional nurse.
    (b) Exception. Medicare does not pay for the services of a private 
duty nurse or attendant. An individual is not considered to be a 
private duty nurse or attendant if he or she is an SNF employee at the 
time the services are furnished.
    4. Section 409.24 is revised to read as follows:


Sec. 409.24  Medical social services.

    Medicare pays for medical social services as posthospital SNF care, 
including--
    (a) Assessment of the social and emotional factors related to the 
beneficiary's illness, need for care, response to treatment, and 
adjustment to care in the facility;
    (b) Case work services to assist in resolving social or emotional 
problems that may have an adverse effect on the beneficiary's ability 
to respond to treatment; and
    (c) Assessment of the relationship of the beneficiary's medical and 
nursing requirements to his or her home situation, financial resources, 
and the community resources available upon discharge from facility 
care.
    5. Section 409.25 is revised to read as follows:

[[Page 26307]]

Sec. 409.25  Drugs, biologicals, supplies, appliances, and equipment.

    (a) Drugs and biologicals. Except as specified in paragraph (b) of 
this section, Medicare pays for drugs and biologicals as posthospital 
SNF care only if--
    (1) They represent a cost to the facility;
    (2) They are ordinarily furnished by the facility for the care and 
treatment of inpatients; and
    (3) They are furnished to an inpatient for use in the facility.
    (b) Exception. Medicare pays for a limited supply of drugs for use 
outside the facility if it is medically necessary to facilitate the 
beneficiary's departure from the facility and required until he or she 
can obtain a continuing supply.
    (c) Supplies, appliances, and equipment. Except as specified in 
paragraph (d) of this section, Medicare pays for supplies, appliances, 
and equipment as posthospital SNF care only if they are--
    (1) Ordinarily furnished by the facility to inpatients; and
    (2) Furnished to inpatients for use in the facility.
    (d) Exception. Medicare pays for items to be used after the 
individual leaves the facility if--
    (1) The item is one that the beneficiary must continue to use after 
leaving, such as a leg brace; or
    (2) The item is necessary to permit or facilitate the beneficiary's 
departure from the facility and is required until he or she can obtain 
a continuing supply, for example, sterile dressings.
    6. Section 409.26 is revised to read as follows:


Sec. 409.26  Transfer agreement hospital services.

    (a) Services furnished by an intern or a resident-in-training. 
Medicare pays for medical services that are furnished by an intern or a 
resident-in-training (under a hospital teaching program approved in 
accordance with the provisions of Sec. 409.15) as posthospital SNF 
care, if the intern or resident is in--
    (1) A participating hospital with which the SNF has in effect an 
agreement under Sec. 483.75(n) of this chapter for the transfer of 
patients and exchange of medical records; or
    (2) A hospital that has a swing-bed approval, and is furnishing 
services to an SNF-level inpatient of that hospital.
    (b) Other diagnostic or therapeutic services. Medicare pays for 
other diagnostic or therapeutic services as posthospital SNF care if 
they are provided--
    (1) By a participating hospital with which the SNF has in effect a 
transfer agreement as described in paragraph (a)(1) of this section; or
    (2) By a hospital or a CAH that has a swing-bed approval, to its 
own SNF-level inpatient.
    7. Section 409.27 is revised to read as follows:


Sec. 409.27  Other services generally provided by (or under 
arrangements made by) SNFs.

    In addition to those services specified in Secs. 409.21 through 
409.26, Medicare pays as posthospital SNF care for such other 
diagnostic and therapeutic services as are generally provided by (or 
under arrangements made by) SNFs, including--
    (a) Medical and other health services as described in subpart B of 
part 410 of this chapter, subject to any applicable limitations or 
exclusions contained in that subpart or in Sec. 409.20(b); and
    (b) Respiratory therapy services prescribed by a physician for the 
assessment, diagnostic evaluation, treatment, management, and 
monitoring of patients with deficiencies and abnormalities of 
cardiopulmonary function.

Subpart D--Requirements for Coverage of Posthospital SNF Care

    8. In Sec. 409.30, the introductory text is revised to read as 
follows:


Sec. 409.30  Basic requirements.

    Posthospital SNF care, including SNF-type care furnished in a 
hospital or CAH that has a swing-bed approval, is covered only if the 
beneficiary meets the requirements of this section and only for days 
when he or she needs and receives care of the level described in 
Sec. 409.31. A beneficiary in an SNF is also considered to meet the 
requirements of this section and of Sec. 409.31 when assigned to one of 
the Resource Utilization Groups that is designated (in the annual 
publication of Federal prospective payment rates described in 
Sec. 413.345 of this chapter) as representing the required level of 
care.
    9. In Sec. 409.33, paragraph (a) is removed, and paragraphs (b), 
(c), and (d) are redesignated as paragraphs (a), (b), and (c), 
respectively; and newly redesignated paragraphs (a)(1) and (a)(2) are 
revised to read as follows:


Sec. 409.33  Examples of skilled nursing and rehabilitation services.

    (a) Services that qualify as skilled nursing services. (1) 
Intravenous or intramuscular injections and intravenous feeding.
    (2) Enteral feeding that comprises at least 26 per cent of daily 
calorie requirements and provides at least 501 milliliters of fluid per 
day.
* * * * *

Subpart F--Scope of Hospital Insurance Benefits

    10. In Sec. 409.60, the heading of paragraph (c) is republished, 
paragraphs (c)(2)(i) through (c)(2)(iii) are redesignated as paragraphs 
(c)(2)(ii) through (c)(2)(iv), respectively, and a new paragraph 
(c)(2)(i) is added to read as follows:


Sec. 409.60  Benefit periods.

* * * * *
    (c) Presumptions.
* * * * *
    (2) * * *
    (i) To have met the skilled level of care requirements during any 
period for which the beneficiary was assigned to one of the Resource 
Utilization Groups designated as representing the required level of 
care, as provided in Sec. 409.30.
* * * * *

Part 410--Supplementary Medical Insurance (SMI) Benefits

    B. Part 410 is amended as set forth below:
    1. The authority citation for part 410 continues to read as 
follows:

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

Subpart B--Medical and Other Health Services

    2. In Sec. 410.27, paragraph (a)(1)(i) is revised to read as 
follows:


Sec. 410.27  Outpatient hospital services and supplies incident to 
physicians' services: Conditions.

    (a) * * *
    (1) * * *
    (i) By or under arrangements made by a participating hospital, 
except in the case of an SNF resident as provided in Sec. 411.15(p) of 
this chapter; and
* * * * *
    3. In Sec. 410.28, paragraph (a)(1) is revised to read as follows:


Sec. 410.28  Hospital or CAH diagnostic services furnished to 
outpatients: Conditions.

    (a) * * *
    (1) They are furnished by or under arrangements made by a 
participating hospital or participating CAH, except in the case of an 
SNF resident as provided in Sec. 411.15(p) of this chapter.
* * * * *
    4. In Sec. 410.32, the introductory text to paragraph (e) is 
republished, and a new

[[Page 26308]]

paragraph (e)(7) is added to read as follows:


Sec. 410.32  Diagnostic X-ray texts, diagnostic laboratory tests, and 
other diagnostic tests: Conditions.

* * * * *
    (e) Diagnostic laboratory tests. Medicare Part B pays for covered 
diagnostic laboratory tests that are furnished by any of the following:
* * * * *
    (7) An SNF to its resident under Sec. 411.15(p) of this chapter, 
either directly (in accordance with Sec. 483.75(k)(1)(i) of this 
chapter) or under an arrangement (as defined in Sec. 409.3 of this 
chapter) with another entity described in this paragraph.
    5. In Sec. 410.40, the introductory text to paragraph (b) is 
republished, paragraphs (b)(2) and (b)(3)(ii) are revised, and a new 
paragraph (b)(4) is added to read as follows:


Sec. 410.40  Ambulance services: Limitations.

* * * * *
    (b) Limits on coverage of ambulance transportation. Medicare Part B 
pays for ambulance transportation only if--
* * * * *
    (2) Medicare Part A payment is not available for the service;
    (3) * * *
    (ii) The transportation is furnished by an ambulance service with 
which the hospital does not have an arrangement (as defined in 
Sec. 409.3 of this chapter), and the hospital has a waiver (in 
accordance with Sec. 489.23 of this chapter) under which Medicare Part 
B payment may be made to the ambulance service; and
    (4) In the case of an SNF resident (as defined in Sec. 411.15(p)(3) 
of this chapter), the transportation is furnished by, or under 
arrangements made by, the SNF.
* * * * *

Subpart I--Payment of SMI Benefits

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


Sec. 410.150  To whom payment is made.

    (a) General rules.
* * * * *
    (2) The services specified in paragraphs (b)(5) through (b)(14) of 
this section must be furnished by a facility that has in effect a 
provider agreement or other appropriate agreement to participate in 
Medicare.
    (b) Specific rules. Subject to the conditions set forth in 
paragraph (a) of this section, Medicare Part B pays as follows:
* * * * *
    (14) To an SNF for services (other than those described in 
Sec. 411.15(p)(2) of this chapter) that are furnished to a resident (as 
defined in Sec. 411.15(p)(3) of this chapter) of the SNF.

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

    C. Part 411 is amended as set forth below:
    1. The authority citation for part 411 continues to read as 
follows:

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

Subpart A--General Exclusions and Exclusion of Particular Services

    2. In Sec. 411.15, the introductory text is republished; in the 
heading to paragraph (m) of this section, the word ``furnished'' is 
added before the word ``to''; and a new paragraph (p) is added to read 
as follows:


Sec. 411.15  Particular services excluded from coverage.

    The following services are excluded from coverage.
* * * * *
    (p) Services furnished to SNF residents. (1) Basic rule. Except as 
provided in paragraph (p)(2) of this section, any service furnished to 
a resident of an SNF by an entity other than the SNF, unless the SNF 
has an arrangement (as defined in Sec. 409.3 of this chapter) with that 
entity to furnish that particular service to the SNF's residents. 
Services subject to exclusion under this paragraph include, but are not 
limited to--
    (i) Any physical, occupational, or speech-language therapy services 
regardless of whether or not the services are furnished by, or under 
the supervision of, a physician or other health care professional; and
    (ii) Services furnished as an incident to the professional services 
of a physician or other health care professional specified in paragraph 
(p)(2) of this section.
    (2) Exceptions. The following services are not excluded from 
coverage:
    (i) Physicians' services that meet the criteria of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis, provided that the 
claim for payment includes the SNF's Medicare provider number in 
accordance with Sec. 424.32(a)(2) of this chapter.
    (ii) Services performed under a physician's supervision by a 
physician assistant who meets the applicable definition in section 
1861(aa)(5) of the Act.
    (iii) Services performed by a nurse practitioner or clinical nurse 
specialist who meets the applicable definition in section 1861(aa)(5) 
of the Act and is working in collaboration (as defined in section 
1861(aa)(6) of the Act) with a physician.
    (iv) Services performed by a certified nurse-midwife, as defined in 
section 1861(gg) of the Act.
    (v) Services performed by a qualified psychologist, as defined in 
section 1861(ii) of the Act.
    (vi) Services performed by a certified registered nurse 
anesthetist, as defined in section 1861(bb) of the Act.
    (vii) Dialysis services and supplies, as defined in section 
1861(s)(2)(F) of the Act.
    (viii) Erythropoietin (EPO) for dialysis patients, as defined in 
section 1861(s)(2)(O) of the Act.
    (ix) Hospice care, as defined in section 1861(dd) of the Act.
    (x) An ambulance trip that initially conveys an individual to the 
SNF to be admitted as a resident, or that conveys an individual from 
the SNF in connection with one of the circumstances specified in 
paragraphs (p)(3)(i) through (p)(3)(iv) of this section as ending the 
individual's status as an SNF resident.
    (xi) For services furnished during 1998 only. The transportation 
costs of electrocardiogram equipment for electrocardiogram test 
services (HCPCS code R0076).
    (3) SNF resident defined. For purposes of this paragraph, a 
beneficiary who is admitted to a Medicare-participating SNF (or to the 
nonparticipating portion of a nursing home of which a distinct part is 
a Medicare-participating SNF) is considered to be a resident of the 
SNF, regardless of whether Part A covers the stay. Whenever such a 
beneficiary leaves the facility, the beneficiary's status as an SNF 
resident for purposes of this paragraph (along with the SNF's 
responsibility to furnish or make arrangements for the services 
described in paragraph (p)(1) of this section) ends when one of the 
following events occurs--
    (i) The beneficiary is admitted as an inpatient to a Medicare-
participating hospital or CAH, or as a resident to another SNF;
    (ii) The beneficiary receives services from a Medicare-
participating home health agency under a plan of care;
    (iii) The beneficiary receives outpatient services from a Medicare-
participating hospital or CAH (but only

[[Page 26309]]

with respect to those services that are not furnished pursuant to the 
comprehensive care plan required under Sec. 483.20 of this chapter); or
    (iv) The beneficiary is formally discharged (or otherwise departs) 
from the SNF, unless the beneficiary is readmitted (or returns) to that 
or another SNF within 24 consecutive hours.

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

    D. Part 413 is amended as set forth below:
    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).

Subpart A--Introduction and General Rules

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


Sec. 413.1  Introduction.

* * * * *
    (g) Payment for services furnished in SNFs. (1) Except as specified 
in paragraph (g)(2)(ii) of this section, the amount paid for services 
furnished in cost reporting periods beginning before July 1, 1998, is 
determined on a reasonable cost basis or, where applicable, in 
accordance with the prospectively determined payment rates for low-
volume SNFs established under section 1888(d) of the Act, as set forth 
in subpart I of this part.
    (2) The amount paid for services (other than those described in 
Sec. 411.15(p)(2) of this chapter)--
    (i) That are furnished in cost reporting periods beginning on or 
after July 1, 1998, to a resident who is in a covered Part A stay, is 
determined in accordance with the prospectively determined payment 
rates for SNFs established under section 1888(e) of the Act, as set 
forth in subpart J of this part.
    (ii) That are furnished on or after July 1, 1998, to a resident who 
is not in a covered Part A stay, is determined in accordance with any 
applicable Part B fee schedule or, for a particular item or service to 
which no fee schedule applies, by using the existing payment 
methodology utilized under Part B for such item or service.
    3. The heading for subpart I of part 413 is revised to read as 
follows:

Subpart I--Prospectively Determined Payment Rates for Low-Volume 
Skilled Nursing Facilities, for Cost Reporting Periods Beginning 
Prior to July 1, 1998

    4. A new subpart J, consisting of Secs. 413.330, 413.333, 413.335, 
413.337, 413.340, 413.343, 413.345, and 413.348, is added to part 413 
to read as follows:

Subpart J--Prospective Payment for Skilled Nursing Facilities

Sec.
413.330  Basis and scope.
413.333  Definitions.
413.335  Basis of payment.
413.337  Methodology for calculating the prospective payment rates.
413.340  Transition period.
413.343  Resident assessment data.
413.345  Publication of Federal prospective payment rates.
413.348  Limitation on review.

Subpart J--Prospective Payment for Skilled Nursing Facilities


Sec. 413.330  Basis and scope.

    (a) Basis. This subpart implements section 1888(e) of the Act, 
which provides for the implementation of a prospective payment system 
for SNFs for cost reporting periods beginning on or after July 1, 1998.
    (b) Scope. This subpart sets forth the framework for the 
prospective payment system for SNFs, including the methodology used for 
the development of payment rates and associated adjustments, the 
application of a transition phase, and related rules.


Sec. 413.333  Definitions.

    As used in this subpart--
    Case-mix index means a scale that measures the relative difference 
in resource intensity among different groups in the resident 
classification system.
    Market basket index means an index that reflects changes over time 
in the prices of an appropriate mix of goods and services included in 
covered skilled nursing services.
    Resident classification system means a system for classifying SNF 
residents into mutually exclusive groups based on clinical, functional, 
and resource-based criteria. For purposes of this subpart, this term 
refers to the current version of the Resource Utilization Groups, as 
set out in the annual publication of Federal prospective payment rates 
described in Sec. 413.345.
    Rural area means any area outside of an urban area.
    Urban area means a metropolitan statistical area (MSA) or New 
England County Metropolitan Area (NECMA), as defined by the Office of 
Management and Budget, or a New England county deemed to be an urban 
area, as listed in Sec. 412.62(f)(1)(ii)(B) of this chapter.


Sec. 413.335  Basis of payment.

    (a) Method of payment. Under the prospective payment system, SNFs 
receive a per diem payment of a predetermined rate for inpatient 
services furnished to Medicare beneficiaries. The per diem payments are 
made on the basis of the Federal payment rate described in Sec. 413.337 
and, during a transition period, on the basis of a blend of the Federal 
rate and the facility-specific rate described in Sec. 413.340. These 
per diem payment rates are determined according to the methodology 
described in Sec. 413.337 and Sec. 413.340.
    (b) Payment in full. The payment rates represent payment in full 
(subject to applicable coinsurance as described in subpart G of part 
409 of this chapter) for all costs (routine, ancillary, and capital-
related) associated with furnishing inpatient SNF services to Medicare 
beneficiaries other than costs associated with operating approved 
educational activities as described in Sec. 413.85.


Sec. 413.337  Methodology for calculating the prospective payment 
rates.

    (a) Data used. (1) To calculate the prospective payment rates, HCFA 
uses--
    (i) Medicare data on allowable costs from freestanding and 
hospital-based SNFs for cost reporting periods beginning in fiscal year 
1995. SNFs that received ``new provider'' exemptions under 
Sec. 413.30(e)(2) are excluded from the data base used to compute the 
Federal payment rates. In addition, allowable costs related to 
exceptions payments under Sec. 413.30(f) are excluded from the data 
base used to compute the Federal payment rates;
    (ii) An appropriate wage index to adjust for area wage differences;
    (iii) The most recent projections of increases in the costs from 
the SNF market basket index;
    (iv) Resident assessment and other data that account for the 
relative resource utilization of different resident types; and
    (v) Medicare Part B SNF claims data reflecting amounts payable 
under Part B for covered SNF services (other than those services 
described in Sec. 411.15(p)(2) of this chapter) furnished during SNF 
cost reporting periods beginning in fiscal year 1995 to individuals who 
were residents of SNFs and receiving Part A covered services.
    (b) Methodology for calculating the per diem Federal payment rates. 
(1) Determining SNF costs. In calculating the initial unadjusted 
Federal rates

[[Page 26310]]

applicable for services provided during the period beginning July 1, 
1998 through September 30, 1999, HCFA determines each SNF's costs by 
summing its allowable costs for the cost reporting period beginning in 
fiscal year 1995 and its estimate of Part B payments (described in 
paragraphs (a)(1)(i) and (a)(1)(v) of this section).
    (2) Use of market basket index. The SNF market basket index is used 
to adjust the SNF cost data to reflect cost increases occurring between 
cost reporting periods represented in the data and the initial period 
(beginning July 1, 1998 and ending September 30, 1999) to which the 
payment rates apply. For each year, the cost data are updated by a 
factor equivalent to the annual market basket index percentage minus 1 
percentage point.
    (3) Calculation of the per diem cost. For each SNF, the per diem 
cost is computed by dividing the cost data for each SNF by the 
corresponding number of Medicare days.
    (4) Standardization of data for variation in area wage levels and 
case-mix. The cost data described in paragraph (b)(2) of this section 
are standardized to remove the effects of geographic variation in wage 
levels and facility variation in case-mix. The cost data are 
standardized for geographic variation in wage levels using the wage 
index. The cost data are standardized for facility variation in case-
mix using the case-mix indices and other data that indicate facility 
case-mix.
    (5) Calculation of unadjusted Federal payment rates. HCFA 
calculates the national per diem unadjusted payment rates by urban and 
rural classification in the following manner:
    (i) By computing the average per diem standardized cost of 
freestanding SNFs weighted by Medicare days.
    (ii) By computing the average per diem standardized cost of 
freestanding and hospital-based SNFs combined weighted by Medicare 
days.
    (iii) By computing the average of the amounts determined under 
paragraphs (b)(5)(i) and (b)(5)(ii) of this section.
    (c) Calculation of adjusted Federal payment rates for case-mix and 
area wage levels. The Federal rate is adjusted to account for facility 
case-mix using a resident classification system and associated case-mix 
indices that account for the relative resource utilization of different 
patient types. This classification system utilizes the resident 
assessment instrument completed by SNFs as described at Sec. 483.20 of 
this chapter, according to the assessment schedule described in 
Sec. 413.343(b). The Federal rate is also adjusted to account for 
geographic differences in area wage levels using an appropriate wage 
index.
    (d) Annual updates of Federal unadjusted payment rates. HCFA 
updates the unadjusted Federal payment rates on a fiscal year basis.
    (1) For fiscal years 2000 through 2002, the unadjusted Federal rate 
is equal to the rate for the previous period or fiscal year increased 
by a factor equal to the SNF market basket index percentage minus 1 
percentage point.
    (2) For subsequent fiscal years, the unadjusted Federal rate is 
equal to the rate for the previous fiscal year increased by the 
applicable SNF market basket index amount.


Sec. 413.340  Transition period.

    (a) Duration of transition period and proportions for the blended 
transition rate. Beginning with an SNF's first cost reporting period 
beginning on or after July 1, 1998, there is a transition period 
covering three cost reporting periods. During this transition phase, 
SNFs receive a payment rate comprising a blend of the adjusted Federal 
rate and a facility-specific rate. For the first cost reporting period 
beginning on or after July 1, 1998, payment is based on 75 percent of 
the facility-specific rate and 25 percent of the Federal rate. For the 
subsequent cost reporting period, the rate is comprised of 50 percent 
of the facility-specific rate and 50 percent of the Federal rate. In 
the final cost reporting period of the transition, the rate is 
comprised of 25 percent of the facility-specific rate and 75 percent of 
the Federal rate. For all subsequent cost reporting periods, payment is 
based entirely on the Federal rate.
    (b) Calculation of facility-specific rate for the first cost 
reporting period. The facility-specific rate is computed based on the 
SNF's Medicare allowable costs from its fiscal year 1995 cost report 
plus an estimate of the amounts payable under Part B for covered SNF 
services (other than those services described in Sec. 411.15(p)(2) of 
this chapter) furnished during fiscal year 1995 to individuals who were 
residents of SNFs and receiving Part A covered services. Allowable 
costs associated with exceptions, as described in Sec. 413.30(f), are 
included in the calculation of the facility-specific rate. Allowable 
costs associated with exemptions, as described in Sec. 413.30(e)(2), 
are included in the calculation of the facility-specific rate but only 
to the extent that they do not exceed 150 percent of the routine cost 
limit. Low Medicare volume SNFs that were paid a prospectively 
determined rate under Sec. 413.300 for their cost reporting period 
beginning in fiscal year 1995 will utilize that rate as the basis for 
the allowable costs of routine (operating and capital-related) expenses 
in determining the facility-specific rate. Each SNF's allowable costs 
are updated to the first cost reporting period to which the payment 
rates apply using annual factors equal to the SNF market basket 
percentage minus 1 percentage point.
    (c) SNFs participating in the Multistate Nursing Home Case-Mix and 
Quality Demonstration. SNFs that participated in the Multistate Nursing 
Home Case-Mix and Quality Demonstration in a cost reporting period that 
began in calendar year 1997 will utilize their allowable costs from 
that cost reporting period, including prospective payment amounts 
determined under the demonstration payment methodology.
    (d) Update of facility-specific rates for subsequent cost reporting 
periods. The facility-specific rate for a cost reporting period that is 
subsequent to the first cost reporting period is equal to the facility-
specific rate for the first cost reporting period (described in 
paragraph (a) of this section) updated by the market basket index.
    (1) For a subsequent cost reporting period beginning in fiscal 
years 1998 and 1999, the facility-specific rate is equal to the 
facility-specific rate for the previous cost reporting period updated 
by the applicable market basket index percentage minus one percentage 
point.
    (2) For a subsequent cost reporting period beginning in fiscal year 
2000, the facility-specific rate is equal to the facility-specific rate 
for the previous cost reporting period updated by the applicable market 
basket index percentage.
    (e) SNFs excluded from the transition period. SNFs that received 
their first payment from Medicare, under present or previous ownership, 
on or after October 1, 1995, are excluded from the transition period, 
and payment is made according to the Federal rates only.


Sec. 413.343  Resident assessment data.

    (a) Submission of resident assessment data. SNFs are required to 
submit the resident assessment data described at Sec. 483.20 of this 
chapter in the manner necessary to administer the payment rate 
methodology described in Sec. 413.337. This provision includes the 
frequency, scope, and number of assessments required.
    (b) Assessment schedule. In accordance with the methodology 
described in Sec. 413.337(c) related to the adjustment of the Federal 
rates for case-mix, SNFs must submit assessments according to an 
assessment schedule. This schedule must include

[[Page 26311]]

performance of patient assessments on the 5th, 14th, 30th, 60th, and 
90th days following admission and such other assessments that are 
necessary to account for changes in patient care needs.
    (c) Noncompliance with assessment schedule. HCFA pays a default 
rate for the Federal rate when a SNF fails to comply with the 
assessment schedule in paragraph (b) of this section. The default rate 
is paid for the days of a patient's care for which the SNF is not in 
compliance with the assessment schedule.


Sec. 413.345  Publication of Federal prospective payment rates.

    HCFA publishes information pertaining to each update of the Federal 
payment rates in the Federal Register. This information includes the 
standardized Federal rates, the resident classification system that 
provides the basis for case-mix adjustment (including the designation 
of those specific Resource Utilization Groups under the resident 
classification system that represent the required SNF level of care, as 
provided in Sec. 409.30 of this chapter), and the wage index. This 
information is published before May 1 for the fiscal year 1998 and 
before August 1 for the fiscal years 1999 and after.


Sec. 413.348  Limitation on review.

    Judicial or administrative review under sections 1869 or 1878 of 
the Act or otherwise is prohibited with regard to the establishment of 
the Federal rates. This prohibition includes the methodology used in 
the computation of the Federal standardized payment rates, the case-mix 
methodology, and the development and application of the wage index. 
This prohibition on judicial and administrative review also extends to 
the methodology used to establish the facility-specific rates but not 
to determinations related to reasonable cost in the fiscal year 1995 
cost reporting period used as the basis for these rates.

PART 424--CONDITIONS FOR MEDICARE PAYMENT

    E. Part 424 is amended as set forth below:
    1. The authority citation for part 424 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act 
(U.S.C. 1302 and 1895hh).

Subpart A--General Provisions

    2. In Sec. 424.3, the following definition is added, in 
alphabetical order, to read as follows:


Sec. 424.3  Definitions.

* * * * *
    HCPCS means HCFA Common Procedure Coding System.
* * * * *

Subpart B--Certification and Plan of Treatment Requirements

    3. In Sec. 424.20, the introductory text and paragraph (a) are 
revised to read as follows:


Sec. 424.20  Requirements for posthospital SNF care.

    Medicare Part A pays for posthospital SNF care furnished by an SNF, 
or a hospital or CAH with a swing-bed approval, only if the 
certification and recertification for services are consistent with the 
content of paragraph (a) or (c) of this section, as appropriate.
    (a) Content of certification--(1) General requirements. 
Posthospital SNF care is or was required because--
    (i) The individual needs or needed on a daily basis skilled nursing 
care (furnished directly by or requiring the supervision of skilled 
nursing personnel) or other skilled rehabilitation services that, as a 
practical matter, can only be provided in an SNF or a swing-bed 
hospital on an inpatient basis, and the SNF care is or was needed for a 
condition for which the individual received inpatient care in a 
participating hospital or a qualified hospital, as defined in 
Sec. 409.3 of this chapter; or
    (ii) The individual has been correctly assigned to one of the 
Resource Utilization Groups designated as representing the required 
level of care, as provided in Sec. 409.30 of this chapter.
* * * * *
    4. In Sec. 424.32, the introductory text to paragraph (a) is 
republished, paragraph (a)(2) is revised, and a new paragraph (a)(5) is 
added, to read as follows:


Sec. 424.32  Basic requirements for all claims.

    (a) A claim must meet the following requirements:
* * * * *
    (2) A claim for physician services must include appropriate 
diagnostic coding using ICD-9-CM and, for services furnished to an SNF 
resident under Sec. 411.15(p)(2)(i) of this chapter, must also include 
the SNF's Medicare provider number.
* * * * *
    (5) A Part B claim filed by an SNF must include appropriate HCPCS 
coding.
* * * * *

PART 483--REQUIREMENTS FOR STATES AND LONG TERM CARE FACILITIES

    F. Part 483 is amended as set forth below:
    1. The authority citation for part 483 continues to read as 
follows:

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

Subpart B--Requirements for Long Term Care Facilities

    2. In Sec. 483.20, paragraph (b)(4) is revised to read as follows:


Sec. 483.20  Resident assessment.

* * * * *
    (b) Comprehensive assessments.
* * * * *
    (4) Frequency. Subject to the timeframes prescribed in 
Sec. 413.343(b) of this chapter, assessments must be conducted--
    (i) No later than 14 days after the date of admission;
    (ii) Promptly after a significant change in the resident's physical 
or mental condition; and
    (iii) In no case, less often than once every 12 months.
* * * * *
    3. In Sec. 483.75, paragraph (h)(1) is revised to read as follows:


Sec. 483.75  Administration.

* * * * *
    (h) Use of outside resources. (1) If the facility does not employ a 
qualified professional person to furnish a specific service to be 
provided by the facility, the facility must have that service furnished 
to residents by a person or agency outside the facility under an 
arrangement described in section 1861(w) of the Act or (with respect to 
services furnished to NF residents and dental services furnished to SNF 
residents) an agreement described in paragraph (h)(2) of this section.
* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

    G. Part 489 is amended to read as follows:
    1. The authority citation for part 489 continues to read as 
follows:

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

Subpart B--Essentials of Provider Agreements

    2. In Sec. 489.20, the introductory text is republished, and a new 
paragraph (s) is added to read as follows:

[[Page 26312]]

Sec. 489.20  Basic commitments.

    The provider agrees to the following:
* * * * *
    (s) In the case of an SNF, either to furnish directly or make 
arrangements (as defined in Sec. 409.3 of this chapter) for all 
Medicare-covered services furnished to a resident (as defined in 
Sec. 411.15(p)(3) of this chapter) of the SNF, except the following:
    (1) Physicians' services that meet the criteria of Sec. 415.102(a) 
of this chapter for payment on a fee schedule basis.
    (2) Services performed under a physician's supervision by a 
physician assistant who meets the applicable definition in section 
1861(aa)(5) of the Act.
    (3) Services performed by a nurse practitioner or clinical nurse 
specialist who meets the applicable definition in section 1861(aa)(5) 
of the Act and is working in collaboration (as defined in section 
1861(aa)(6) of the Act) with a physician.
    (4) Services performed by a certified nurse-midwife, as defined in 
section 1861(gg) of the Act.
    (5) Services performed by a qualified psychologist, as defined in 
section 1861(ii) of the Act.
    (6) Services performed by a certified registered nurse anesthetist, 
as defined in section 1861(bb) of the Act.
    (7) Dialysis services and supplies, as defined in section 
1861(s)(2)(F) of the Act.
    (8) Erythropoietin (EPO) for dialysis patients, as defined in 
section 1861(s)(2)(O) of the Act.
    (9) Hospice care, as defined in section 1861(dd) of the Act.
    (10) An ambulance trip that initially conveys an individual to the 
SNF to be admitted as a resident, or that conveys an individual from 
the SNF in connection with one of the circumstances specified in 
Sec. 411.15(p)(3)(i) through (p)(3)(iv) of this chapter as ending the 
individual's status as an SNF resident.
    (11) For services furnished during 1998 only. The transportation 
costs of electrocardiogram equipment for electrocardiogram test 
services (HCPCS code R0076).

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

    Dated: April 22, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Approved: April 28, 1998.
Donna E. Shalala,
Secretary.

    Note: The following Appendix will not appear in the Code of 
Federal Regulations.

Appendix A--Technical Features of the 1992 Skilled Nursing Facility 
Total Cost Market Basket Index

    As discussed in the preamble of this rule, we are revising and 
rebasing the SNF market basket. This appendix describes the 
technical aspects of the 1992-based index that we are implementing 
in this rule. We present this description of the market basket in 
three steps:
     A synopsis of the structural differences between the 
1977- and the 1992-based market baskets.
     A description of the methodology used to develop the 
cost category weights in the 1992-based market basket.
     A description of the data sources used to measure price 
change for each component of the 1992-based market basket, making 
note of the differences from the price proxies used in the 1977-
based market basket.

I. Synopsis of Structural Changes Adopted in the Revised and Rebased 
1992 Skilled Nursing Facility Total Cost Market Basket

    Four major structural differences exist between the current 
1977-based and the 1992-based SNF market baskets.
     The 1992-based market basket has total costs (routine, 
ancillary, and capital-related) whereas the 1977-based market basket 
had only routine costs.
     More recent SNF cost data are used in the revised and 
rebased SNF market basket.
    The 1977-based market basket contained cost shares that were 
derived from 1977 National Center for Health Statistics data. The 
1992-based market basket uses data from the PPS-9 Medicare Cost 
Reports for freestanding SNFs with Medicare expenses greater than 1 
percent of total expenses for five major categories of cost. PPS-9 
cost reports have cost reporting periods beginning after September 
30, 1991 and before October 1, 1992. Cost allocations with the six 
major cost categories use two Department of Commerce data sources, 
the 1992 Asset and Expenditure Survey, Bureau of the Census, 
Economics and Statistics Administration, and the 1992 Bureau of 
Economic Analysis Input-Output Tables.
     Some cost categories have been disaggregated and some 
cost categories have been combined. These category changes reflect 
the availability of data in the cost reports, the Asset and 
Expenditure Survey, and the Input-Output Tables. The cost categories 
for Fuel Oil, Coal, etc. and Natural Gas have been combined into 
Fuels, Nonhighway. The Supplies category has been disaggregated into 
several subcategories: Paper, Rubber and Plastics, and Chemicals. 
The 1977-based Miscellaneous Costs cost category was disaggregated 
into Miscellaneous Products and Other Services, which was then 
further disaggregated into Telephone, Labor-intensive Services, and 
Non Labor-intensive Services. The Capital-related Expenses major 
cost category was added, and then disaggregated into five 
subcategories, including Depreciation expenses for Building and 
Fixed Equipment and for Movable Equipment, Interest expenses for 
Government and Nonprofit SNFs and for For-profit SNFs, and Other 
Capital-related expenses.
     Some new price proxies have been incorporated in the 
revised and rebased market basket.

II. Methodology for Developing the Cost Category Weights

    Cost category weights for the 1992-based market basket were 
developed in two stages. First, base weights for six main categories 
(wages and salaries, employee benefits, contract labor, 
pharmaceuticals, capital-related expenses, and a residual all other) 
were derived from the SNF Medicare Cost Reports described above. The 
residual ``all other'' cost category was divided into subcategories, 
using U.S. Department of Commerce data sources for the nursing home 
industry. Relationships from the 1992 Input-Output Tables were used 
to allocate the ``all other'' cost category.
    Below we describe the source of the six main category weights 
and their subcategories in the 1992-based market basket.
     Wages and Salaries: The wages and salaries cost 
category is one of the six base weights derived from using 1992 SNF 
Medicare Cost Reports.
     Employee Benefits: The ratio used in the employee 
benefits cost category is derived from 1993 SNF Medicare cost 
reports. The 1993 cost reports contained information from which to 
derive the ratio of employee benefits to wages and salaries that was 
not available in the 1992 SNF cost reports.
     Pharmaceuticals: The ratio used in the pharmaceuticals 
cost category was derived from 1993 SNF Medicare cost reports. The 
1993 cost reports contained information from which to derive the 
ratio of pharmaceuticals costs to that cost that was not available 
in the 1992 cost reports.
     Capital-related: The weight for the overall capital-
related expenses cost category was derived using 1992 SNF Medicare 
Cost Reports. The subcategory and vintage weights within the overall 
capital-related expenses were derived using additional data sources. 
The methodology for deriving these weights is described below.
    In determining the subcategory weights, we used a combination of 
information from the 1992 and 1993 SNF Medicare Cost Reports, the 
1992 Census Asset and Expenditure Survey, and the 1992 hospital 
Medicare Cost Reports. We estimated the depreciation expense share 
of capital-related expenses, including the distribution between 
building and fixed equipment and movable equipment, from the 1992 
Asset and Expenditure Survey. Depreciation expenses cannot be 
disaggregated from the Medicare Cost Reports due to multiple 
reporting methods. From these calculations, depreciation expenses, 
not including

[[Page 26313]]

depreciation expenses implicit from leases, were estimated to be 
50.7 percent of total capital-related expenditures in 1992.
    The interest expense share of capital-related expenses was 
derived from a special file of the 1993 SNF Medicare Cost Reports. 
Interest expenses are not identifiable in the 1992 SNF Medicare Cost 
Reports and not reported in the 1992 Asset and Expenditure Survey. 
We determined the split between for-profit interest expense and not-
for profit interest expense based on the distribution of long-term 
debt outstanding by type of SNF (for-profit or not-for-profit) from 
the 1992 SNF Medicare Cost Reports. Interest expense, not including 
interest expenses from leases, was estimated to be 27.3 percent of 
total capital-related expenditures in 1992.
    A small category, other capital-related expenses (insurance, 
taxes, other), was calculated using a ratio from the 1992 hospital 
Medicare Cost Reports. We determined the ratio of other capital-
related expenses to book values for hospital depreciable assets by 
type of hospital control (for-profit, not-for-profit, and 
government) from the 1992 hospital Medicare Cost Reports. We then 
applied this ratio by type of SNF control to the book values of SNF 
depreciable assets from the 1992 SNF Medicare Cost Reports to 
determine other capital-related expenses for SNFs. This methodology 
assumes that by type of control, hospitals and SNFs have the same 
proportion of other capital-related expenses to depreciable assets. 
This assumption was necessary since other capital-related expenses 
not including leases were not directly available from the SNF 
Medicare Cost Reports. Other capital-related expenses, not including 
other capital-related expenses implicit from leases, were estimated 
to be 4.5 percent of total capital-related expenditures in 1992.
    Consistent with the methodology from the hospital PPS capital 
input price index, we calculated lease expenses as a residual by 
subtracting depreciation, interest, and other capital-related 
expenses from total capital-related expenses. We then assumed that 
roughly 10 percent of lease expenses were overhead, the same 
assumption used in the hospital PPS capital input price index, and 
included them in the other capital-related expense category. The 
remaining 90 percent of lease expenses were distributed across the 
depreciation (61.5 percent = 50.7/82.5), interest (33.1 percent = 
27.3/82.5), and other capital-related expenses (5.4 percent = 4.5/
82.5) categories using the shares determined by the methodology 
described above. The amount of lease expenses applied to the 
depreciation subcategories, building and fixed equipment (93.9 
percent) and movable equipment (6.1 percent), were determined using 
the 1992 Asset and Expenditure Survey distribution of lease 
expenses. The table below shows the final capital-related expense 
distribution, including expenses from leases, in the SNF PPS market 
basket:

------------------------------------------------------------------------
                                           SNF capital-    SNF capital- 
                                              related         related   
                                             expenses*      expenses**  
------------------------------------------------------------------------
Total...................................           100.0             9.8
    Depreciation........................            60.5             5.9
        Building and Fixed..............            42.1             4.1
Equipment...............................                                
        Movable Equipment...............            18.4             1.8
    Interest............................            32.6             3.2
    Other capital-related expense.......             6.9             0.7
------------------------------------------------------------------------
* As a percent of total capital-related expenses.                       
** As percent of total SNF expenses.                                    

    As explained in the Rebasing and Revising the SNF market basket 
section of the preamble, the HCFA methodology for determining the 
price change of capital-related expenses accounts for the vintage 
nature of capital, which is the acquisition and use of capital over 
time. In order to capture this vintage nature, the price proxies 
must be vintage-weighted. The determination of these vintage weights 
occurs in two steps. First, we must determine the expected life of 
capital and debt instruments in SNFs. Second, we must identify the 
proportion of expenditures within a cost category that are 
attributable to each year over the life of capital assets in that 
category, or the vintage weights. Each of these steps is explained 
in detail below.
    The expected life of capital must be determined for both 
building and fixed equipment and movable equipment. The expected 
life for each of these cost categories is determined by dividing end 
of year book value amounts by annual depreciation expenses for SNFs 
from the 1992 Asset and Expenditure Survey. This calculation 
produced an expected life of 23 years for building and fixed 
equipment and 10 years for movable equipment. Implicit in this 
calculation is the assumption that all book values are currently 
depreciable. In the absence of data on capital debt instruments held 
by SNFs, the expected life of capital debt instruments is assumed to 
be 22 years for both for-profit and not-for-profit debt instruments, 
the same as for the hospital PPS capital input price index.
    Given the expected life of capital and debt instruments as 
determined from the methodology above, we must determine the 
proportion of capital expenditures attributable to each year of the 
expected life by cost category. These proportions represent the 
vintage weights. We were not able to find historical time-series of 
capital expenditures by SNFs. Therefore, we approximated the capital 
expenditure patterns of SNFs over time using alternative SNF data 
sources. For building and fixed equipment, we used the stock of beds 
in nursing homes from the HCFA's National Health Accounts for 1962 
through 1991. We then used the change in the stock of beds each year 
to approximate building and fixed equipment purchases for that year. 
This procedure assumes that bed growth reflects the growth in 
capital-related costs in SNFs for building and fixed equipment. We 
believe this assumption is reasonable since the number of beds 
reflects the size of the SNF, and as the SNF adds beds, it also adds 
fixed capital.
    For movable equipment, we used available SNF data to capture the 
changes in intensity of SNF services that would cause SNFs to 
purchase movable equipment. We estimated the change in intensity as 
the trend in the ratio of non-therapy ancillary costs to routine 
costs from the 1989 through 1993 SNF Medicare Cost Reports. We 
estimated this ratio for 1962 through 1988 using regression 
analysis. The time series of non-therapy ancillary costs to routine 
costs for SNFs measures changes in intensity in SNF services, which 
are assumed to be associated with movable equipment purchase 
patterns. The assumption here is that as non-therapy ancillary costs 
increase compared with routine costs, the SNF caseload is more 
complex and would require more movable equipment. Again, the lack of 
direct movable equipment purchase data for SNFs over time required 
us to use alternative SNF data sources. The resulting two time 
series, determined from beds and the ratio of non-therapy ancillary 
to routine costs, reflect real capital purchases of building and 
fixed equipment and movable equipment over time, respectively.
    To obtain nominal purchases, which are used to determine the 
vintage weights for interest, we converted the two real capital 
purchase series from 1963 through 1991 determined above to nominal 
capital purchase series using their respective price proxies (Boeckh 
institutional construction index and PPI for machinery and 
equipment). We then combined the two nominal series into one nominal 
capital purchase series for 1963 through 1991. Nominal capital 
purchases are needed for interest vintage weights to capture the 
value of the debt instrument.
    Once these capital purchase time series were created for 1963 
through 1991, we averaged different periods to obtain an average 
capital purchase pattern over time. For building and fixed equipment 
we

[[Page 26314]]

averaged seven 23-year periods, for movable equipment we averaged 
twenty 10-year periods, and for interest we averaged eight 22-year 
periods. The vintage weight for a given year is calculated by 
dividing the capital purchase amount in any given year by the total 
amount of purchases during the expected life of the equipment or 
debt instrument. For example, for the 23-year period of 1963 through 
1985 for building and fixed equipment, the vintage weight for year 1 
is calculated by dividing the real annual capital purchase amount of 
building and fixed equipment in 1963 into the total amount of real 
annual capital purchases of building and fixed equipment over the 
entire 1963 through 1985 period. We performed this calculation for 
each year in the 23-year period, and for each of the seven 23-year 
periods. We then calculated an average of the seven 23-year periods. 
The resulting vintage weights for each of these cost categories are 
shown in Table A-1 below:

                  Appendix Table A-1--Vintage Weights for SNF PPS Capital-Related Price Proxies                 
----------------------------------------------------------------------------------------------------------------
                                                                   Building and                                 
                              Year                                     fixed          Movable        Interest   
                                                                     equipment       equipment                  
----------------------------------------------------------------------------------------------------------------
1...............................................................           0.059           0.089           0.038
2...............................................................           0.078           0.093           0.046
3...............................................................           0.086           0.096           0.046
4...............................................................           0.079           0.101           0.047
5...............................................................           0.074           0.104           0.051
6...............................................................           0.071           0.104           0.054
7...............................................................           0.073           0.104           0.060
8...............................................................           0.075           0.114           0.064
9...............................................................           0.064           0.101           0.062
10..............................................................           0.056           0.097           0.055
11..............................................................           0.052  ..............           0.056
12..............................................................           0.048  ..............           0.056
13..............................................................           0.041  ..............           0.055
14..............................................................           0.034  ..............           0.050
15..............................................................           0.026  ..............           0.042
16..............................................................           0.019  ..............           0.044
17..............................................................           0.017  ..............           0.039
18..............................................................           0.016  ..............           0.036
19..............................................................           0.013  ..............           0.025
20..............................................................           0.004  ..............           0.027
21..............................................................           0.003  ..............           0.023
22..............................................................           0.005  ..............           0.026
23..............................................................           0.009  ..............  ..............
                                                                 -----------------------------------------------
        Total...................................................           1.000           1.000           1.000
----------------------------------------------------------------------------------------------------------------
Sources: 1992 SNF Medicare Cost Reports; HCFA, National Health Accounts.                                        

---------------------------------------------------------------------------
    Note: Totals may not sum to 1.000 due to rounding.

    In developing the capital-related expenses portion of the SNF 
input price index, we considered numerous alternatives for 
developing the cost category and vintage weights. Our analysis 
showed that using any of these alternatives would have a minimal 
impact on the capital-related expense portion of the SNF index. 
Since the capital-related expense share of the total SNF market 
basket is just 9.777 percent, these minimal differences have no 
effect on the total SNF market basket percent change.
    We compared the price change in the capital-related expense 
component to changes in other relevant price indexes to evaluate our 
methodology. The table below shows the four-quarter moving-average 
percent change in the SNF PPS capital-related expense component, the 
hospital PPS capital input price index, the Boeckh institutional 
construction index, and the CPI-all items for FY 1992 to FY 1997. 
Since the two HCFA capital indexes include an adjustment for 
interest rates that have been declining in recent years, the 
capital-related expense component of the SNF PPS market basket 
appears to be within a reasonable range of the other price indexes.

 Appendix Table A-2--Percent Change in HCFA Capital-Related Expense Share of SNF PPS Input Price Index Compared 
                                             to Other Price Indexes                                             
----------------------------------------------------------------------------------------------------------------
                                            HCFA capital-                                                       
                                           related expense    HCFA hospital        Boeckh                       
                                          share of SNF PPS     PPS capital      institutional    CPI-- all items
                                             input price       input price      construction                    
                                                index             index             index                       
----------------------------------------------------------------------------------------------------------------
FY92....................................               2.4               1.5               2.6               3.0
FY93....................................               2.0               1.1               2.4               3.0
FY94....................................               1.8               1.1               2.8               2.6
FY95....................................               1.8               1.3               3.1               2.8
FY96....................................               1.6               1.0               2.3               2.8
FY97....................................               1.4               0.9               2.4               2.7
----------------------------------------------------------------------------------------------------------------

     Contract labor: The weight for the contract labor cost 
category was derived using 1992 Medicare Cost Reports. It was then 
distributed among the wages and salaries, employee benefits, and 
``all other'' cost categories, so that contract costs will have the 
same price proxies as direct cost categories.
     All Other: Subcategory weights for the All Other 
category were derived using information from a U.S. Department of 
Commerce data source. The 1992 Input-

[[Page 26315]]

Output Tables were used to apportion all other costs within the SNF 
Medicare Cost Reports.

III. Price Proxies Used To Measure Cost Category Growth

     Wages and Salaries: For measuring price growth in the 
wages and salaries cost component of the 1992-based market basket, 
the percentage change in the ECI for wages and salaries for private 
nursing homes is used. This is a revision from the 1977-based market 
basket, in which the AHE for Nursing and Personal Care Facilities 
was used to measure the percentage change in wages and salaries. The 
ECI for wages and salaries for private nursing homes is a fixed-
weight index that measures the rate of change in employee wage rates 
per hour worked. It measures pure price change and is not affected 
by shifts among occupations. The previous measure, AHE, confounds 
changes in the proportion of different occupations with changes in 
earnings levels for a given occupation.
     Employee Benefits: For measuring price growth in the 
1992-based market basket, the percentage change in the ECI for 
benefits for private nursing homes is used. This is a revision from 
the 1977-based market basket, in which the BEA Supplement to Wages 
and Salaries per employee (BLS) was used to measure this component. 
The ECI for benefits for private nursing homes is also a fixed-
weight index that measures pure price change and is not affected by 
shifts in occupation. In contrast to the ECI, the BEA Supplement to 
Wages and Salaries per employee (BLS) is not specific to the nursing 
home industry and is not as conceptually sound for our purpose.
     All Other Expenses:
    + Nonmedical professional fees: The ECI for compensation for 
Private Industry Professional, Technical, and Specialty Workers is 
used to measure price changes in nonmedical professional fees. This 
is a revision from the 1977-based index in which the cost of 
nonmedical professional fees was not specifically measured.
    + Electricity: For measuring price change in the Electricity 
cost category, the PPI for Commercial Electric Power is used. This 
is a revision from the 1977-based index in which the Implicit Price 
Deflator-Electricity (PCE) was used.
    + Fuels, nonhighway: For measuring price change in the Fuels, 
Nonhighway cost category, the PPI for Commercial Natural Gas is 
used. This is a revision from the 1977-based market basket, in which 
the Implicit Price Deflator-Fuel Oil (PCE) and the Implicit Price 
Deflator-Natural Gas (PCE) were used for separate cost categories.
    + Water and Sewerage: For measuring price change in the Water 
and Sewerage cost category, the CPI-U (Consumer Price Index for All 
Urban Consumers) for Water and Sewerage is used. The same price 
proxy was used in the 1977-based index.
    + Food-wholesale purchases: For measuring price change in the 
Food-wholesale purchases cost category, the PPI for Processed Foods 
is used. The same price proxy was used in the 1977-based index.
    + Food-retail purchases: For measuring price change in the Food-
retail purchases cost category, the CPI-U for Food Away From Home is 
used. This is a change from the 1977-based index, when the CPI-U for 
Food and Beverages was used, and reflects the use of contract food 
service by some SNFs.
    + Pharmaceuticals: For measuring price change in the 
Pharmaceuticals cost category, the PPI for Prescription Drugs is 
used. The same price proxy was used for this cost category in the 
1977-based index.
    + Chemicals: For measuring price change in the Chemicals cost 
category, the PPI for Industrial Chemicals is used. This is a 
revision from the 1977-based index, in which the cost of chemicals 
was not specifically measured.
    + Rubber and Plastics: For measuring price change in the Rubber 
and Plastics cost category, the PPI for Rubber and Plastic Products 
is used. This too is a revision from the 1977-based index, in which 
the cost of rubber and plastic products was not specifically 
measured.
    + Paper Products: For measuring price change in the Paper 
Products cost category, the PPI for Converted Paper and Paperboard 
is used. The cost of paper products was not specifically measured in 
the 1977-based index.
    + Miscellaneous Products: For measuring price change in the 
Miscellaneous Products cost category, the PPI for Finished Goods is 
used. The cost of miscellaneous products was not specifically 
measured in the 1977-based index.
    + Telephone Services: The percentage change in the price of 
Telephone service as measured by the CPI-U is applied to this 
component. This is a revision from the 1977-based index, in which 
the cost of telephone services was not specifically measured.
    + Labor-intensive Services: For measuring price change in the 
Labor-intensive Services cost category, the ECI for Compensation for 
Private Service Occupations is used. The cost of Labor-intensive 
Services was not specifically measured in the 1977-based index.
    +Non Labor-intensive Services: For measuring price change in the 
Non Labor-intensive Services cost category, the CPI-U for All Items 
is used. The 1977-based index did not specifically measure the cost 
of Non Labor-intensive Services.
     Capital-related: All capital-related expense categories 
are new cost categories in the revised SNF market basket. The price 
proxies chosen are the same as those used for the hospital PPS 
capital input price index described in the August 30, 1996 Federal 
Register (61 FR 46326). The price proxies for the SNF capital-
related expenses are described below:
    + Depreciation--Building and Fixed Equipment: The Boeckh 
Institutional Construction Index for unit prices of fixed assets.
    + Depreciation--Movable Equipment: The PPI for Machinery and 
Equipment.
    + Interest--Government and Nonprofit SNFs: The Average Yield for 
Municipal Bonds from the Bond Buyer Index of 20 bonds. HCFA input 
price indexes, including this rebased SNF index, are concerned with 
the rate of change in the price proxy and not the level of the price 
proxy. While SNFs may face different interest rate levels than 
hospitals, the rate of change in most interest rates is not 
significantly different. Our research on this issue regarding 
hospitals has been presented in the August 30, 1996 Federal Register 
(61 FR 46201).
    + Interest--For-profit SNFs: The Average Yield for Moody's AAA 
Corporate Bonds. Again, the rebased SNF index focuses on the rate of 
change in this interest rate and not the level of the interest rate.
    + Other Capital-related Expenses: The CPI-U for Residential 
Rent.

Appendix Table A-3--A Comparison of Price Proxies Used in the 1992-Based
         and 1977-Based Skilled Nursing Facility Market Baskets         
------------------------------------------------------------------------
                                   1992-based  price   1977-based  price
         Cost  category                  proxy               proxy      
------------------------------------------------------------------------
Wages and Salaries..............  ECI for Wages and   AHE--Private      
                                   Salaries for        Nursing and      
                                   Private Nursing     Personal Care    
                                   Homes.              Facilities       
Employee Benefits...............  ECI for Benefits    BEA Supplement to 
                                   for Private         Wages and        
                                   Nursing Homes.      Salaries per     
                                                       worker (BLS)     
Nonmedical professional fees....  ECI for             n/a               
                                   Compensation for                     
                                   Private                              
                                   Professional and                     
                                   Technical Workers.                   
Electricity.....................  PPI for Commercial  Implicit Price    
                                   Electric Power.     Deflator--Electri
                                                       city (PCE)       
Fuels...........................  PPI for Commercial  Implicit Price    
                                   Natural Gas.        Deflator--Fuel   
                                                       Oil (PCE) and    
                                                       Implicit Price   
                                                       Deflator--Natural
                                                       Gas (PCE)        
Water and sewerage..............  CPI-U for Water     CPI-U for Water   
                                   and Sewerage.       and Sewerage     
Food--Wholesale purchases.......  PPI--Processed      PPI--Processed    
                                   Foods.              Foods            
Food--Retail purchases..........  CPI-U--Food Away    CPI-U--Food and   
                                   From Home.          Beverages        
Pharmaceuticals.................  PPI for             PPI--Prescription 
                                   Prescription        Drugs            
                                   Drugs.                               

[[Page 26316]]

                                                                        
Chemicals.......................  PPI for Industrial  n/a               
                                   Chemicals.                           
Rubber and plastics.............  PPI for Rubber and  n/a               
                                   Plastic Products.                    
Paper products..................  PPI for Converted   n/a               
                                   Paper and                            
                                   Paperboard.                          
Miscellaneous products..........  PPI for Finished    n/a               
                                   Goods.                               
Telephone services..............  CPI-U for           n/a               
                                   Telephone                            
                                   Services.                            
Labor-intensive services........  ECI for             n/a               
                                   Compensation for                     
                                   Private Service                      
                                   Occupations.                         
Non labor-intensive services....  CPI-U for All       n/a               
                                   Items.                               
Depreciation: Building and Fixed  Boeckh              n/a               
 Equipment.                        Institutional                        
                                   Construction                         
                                   Index.                               
Depreciation: Movable Equipment.  PPI for Machinery   n/a               
                                   and Equipment.                       
Interest: Government and          Average Yield       n/a               
 Nonprofit SNFs.                   Municipal Bonds                      
                                   (Bond Buyer Index-                   
                                   20 bonds).                           
Interest: For-profit SNFs.......  Average Yield       n/a               
                                   Moody's AAA Bonds.                   
Other Capital-related Expenses..  CPI-U for           n/a               
                                   Residential Rent.                    
------------------------------------------------------------------------

[FR Doc. 98-12208 Filed 5-5-98; 12:57 pm]
BILLING CODE 4120-01-P