[Federal Register Volume 64, Number 146 (Friday, July 30, 1999)]
[Rules and Regulations]
[Pages 41644-41683]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19478]



[[Page 41643]]

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Part III





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 409, 411, 413, and 489



Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities--Update; Final Rule and Notice

  Federal Register / Vol. 64, No. 146 / Friday, July 30, 1999 / Rules 
and Regulations  

[[Page 41644]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 409, 411, 413, and 489

[HCFA-1913-F]
RIN 0938-AI47


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

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

ACTION: Final rule.

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

SUMMARY: This final rule responds to comments submitted by the public 
on our May 12, 1998 interim final rule, that implemented provisions in 
section 4432 of the Balanced Budget Act of 1997 regarding Medicare 
payment for skilled nursing facility services. This legislation 
established a prospective payment system, a consolidated billing 
provision, and a number of related changes.

EFFECTIVE DATE: These regulations are effective on September 28, 1999.

FOR FURTHER INFORMATION CONTACT:

Dana Burley, (410) 786-4547 (for information related to the case-mix 
classification methodology).
John Davis, (410) 786-0008 (for information related to the Federal 
rates).
Jackie Gordon, (410) 786-4517 (for information related to consolidated 
billing).
Steve Raitzyk, (410) 786-4599 (for information related to the facility-
specific transition payment rates).
Bill Ullman, (410) 786-5667 (for information related to coverage and 
level of care determinations).
Laurence Wilson, (410) 786-4603 (for general information).

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

Table of Contents

I. Background
    A. Payment Provisions--Federal Rate
    B. Payment Provisions--Transition Period
    C. Payment Provisions--Facility-Specific Rate
    D. Consolidated Billing for Skilled Nursing Facilities
II. Provisions of the Interim Final Rule
III. Analysis of and Responses to Public Comments
    A. Federal Rates--Outliers/Non-therapy ancillaries (NTAs)
    B. Federal Rate Calculation
    C. Federal Rates--Part B Add-on
    D. Facility-specific Rates-Transition
    E. Minimum Data Set (MDS) Assessments
    1. Billing Issues
    2. Corrections
    3. Other Medicare Required Assessment (OMRA)
    F. Certification and Recertification
    G. MDS Scheduling Requirements
    1. Grace Days
    2. Completion and Locking
    3. Discharge and Leave of Absence
    H. Other Medicare MDS Requirements
    I. Medical Review
    J. Rehabilitation Therapy Services and PPS
    K. RUG-III Groups
    L. Nurse Staffing and the Staff Time Measurement Studies
    M. SNF Coverage and Level of Care Determinations
    N. SNF Consolidated Billing
    O. Scope of Extended Care Benefits
    P. Impact Analysis
IV. Provisions of the Final Regulations
V. Collection of Information Requirements
VI. Impact Analysis
    A. Background
    B. Impact of this Final Rule
    C. Rural Hospital Impact Statement
    D. Unfunded Mandates

    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
ASC  Ambulatory Surgical Center
BBA  Balanced Budget Act of 1997
CAH  Critical access hospital
CBO  Congressional Budget Office
CFR  Code of Federal Regulations
CORF  Comprehensive Outpatient Rehabilitation Facility
CPI  Consumer Price Index
CPI-U  Consumer Price Index for All Urban Consumers
CPT  [Physicians'] Current Procedural Terminology
DME  Durable medical equipment
ESRD  End stage renal disease
FI  Fiscal intermediary
GAO  General Accounting Office
HCFA  Health Care Financing Administration
HCPCS  HCFA Common Procedure Coding System
HIPPS  Health Insurance Prospective Payment System
ICD-9-CM  International Classification of Diseases, Ninth Edition, 
Clinical Modification
MDS  Minimum Data Set
MEDPAR  Medicare Provider Analysis and Review File
MGCRB  Medicare Geographic Classification Review Board
MIM-3  Medicare Intermediary Manual, Part 3
MRI  Magnetic Resonance Imaging
MSA  Metropolitan Statistical Area
NHCMQD  [Multistate] Nursing Home Case-mix and Quality Demonstration
OBRA 87  Omnibus Budget Reconciliation Act of 1987
OIG  Office of the Inspector General
OMRA  Other Medicare Required Assessment
PM  Program Memorandum
PPS  Prospective payment system
PRM  Provider Reimbursement Manual
PRO  Peer Review Organization
RAI  Resident Assessment Instrument
RAPs  Resident Assessment Protocols
RUG-III  Resource Utilization Groups, version III
SNF  Skilled nursing facility
SOM  State Operations Manual
STM  Staff time measure

I. Background

    Section 4432 of the Balanced Budget Act of 1997 (BBA) (Public Law 
105-33) mandated the implementation of a per diem prospective payment 
system (PPS) for skilled nursing facilities (SNFs), covering all costs 
(routine, ancillary, and capital) of covered SNF services furnished to 
beneficiaries under Part A of the Medicare program, effective for cost 
reporting periods beginning on or after July 1, 1998. Major elements of 
the system include:
     Rates: Per diem Federal rates are established for urban 
and rural areas using allowable costs from fiscal year (FY) 1995 cost 
reports. These rates also include an estimate of the cost of services 
that, before July 1, 1998, had been paid under Part B but furnished to 
SNF residents during a Part A covered stay. Rates are case-mix adjusted 
using a resident classification system (Resource Utilization Groups, 
version III (RUG-III)) based on resident assessments (using the Minimum 
Data Set (MDS) 2.0). In addition, the Federal rates are adjusted by a 
wage index to account for geographic variation in wages. Finally, the 
rates will be adjusted annually using an SNF market basket index.
     Transition: The SNF PPS includes a 3-year transition that 
blends a facility-specific payment rate with the Federal case-mix 
adjusted rate. The blend that is used changes each cost reporting 
period after a facility migrates to the new system. For most 
facilities, the facility-specific rate is based on allowable costs from 
FY 1995.
     Coverage: The PPS legislation did not change Medicare's 
fundamental statutory requirements for SNF coverage. However, because 
RUG-III classification is based, in part, on the resident's need for 
skilled nursing care and therapy, we have attempted where possible to 
adapt the existing claims review procedures to coordinate them with the 
outputs of resident assessment and RUG-III classifying activities, as 
discussed later in this preamble.

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     Consolidated Billing: The statute includes a billing 
provision that requires an SNF to submit consolidated Medicare bills 
for its residents for virtually all services that are covered under 
either Part A or Part B. The statute excludes a small list of services 
(primarily those of physicians and certain other types of 
practitioners). A related statutory provision requires SNFs to use HCFA 
Common Procedure Coding System (HCPCS) coding on all Part B bills, and 
specifies that they are to be paid an amount determined in accordance 
with the otherwise applicable Part B fee schedule for the particular 
item or service.
     Effective Date: The SNF PPS is effective for cost 
reporting periods beginning on or after July 1, 1998. The law provides 
that the consolidated billing and coding requirements are effective for 
services and items furnished on or after July 1, 1998.
    An interim final rule implementing the SNF PPS was published in the 
Federal Register on May 12, 1998 (63 FR 26252), and the comment period 
was initially scheduled to close on July 13, 1998. A follow-up notice 
(63 FR 37498, July 13, 1998) extended the public comment period for an 
additional 60 days, and a second notice (63 FR 65561, November 27, 
1998) reopened the comment period for another 30 days. In addition, a 
correction notice (63 FR 53301, October 5, 1998) made a number of minor 
technical and editorial corrections to the interim final rule. We have 
also issued several Program Memorandums (PMs) on claims processing and 
billing under the SNF PPS that are available on the SNF PPS home page 
at the HCFA website on the Internet, at the following location: 
<www.hcfa.gov/medicare/snfpps.htm>.
    As described in the interim final rule, the BBA 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 under the previous, 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 
approved educational activities. Covered SNF services include 
posthospital SNF services for which benefits are provided under Part A 
and all items and services that, prior to July 1, 1998, had been paid 
under Part B (other than physician and certain other services 
specifically excluded under the BBA), but furnished to SNF residents 
during a Part A covered stay.

A. Payment Provisions--Federal Rate

    The statute sets forth a fairly prescriptive methodology for 
calculating the amount of payments under the SNF PPS. The PPS uses per 
diem Federal payment rates based on mean SNF costs in a base year 
updated for inflation to the first effective period of the system. We 
developed the Federal payment rates using allowable costs from 
hospital-based and freestanding SNF cost reports during the base year 
(that is, for reporting periods that began in FY 1995). The data used 
in developing the Federal rates also incorporate an estimate of the 
amounts that were paid separately under Part B for covered SNF services 
furnished during the base year 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 an 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, 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, RUG-III, uses resident assessment data (from the 
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 specific 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 were contained in the 
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. Pursuant to section 1888(e)(4)(E)(ii) 
of the Social Security Act (the Act), for FY 2000 through 2002, we will 
increase the rates each year by a factor equal to the SNF market basket 
change minus one percentage point. For subsequent fiscal years, we will 
increase the rates by the applicable SNF market basket change.

B. 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 comprising a blend between the Federal rate and a 
facility-specific rate based on each facility's FY 1995 cost report. 
Under section 1888(e)(2)(E)(ii) of the Act, SNFs that received their 
first payment from Medicare on or after October 1, 1995, receive 
payment according to the Federal rates only.
    For SNFs subject to 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.

C. Payment Provisions--Facility-Specific Rate

    For most facilities, we compute the facility-specific payment rate 
used for the transition using the allowable costs of SNF services for 
cost reporting periods that began in FY 1995 (cost reporting periods 
beginning on or after October 1, 1994, and before October 1, 1995). 
Included in the facility-specific per diem rate for most facilities is 
an

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estimate of the amount that was paid separately under Part B for 
covered SNF services furnished during the base year to individuals who 
were residents of the facility and receiving Part A covered services. 
Under section 1888(e)(3)(A) of the Act, the facility-specific rate (in 
contrast to the Federal rates) 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 FY 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 
FYs 1998 and 1999, we update this rate by a factor equal to the SNF 
market basket increase minus 1 percentage point, and, for each 
subsequent year, we update it by the applicable SNF market basket 
increase.

D. Consolidated Billing for Skilled Nursing Facilities

    Section 4432(b) of the BBA 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 requires the use of fee schedules and uniform 
coding specified by the Secretary of Health and Human Services (the 
Secretary) for SNF Part B bills. The law provides that these 
requirements are effective for services furnished on or after July 1, 
1998.

II. Provisions of the Interim Final Rule

    In the interim final rule that was published on May 12, 1998, we 
made a number of revisions in the regulations in order to implement 
both the PPS and the SNF consolidated billing provision and its 
conforming statutory changes:
     With regard to payment, we revised the regulations in 42 
CFR part 413, subpart A (that deal with Medicare payment to providers 
of services) to reflect the replacement of the existing reasonable cost 
reimbursement methodology for SNFs by the new SNF PPS.
     We revised the regulations to provide that for SNF 
residents who are in a covered Part A stay, Medicare makes payment 
under the PPS described in new subpart J of part 413, effective with 
cost reporting periods beginning on or after July 1, 1998.
     For SNF residents who are not in a covered Part A stay, we 
revised the regulations to provide that Medicare makes payment on the 
basis of the otherwise applicable Part B fee schedule amounts, 
effective for services furnished on or after July 1, 1998.
     We made a conforming change in subpart B of part 483 
(requirements for long term care facilities) to indicate that the 
frequency of resident assessments is subject to the timeframes 
prescribed under the SNF PPS in the new subpart J of part 413.
     We made a number of revisions to implement the 
consolidated billing provision, under which the SNF itself has the 
Medicare billing responsibility for virtually all of the services that 
its residents receive.
     We revised the regulations in part 410 (payment of 
benefits under Part B) to provide that Part B makes payment for these 
services to the SNF rather than to the beneficiary. We also made 
conforming changes with regard to Part B coverage of certain individual 
medical and other health services.
     We revised part 411 (exclusions from coverage) to exclude 
from coverage any service furnished to an SNF resident (other than 
certain specified service categories) when billed to Medicare by an 
entity other than the SNF itself, and we added a definition of an SNF 
``resident'' for purposes of this provision.
     We revised the regulations in subpart B of part 489 
(Medicare provider agreements) to add compliance with the consolidated 
billing provision to the specific terms of an SNF's provider agreement.
     We revised subpart C of part 424 (claims for payment) to 
require the inclusion of an SNF's Medicare provider number on claims 
for physician services furnished to an SNF resident, and the inclusion 
of HCPCS coding on an SNF's Part B claims.
     We made a number of conforming changes in subparts C, D, 
and F of part 409 of the regulations which describe, respectively, the 
scope of covered SNF benefits under Part A, the criteria for 
determining a covered SNF level of care, and benefit period 
determinations.
    As noted previously, the PPS legislation did not change the basic 
statutory definition of an SNF level of care. However, because RUG-III 
classification is based, in part, on the resident's need for skilled 
nursing care and therapy, our revisions in the level of care criteria 
reflected an attempt where possible to coordinate claims review 
procedures with the outputs of resident assessment and RUG-III 
classifying activities. For example, we believe that an initial 5-day 
assessment, properly completed, that places the resident in one of the 
upper 26 RUG-III classifications provides the basis for us to assume 
that the resident needed a covered level of SNF care upon admission and 
at least up until the assessment reference date of the initial 
Medicare-required 5-day assessment. We will, however, continue to make 
individual review determinations for claims of individuals who classify 
in the lower 18 RUG-III categories.

III. Analysis of and Responses to Public Comments

    We received almost 500 comments on the SNF PPS interim final rule 
published on May 12, 1998 (63 FR 26302). Comments were submitted by 
nursing homes and other providers, suppliers and practitioners (both 
individually, and through their respective trade associations), State 
agencies, nursing home resident advocacy groups, elected officials, 
health care consulting firms, and private citizens.
    The comments basically fell into three broad areas. The first 
involved the payment rates, including treatment of ``outlier'' 
situations and non-therapy ancillaries, calculation of the Federal 
rates themselves and of the Part B add-on, and the transition from 
facility-specific rates to the Federal rates. The second area concerned 
the clinical aspects of the SNF PPS, including MDS assessment and 
scheduling requirements, certification and recertification procedures, 
medical review criteria, treatment of rehabilitation therapy under the 
RUG-III classification system, nurse staffing and staff time 
measurement studies, and coverage and level of care determinations. The 
third broad area involved the consolidated billing requirement and the 
scope of the extended care benefit.
    As noted in the interim final rule, because of the large number of 
items of correspondence we normally receive on Federal Register 
documents published for comment, we are unable to acknowledge or 
respond to them individually. In particular, a number of commenters on 
the interim final rule raised extremely technical and detailed 
questions regarding the MDS and the

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billing process. These questions are of a nature that would more 
appropriately be addressed through manual instructions and other 
issuances than in these regulations. In this final rule, we are 
addressing the general concerns raised by the commenters. A summary of 
the major issues and our responses follows:

A. Federal Rates--Outliers/Non-therapy Ancillaries (NTAs)

    Comment: We received a number of comments expressing concern over 
the ability of the PPS to provide adequate payment for certain outlier 
or extraordinary cases. Several of the comments noted specific examples 
of these cases, such as HIV-infected patients with significant drug 
therapy needs, patients receiving intravenous (IV) drug therapy for 
antibiotic-resistant infections, ventilator-dependent patients, or 
simply patients with generally high costs. A number of commenters 
recommended the adoption of an outlier payment process or exceptions 
process to provide higher payments for these cases.
    Other comments suggested use of a later base year (for example, FY 
1997) or add-on to the rates in order to recognize changes made by 
facilities after 1995, the year on which the rates are based. These 
commenters argued that many facilities increased the scope of services 
provided to beneficiaries and served a higher acuity resident 
population after 1995 and, therefore, the costs associated with 
providing this higher level of care were not reflected in the 
calculation of the Federal rate.
    Response: Section 1888(e)(4) of the Act provides specific 
requirements related to the formula and cost data to be used in 
computing the Federal rates. The statute provides that ``the amount of 
the payment for all costs * * * of covered skilled nursing facility 
services'' during the transition period is ``equal to'' a prescribed 
blended payment, and after the transition period is ``equal to'' the 
applicable adjusted Federal per diem rate. The statute does not provide 
for additional payments over and above these prescribed amounts. While 
the Act includes specific statutory authority for the application of 
outlier policies in relation to the acute care hospital PPS (section 
1886(d) through (f) of the Act), home health PPS (section 1895 of the 
Act), and inpatient rehabilitation PPS (section 1886(j) of the Act), it 
does not provide such explicit authority with regard to the SNF PPS. 
However, we are concerned about this matter and are pursuing the basic 
issue of the accuracy of payments through an examination of the case-
mix classification system.
    In addition, the statute mandates use of the FY 1995 cost data in 
the development of the payment rates. It should be noted that when the 
rates were computed, the FY 1995 data were the latest available to 
compute the rates. We believe the Congress took this into consideration 
when developing the statutory language related to the computation of 
the Federal rates as well as the specific impact of using the 1995 data 
on the accumulation of Medicare savings, a key goal of the BBA.
    We also note that while the Congress provided for Medicare 
budgetary savings through the SNF PPS (which had an obvious downward 
effect on the rates), there are numerous reports by the U.S. General 
Accounting Office (GAO) and Office of the Inspector General (OIG) 
suggesting Medicare payment for SNF ancillary services under cost 
reimbursement was inappropriately inflated in the past. If correct, 
this would mitigate the impact of the budgetary savings. The OIG 
includes an expanded discussion of this concept in a 1998 report on the 
SNF PPS titled ``Review of the Health Care Financing Administration's 
Development of a Prospective Payment System for Skilled Nursing 
Facilities'' (Number A-14-98-00350).
    We understand the concerns expressed in the comments related to 
this issue. As discussed in the impact analysis accompanying the 
interim final rule, the SNF PPS will have a varying impact on 
providers. Because ``prices'' are based on averages, SNFs should expect 
that certain patients cost more than payments and others less. The 
extent to which certain facilities can provide quality care, while 
incorporating efficiencies in their purchasing of services and 
operations, will affect how well they manage under this payment system, 
which uses mean-based prices rather than reasonable costs. Financial 
performance should, therefore, be determined by looking across each 
facility's Medicare population, not on a patient specific comparison of 
costs and the payment rate under which the rate would become 
essentially a limit.
    We will focus our efforts on ensuring that these prices are as 
accurate as possible with respect to the resources used by Medicare 
beneficiaries. The SNF PPS, through case-mix classification and 
adjustment, currently reflects a full range of SNF patient types with 
varying characteristics and degrees of resource intensity. Through 
research and refinements to the PPS, we will try to ensure that the PPS 
not only continues to account for a high level of resource intensity, 
but improves in terms of its sensitivity to less common conditions or 
patient types. This aspect of our plan is discussed later in the 
context of the comments on payment for certain ancillary services.
    Comment: There were a number of comments expressing concern with 
the adequacy of the PPS rates to cover the costs of ancillary services 
other than occupational, physical, and speech therapy (non-therapy 
ancillaries), including such things as drugs, laboratory services, 
respiratory therapy, and medical supplies. Prescription drugs or 
medication therapy were frequently noted areas of concern due to their 
potentially high cost for particular residents. Some commenters 
suggested that the RUG-III case-mix classification methodology does not 
adequately provide for payments that account for the variation in, or 
the real costs of, these services provided to their residents. A number 
of commenters stated their belief that the payment rates do not 
generally reflect the costs of certain of these services (for example, 
drugs or respiratory therapy).
    Recommendations from commenters included removing all or some of 
these services from the PPS rates and continuing to pay for them on a 
cost basis, and making changes to the case-mix system and indices to 
account for these services more accurately.
    Response: We are aware of the challenges certain providers have 
faced as they transition from a payment system based on reasonable 
costs to one that uses mean-based prices such as the SNF PPS. In fact, 
many of the same concerns raised in the comments to the interim final 
rule were voiced by hospitals when we implemented the hospital PPS 
system in the early 1980s. However, we believe this is an important 
issue that calls for a broader discussion of the PPS itself, and 
requires the clarification of certain technical issues related to the 
PPS and to the statute.
    Section 1888(e)(1) of the Act requires that the PPS provide payment 
for ``all costs'' (including routine, ancillary, and capital related 
costs) of covered SNF services. Consistent with the statute, the PPS 
rates are based on 1995 allowable costs calculated from Medicare Part A 
cost report data and applicable Part B allowable charges. Thus, a 
facility's historical costs (from FY 1995) of drugs, laboratory 
services, respiratory therapy, and other non-therapy ancillary services 
were captured in these cost reports and reflected in both the Federal 
and facility-specific transition rates.
    In addition, many of these non-therapy ancillary services (for 
example, respiratory therapy, IV medications, and

[[Page 41648]]

IV feedings) are captured both directly and indirectly in the case-mix 
methodology and result in higher payments for SNFs. The issue of 
whether the nursing case-mix index adequately reflects the relative 
costs of non-therapy ancillary services was one that was studied in the 
development of the interim final rule and the associated payment rates.
    As indicated in the preamble of that rule, using MDS assessments to 
classify patients into RUG-III groups, we compared the relative charges 
for non-therapy ancillaries to the nursing case-mix indices for each 
RUG-III group. We found that the pattern of the two relative amounts 
was similar across the RUG-III groups. That is, RUG-III groups with 
high nursing weights also tended to have relatively high charges per 
stay for non-therapy ancillaries.
    Based on this comparison, we concluded that it was reasonable to 
include non-therapy ancillary costs in the nursing component of the 
rate. Accordingly, the idea that the PPS rates do not reflect the cost 
of respiratory therapy, drugs, and other non-therapy ancillaries is 
simply not accurate. Whether the accuracy of the rates can be enhanced 
in this regard is a subject for research and development that we 
discuss below.
    The recommendation to remove or ``carve out'' these services as a 
class from the PPS rates and continue to pay for them on a cost basis 
raises some fundamental concerns related to both the statutory and 
conceptual framework of the PPS. As discussed above, section 
1888(e)(A)(1) of the Act requires that the PPS provide payment for 
``all costs'' (including routine, ancillary, and capital related costs) 
of covered SNF services. The conference report associated with section 
4432 of the BBA explicitly states that under the SNF PPS, ``services 
and supplies provided to residents will be included in pre-determined 
per diem payment rates.''
    Beyond the threshold issue of statutory language, the issue of 
whether specific services should be identified and paid separately 
appears to conflict with certain fundamental concepts embodied in a 
PPS. Carried to its logical conclusion, this approach is antithetical 
to the very concept of the SNF PPS itself, which is based on bundling 
services for similar patients and paying an average, prospectively 
determined amount for all services included in the bundle. The PPS rate 
already recognizes differences between nursing, rehabilitation therapy, 
and ancillary services, as well as non-case-mix components.
    It is important to consider the budgetary impact of the commenters' 
proposal to remove certain services from the PPS rates and to continue 
paying for them on a cost basis. The budgetary impact would be 
significant and would reduce the savings to Medicare associated with 
the SNF PPS provisions of the BBA. Implementing the provision in a way 
that would have a budget neutral impact on savings (for example, a 
downward adjustment to the Federal rates) would penalize providers that 
have made changes to their operations in order to provide services more 
efficiently, and would benefit those that have not. Therefore, we 
believe that further disaggregation of the payment rate would not be 
consistent with the objectives of prospective payment from a 
conceptual, statutory, or budgetary perspective.
    Finally, we agree with the commenters' recommendation that we 
explore the potential for refinements to the PPS and, more 
specifically, the case-mix classification system (RUG-III) to ensure 
that it continues to account more accurately for the services provided 
to SNF residents. We consider the continuing adequacy of the PPS rates, 
and the case-mix methodology in particular, to be a high priority. We 
believe very strongly that the case-mix methodology should be 
periodically evaluated to determine the appropriateness of the RUG-III 
groups in relation to changes in patient care practices and the 
Medicare population.
    In addition, the conference report language associated with section 
4432 of the BBA specifically recommended examining payment for 
medication therapy in the context of the SNF PPS. Accordingly, we are 
funding substantial research to examine the potential for refinements 
to the case-mix methodology, including an examination of medication 
therapy, medically complex patients, and other non-therapy ancillary 
services.
    We are currently funding two research contracts to determine the 
potential for refinements to the RUG-III model. The first contract was 
awarded in FY 1997 and provides preliminary analysis and alternatives 
for refinements using a limited database. The next phase of the 
research focuses on fully developing these options using more extensive 
data. Completion of the research is targeted for January 1, 2000. 
Potential refinements to the case-mix model may include the division of 
the current 44 groups or the addition of new ones based on items 
currently on the MDS 2.0 (for example, new extensive care groups 
combining both medical ancillaries and rehabilitation).
    In addition, a new payment index (or set of relative weights) based 
on ancillary charges, rather than the current staff-time based indices, 
is being explored for the non-therapy ancillary component of the PPS 
rates. Any refinements to the RUG-III model and case-mix indices that 
result from this research would have a distributional effect on 
payments resulting in a new set of payment weights across the various 
groups. If the research supports refinements, we anticipate their 
implementation in conjunction with the October 1, 2000, update to the 
PPS rates. This time line is dictated by the complexity of the research 
and by operational and regulatory requirements, including publication 
of a proposed rule.
    It should be noted that the BBA provisions establishing the SNF PPS 
provided for over $9 billion in savings to Medicare (in fee for 
service) as a result of the statutory formula used for developing the 
rates. Accordingly, an SNF's current costs may well exceed the PPS 
rates if the SNF does not revise the historical purchasing and charging 
practices that it followed under the preexisting cost-based payment 
system.

B. Federal Rate Calculation

    Section 4432(a) of the BBA amended section 1888 of the Act by 
adding a new paragraph (e) that provides for the establishment of per 
diem Federal payment rates under the SNF PPS. These rates encompass all 
costs of furnishing covered skilled nursing services (that is, routine, 
ancillary, and capital-related costs), other than costs associated with 
approved educational activities. In the interim final rule, we 
established a new subpart J in the regulations at 42 CFR part 413, that 
describes this new payment methodology. In this section of the 
preamble, we are providing responses to comments on a number of 
important issues related to the Federal rates. These include payment 
for non-rehabilitation ancillary services, outlier cases, and a variety 
of issues related to the data and design of the Federal payment rates. 
In addition, we are providing for a minor increase in the unadjusted 
rates effective October 1, 1999, based on the recommendation of one 
commenter.
    Comment: We received a number of comments recommending that we 
periodically recompute the PPS rates using the most recent data. 
Reasons commonly mentioned include that rebasing would allow the PPS to 
recognize changes over time in the intensity and scope of services 
provided in SNFs, and that it would provide an opportunity for re-
standardization of the

[[Page 41649]]

payment rates using actual resident assessment (MDS) data.
    Conversely, we received comments that recommended against rebasing 
payment rates periodically. These commenters were concerned that 
because the PPS provides incentives for SNFs to provide services more 
efficiently and eliminate distinct parts (that would tend to lower 
average SNF costs, as determined from Medicare cost reports), the 
impact of rebasing the rates would be unfair, since it would tend to 
penalize providers for being efficient.
    Response: While we are not able to predict the absolute impact on 
SNF costs of the incentive for SNFs to provide services more 
efficiently or their continued desire to maintain distinct parts under 
PPS, we have no doubt that the PPS will result in some downward 
pressure on costs. Anecdotal evidence up to this point certainly 
supports this conclusion.
    Section 1888(e)(4)(A) of the Act requires a 1995 base year. Section 
1888(e)(5)(A) of the Act specifically provides for the establishment of 
an SNF market basket index, while section 1888(e)(4)(E) of the Act 
requires that the SNF PPS rates be updated annually using that index.
    As discussed in response to earlier comments, we believe that it is 
appropriate to recognize changes over time in the Medicare population 
or care delivery practices in SNFs in the context of case-mix 
adjustments. Our periodic evaluation of the case-mix classification and 
indices will provide an opportunity for making refinements to the PPS 
that recognize changes in the intensity and scope of services provided 
in SNFs.
    Comment: We received several comments regarding certain costs that 
were not included in the computation of the Federal rate. Specifically, 
the commenters expressed concern that all SNFs receiving ``new'' 
provider exemptions from the routine cost limits and all allowable 
costs associated with atypical services exceptions to the cost limits 
have not been included in the data used for computation of the Federal 
rates.
    The commenters suggested that it is unfair to exclude the cost 
associated with those providers that are providing atypical levels of 
care. Further, they noted that these are the same providers that would 
have a high case-mix in the new payment rates and, therefore, should be 
included. Virtually all of these commenters suggested that the rates 
are distorted due to the exclusion of many providers and costs of 
furnishing atypical services.
    Response: The statute is very specific regarding the exclusion of 
providers that have received ``new'' provider exemptions from the 
calculation of the Federal rates. Section 1888(e)(4)(A) of the Act 
requires that cost data from SNFs ``that were subject to (and not 
exempted from) the per diem limits'' be used in computing the payment 
rates. Similarly, the statute specifically requires the exclusion of 
allowable costs associated with exceptions granted in the FY 1995 base 
year. Section 1888(e)(4)(A)(i) requires the use of the allowable costs 
of SNF services ``excluding exceptions payments'' in calculating the 
payment rates.
    Comment: Several commenters were concerned that we eliminated 
certain cost reports from the calculation of the Federal rates on the 
basis of their duration. Cost reports in excess of 13 months or less 
than 10 months in duration were eliminated from the rate computations. 
In addition, concerns were expressed over the use of a geometric 
outlier elimination process to remove SNF costs from the data.
    Response: As we indicated in the interim final rule, we used only 
those cost reports for periods of at least 10 months but not more than 
13 months. We excluded those periods that fell outside these parameters 
on the basis that those cost reports may not be reflective of a normal 
cost reporting period and, therefore, may tend to distort the rate 
computation. For example, providers entering or exiting the Medicare 
program could have abnormally high or low costs due to fluctuations in 
occupancy. This approach does not affect a large number of cost reports 
and is consistent with our rate setting methodology in other areas of 
Medicare.
    Similarly, we believe the application of a geometric outlier 
elimination process for the SNF costs used to calculate the payment 
rates is an appropriate analytical approach consistent with rate 
setting for payment systems in other areas of Medicare. We believe that 
three standard deviations from the geometric mean of the log value for 
each cost component is a fair level of tolerance that focuses on the 
truly aberrant cost values. In addition, this process involved the 
removal of both high cost and low cost aberrant values, resulting in a 
more equitable and more meaningful computation of the rate components.
    We would also add that we used all FY 1995 cost reports that were 
available at the time of the development of the interim final rule and 
associated payment rates. While some cost reports may not have been 
available at that time, we constructed the rates based upon the best 
available data and are confident it was more than adequate for 
construction of the rates. Finally, a small number of cost reports were 
eliminated from the computation of the rates due to faulty or missing 
data on critical items.
    Comment: Several commenters expressed concern with our methodology 
related to the use of a MEDPAR analog in the standardization of the 
Federal payment rates. They questioned whether the MEDPAR data were 
sufficiently accurate for the purpose of developing payment rates and 
referred to the 28 percent difference, reported in the interim final 
rule (63 FR 26260), between the therapy index calculated from actual 
MDS assessments and the MEDPAR analog-generated index. They noted 
additional limitations of the analog, such as the lack of functional 
status information and recommended that we use actual MDS data, when 
available, to re-standardize the payment rates, possibly in conjunction 
with a rebasing of the cost data.
    Response: As noted in the interim final rule, an adequate national 
sample of MDS data for use in standardizing the Federal payment rates 
does not yet exist. In the absence of these data, we believe the MEDPAR 
analog, adjusted by the case-mix adjustment factor, provides an 
appropriate estimate of case-mix for the purpose of rate 
standardization. Based on our comparison of actual MDS and MEDPAR data, 
we concluded that limitations of the MEDPAR case-mix analog had no 
effect on the nursing component of the rate. Whatever inaccuracy 
existed in the MEDPAR analog data, the effect was limited to the 
therapy component and tended to increase, not decrease, the payment 
rate. The fact that the available MDS data yielded a therapy index 
value 29 percent higher than the MEDPAR analog data for the same cases 
demonstrates that use of the MEDPAR data alone would have made the 
therapy component inappropriately high. That is the reason that the 
correction factor was applied to the therapy component.
    Comment: A few commenters expressed concern about the adjustment we 
made to the cost report data in developing the Federal rates, to 
account for providers with cost reports that were not settled. One 
commenter indicated that all SNFs should not be penalized by this 
adjustment. It was also suggested that the rates be redone in the 
future to account for the actual change between the as-submitted cost 
reports and the settled ones. In addition, one comment

[[Page 41650]]

addressed the methodological application of the adjustment in the 
computation of the rates, suggesting an alternative where the 
adjustment is applied to total Medicare routine costs as opposed to 
only costs subject to the routine limit.
    Response: As we indicated in the interim final rule, the adjustment 
made pursuant to section 1888(e)(4)(A)(i) of the Act was applied to 
unsettled cost reports and was based on the average ratio for all 
providers in 1995, between their as-submitted and settled cost report. 
This adjustment is only applied to the cost report data of providers 
whose cost report was not settled as of the time we computed the rates. 
It is an actuarial adjustment required under the law that affects how 
the average SNF costs are determined and does not penalize other 
providers with settled reports.
    As we indicated in the interim final rule, these adjustment factors 
were validated using data from three previous years, that showed this 
ratio remains fairly constant. To update and change the rates in the 
future based on revised cost reports is impractical. Revisions are 
constantly being made to cost reports (for many years) and our 
validation exercise indicates the ratios are accurate.
    Finally, we have decided to incorporate the methodological 
alternative described above and will adjust the unadjusted nursing 
case-mix component of the urban and rural Federal rates by +$.32 and 
+$.24, respectively. In addition, we will adjust the unadjusted non-
case-mix component of the urban and rural Federal rate by +$.25 and 
+$.21, respectively. We believe this refinement in the application of 
the adjustment factor may result in a more accurate estimate of the 
routine costs of SNFs. This adjustment will be prospective and will be 
effective at the next scheduled update of the SNF PPS rates on October 
1, 1999. That is the earliest point at which we can implement changes 
to the standard claims processing systems.
    Comment: We received one comment asking why the issue of payments 
for low-volume SNFs was not addressed in the interim final rule.
    Response: The new Part A PPS established in section 1888(e) of the 
Act applies to all SNFs, and does not include any special treatment for 
low-volume SNFs. Section 1888(d) of the Act provided for a separate, 
optional payment system for SNFs with less than 1500 days (that is, 
low-volume SNFs) in their preceding cost reporting period. However, 
according to current law, this special payment system for low-volume 
SNFs is only in effect for cost reporting periods beginning before July 
1, 1998.
    Comment: Numerous comments were received from hospital-based 
facilities and their representatives indicating that the rates are too 
low and do not recognize the additional overhead incurred in a 
hospital-based facility. The commenters pointed out that the Federal 
rate uses a mean of the average for all freestanding providers and the 
average for all freestanding and hospital-based providers. This 
computation double counts freestanding providers, thus lowering the 
rates. Some commenters suggested the rates should be redone, or an add-
on or separate rate for freestanding versus hospital-based providers be 
established, similar to what was done for routine cost limits.
    Response: As many of the commenters have already recognized, the 
computation as described above is clearly mandated in the formula set 
out in section 1888(e)(4) of the Act.
    Comment: We received several comments regarding the wage index that 
is used to standardize and adjust the rates. The commenters suggested 
that the hospital wage index might not adequately represent wages paid 
in SNFs. Many of the commenters pointed out that SNF wages and hours 
are excluded from the hospital wage index computation, yet we are 
applying it to SNF payments. Most commenters want the wage index 
updated periodically and often to reflect the most recent changes in 
wages. One commenter suggested that we make other changes to the method 
for how the wage index is calculated by including costs that are now 
excluded, such as physician salaries, and excluding items like interns' 
and residents' salaries. There were also a few commenters who suggested 
that any move to a wage index based on SNF wage data be done slowly to 
ensure it is done accurately. Most commenters hope to see a wage index 
based on SNF data soon. In addition, many commenters want us to use a 
later wage index to reflect the recent mandated changes in the minimum 
wages rates paid to some employees.
    Response: As we indicated in the interim final rule, we are using 
the hospital wage data since the SNF wage data have not been completed. 
We used the latest completed hospital wage index that was available at 
the time of publication. It is our intent to use the latest wage index 
data that are complete and available when we publish rates or updates 
to the rates in the future.
    We have been unable to evaluate a wage index based on SNF wage 
data, as not all SNF providers reported data via the worksheet S-3. Now 
that we have a full year of wage data for both freestanding and 
hospital-based facilities, we will begin to evaluate and analyze the 
wage and hourly data from the SNF and hospital-based SNF cost reports. 
We will analyze and develop these data to evaluate their accuracy and 
validity. It is our intent, if the data are accurate, eventually to use 
and publish a wage index based on SNF wage data. However, it has been 
our experience in the past that when new wage data are used, they can 
result in enormous and erratic shifts in the wage indexes; many 
providers could be adversely affected while others experience a 
windfall. Therefore, before we use any SNF wage data, we will perform 
numerous edits to ensure quality. In addition, we will ask for public 
comments once the wage index data are available. Since we have not yet 
developed a wage index based on SNF wage data, we do not know the 
impact of excluding or including any particular cost centers.
    As discussed above and in the interim final rule, until an 
appropriate wage index based on SNF data is available, we will use the 
latest available hospital wage index data in making annual updates to 
the payment rates. We believe that SNFs and hospitals compete in the 
same labor market areas and, therefore, absent specific SNF wage data, 
we continue to believe that the hospital wage data accurately reflect 
the relative wage costs between labor areas. In making these annual 
updates, section 1888(e)(4)(G)(ii) of the Act requires that the 
application of this wage index be made in a manner that does not result 
in aggregate payments which are greater or less than would otherwise be 
made in the absence of the wage adjustment. For the initial period of 
the SNF PPS, the adjustment required by this section was accounted for 
through the standardization of the cost data that formed the basis for 
the per diem rate components. By means of standardization, each rate 
component was adjusted for wage index and case-mix differences so that 
aggregate payments were unaffected by the presence of these payment 
adjustors.
    Since, for the second PPS year (Federal rates effective October 1, 
1999), we plan to update the wage index applicable to SNF payments 
using the most recent hospital wage data, it is necessary to ensure 
that the aggregate payments in the second year are neither greater nor 
less than they would be if we continued to use the wage index from the 
initial year. This requirement, established pursuant to section 
1888(e)(4)(F)(ii) of the Act, will be met by multiplying each of the 
per diem rate components by the ratio of the volume

[[Page 41651]]

weighted mean wage adjustment factor (using the wage index from the 
initial year) to the volume weighted mean wage adjustment factor, using 
the wage index for the fiscal year beginning October 1, 1999. The same 
volume weights are used in both the numerator and denominator and will 
be derived from 1997 MedPAR data. The wage adjustment factor used in 
this calculation is defined as the labor share of the rate component 
multiplied by the wage index plus the non-labor share.
    Comment: We received two comments suggesting that the rates should 
have an add-on to account for the additional cost of completing 
resident assessments and the administrative costs associated with 
implementing this new payment system and other unfunded mandates.
    Response: We recognize that the increased frequency of assessment 
may result in additional costs for SNFs. However, as we indicated in 
response to an earlier comment, the Congress mandated both the basic 
formula and the fiscal year cost data that we are to use in developing 
the rates. To the extent that any of these assessment costs are 
included in the base year data, they are reflected in the rates. We 
would note that, as we indicated in the interim final rules discussion 
of the Paperwork Reduction Act, it was determined that the increased 
assessments required and the time to transmit them has a minimal impact 
on each individual facility. We recognize that providers will incur 
additional costs associated with more frequent assessments but we 
believe our current rate scheme is consistent with the law.
    Comment: Several commenters suggested that capital should not be 
part of the rate, suggesting that it be an add-on or pass-through to 
recognize those facilities that were committed to large capital 
expenditures incurred after 1995.
    Response: In accordance with section 1888(e)(2)(B) of the Act, the 
calculation of the Federal rates included the capital costs. We realize 
that committed capital expenditures after 1995 may create some hardship 
on some providers. However, we believe that the present rate scheme, 
which includes capital, is consistent with the language and intent of 
the statute. Further, we believe that the capital costs included in the 
rates are adequate to cover capital costs that would be incurred for 
providers over time.
    Comment: We received numerous requests, particularly from rural 
hospital-based facilities, suggesting that we allow providers to 
reclassify to a nearby adjacent urban area to receive the urban wage 
index or the rates applicable to the adjoining urban area, especially 
in circumstances where the hospital has been reclassified because it is 
in a county that was defined as urban under section 1886(d)(8)(B) of 
the Act (sometimes referred to as a ``Lugar'' county) or as a result of 
geographic reclassifications based on decisions of the Medicare 
Geographical Classification Review Board (MGCRB) or the Secretary under 
section 1886(d)(10) of the Act for purposes of the hospital PPS. These 
commenters suggested that the SNFs are competing in the same market as 
hospitals. One commenter suggested that a board similar to the MGCRB be 
established to consider an SNF's request to be reclassified.
    Response: While we have broad authority to develop an SNF wage 
index, we continue to believe that the reclassifications permitted for 
hospitals under sections 1886(d)(8)(B) and 1886(d)(10) of the Act are 
specific to hospitals. The Congress could have chosen to extend this 
provision to SNFs under section 1888(e) of the Act, but it did not. In 
addition, it has been our longstanding policy not to allow or recognize 
reclassification for SNFs for payment under the routine cost limits. 
Since we hope eventually to develop a wage index specific to SNFs, the 
possible effect of reclassification on the wage index is unclear and 
might have unintended consequences.
    Comment: Two comments were received asking that we consider an 
adjustment for the non-labor portion for Alaska and Hawaii providers, 
similar to what is done for routine cost limits for SNFs. These 
commenters suggested that these areas experience a much higher cost 
than those providers in the continental United States and, therefore, 
are entitled to this adjustment.
    Response: The hospital inpatient PPS does have an adjustment 
similar to that requested by these commenters; however, it was mandated 
by the statute governing the hospital PPS. By contrast, the Congress 
did not provide for such an adjustment in the legislation for the SNF 
PPS. Costs incurred by Alaska and Hawaii providers are, of course, 
included in the base year computation.
    Comment: One comment we received suggested that SNFs that were 
subject to the low-volume rates should have been eliminated from the 
calculation of the Federal rates. Furthermore, the commenter added that 
these providers should be exempt from PPS and continue to be paid under 
the low-volume rates.
    Response: Section 1888(e)(4)(A) of the Act specifically included 
low-volume facilities in the SNF PPS rate calculation.

C. Federal Rates--Part B Add-on

    In describing the data to be used in developing the Federal rates, 
section 1888(e)(4)(A)(ii) of the Act provides for including an estimate 
of the amounts payable under Part B for covered SNF services furnished 
during FY 1995 to individuals who were residents of a facility and 
receiving Part A covered services. This estimate is also known as the 
``Part B add-on.'' In this section of the preamble we are providing an 
expanded discussion of the development of the add-on for Part B 
services which is included in the Federal rates.
    Comment: We received a number of comments questioning the accuracy 
of our estimate of Medicare Part B allowable charges associated with 
patients in Medicare Part A stays during the FY 1995 base year used for 
determining both the Federal and facility-specific payment rates. 
Certain commenters cited evidence of missing bills and charges 
associated with individual providers for particular types of services 
(for example, laboratory services or rehabilitation therapy). In 
addition, several commenters suggested that we allow for an appeals 
process related to the Part B estimate associated with facility-
specific rates.
    Response: We took great care in both the methodological design and 
construction of the data sources necessary for the development of this 
estimate. We are aware of several independent industry efforts to 
review this methodology which found no defects in the design. In this 
final rule, we are providing the following, more detailed discussion of 
the methodology used for the development of the Part B estimate with 
the hope that doing so will clarify our process of determining this 
estimate and respond to questions and concerns.
    The facility-specific payment rate used for the transition is 
computed using the allowable costs of SNF services for cost reporting 
periods beginning in FY 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 cost reporting 
periods beginning in FY 1995 to individuals who were residents of the 
facility and receiving Part A covered services.
    These estimates were developed using allowed charges (including 
coinsurance and deductibles) from all Medicare Part

[[Page 41652]]

B claims actually submitted (other than those specifically excluded 
from the consolidated billing requirements, such as physician services) 
associated with SNF residents in a Part A stay during cost reporting 
periods that began in FY 1995. Applying the methodology described 
below, we provided the fiscal intermediaries (FIs) in May of 1998 with 
the total aggregate amount payable under Part B. In addition, at the 
request of the nursing home industry, we included a detailing of 
certain components of that amount for informational purposes.
    At that time, we instructed the FIs that only the item listed as 
``Total Part B Add-on Amount'' should be incorporated in the 
calculation of the facility-specific rates. We noted that, while the 
total Part B amount was an accurate estimate based on the universe of 
Part B claims, the assignment of allowed charges into the different 
service components was only an approximation due to the level of 
specificity of the codes and the variation in supplier billing and 
coding practices. The following description details the methodology 
used to determine the Part B add-on amounts:
1. Identify Cost Report Period
    For each SNF, determined appropriate FY 1995 cost report period. 
Used all FY 1995 cost reports on file as of January 30, 1998. If no FY 
1995 cost report was available, estimated a FY 1995 period from the 
latest cost report available.
2. Create List of Dates for SNF Stays for Each Beneficiary
    For each SNF, identified all Part A SNF claims with the discharge 
date on the claim falling within the cost report period. For each 
beneficiary, identified the dates of each stay during the cost report 
period.
3. Identify All Non-Physician Part B Claims
    Obtained all Part B physician, supplier, DME claims for 1994, 1995, 
and 1996. Omitted all professional services, defined as any service 
associated with a physician specialty code. Obtained all Part B 
outpatient department facility claims for 1994, 1995, and 1996.
4. Match List of Part A SNF Stays to Part B Claims
    By beneficiary, matched list of Part A SNF stays to Part B claims. 
Kept all non-physician services or facility claims falling on or 
between dates of admit and discharge for each SNF stay.
5. Drop Claims for DME
    For non-physician Part B claims, that is, not facility claims, 
reviewed all alphanumeric HCPCS and identified and dropped obvious DME 
codes, for example, wheelchairs, canes, transcutaneous electrical nerve 
stimulation (TENS), glucose monitors, commodes, walkers, bath and 
toilet aids, lifts, and oxygen equipment. Because coverage under the 
Part B DME benefit is not allowed for beneficiaries in an SNF stay, we 
believe that these codes probably occurred on either the day of 
admission or the day of discharge or were associated with erroneous 
payments.
6. Adjust Outpatient Claims to Reflect Costs
    Adjusted total charges on Part B outpatient facility bills to 
reflect total Medicare payments using a payment to charge ratio 
calculated from FY 95 outpatient cost reports. If no FY 95 cost report 
was available, used ratio from FY 94 or, if necessary, FY 93 cost 
report. If a FY 93 cost report was not available, used the payment 
amount associated with the claim.
7. Drop Outpatient Bills
    Removed claims with home health and dialysis provider numbers. 
Dropped Part B outpatient facility claims where the SNF provider number 
matched the hospital outpatient provider number. Dropped bills with at 
least one of the following revenue centers: surgery, emergency room 
(ER), ambulatory surgical center (ASC), cardiac catheterization, 
computerized axial tomography (CT) scan, and magnetic resonance imaging 
(MRI). These outpatient hospital services are excluded from the 
consolidated billing requirements.
8. Calculate Totals
    Calculated total allowed charges for all non-physician Part B 
claims. Calculated total payments for Part B outpatient facility 
claims.
9. Create Descriptive Categories Within Totals
    At request of certain members of the industry, created general 
categories to describe the distribution of dollars among types of 
services. Categories are not exact due to the lack of precision in 
categories for HCPCS ranges, local codes, and the structure of facility 
claims. For example, dollars for laboratory services could appear in 
(a) the ``laboratory'' category for non-physician Part B, (b) the 
``other'' category for non-physician Part B if the code was local, or 
(c) the outpatient department's (OPD) ``other'' category for laboratory 
tests conducted by an outpatient facility.
    Created categories for non-physician Part B claims using HCPCS and 
CPT ranges. Often, broad HCPCS categories capture some unrelated codes. 
In addition, temporary local codes had to be placed into the ``other'' 
category.
    The structure of the outpatient facility claims prevents 
associating a code with a specific dollar amount. Created outpatient 
therapy category by combining all claims from CORF hospitals and any 
claim with only one physical therapy (PT), occupational therapy (OT), 
or speech-language pathology (SLP) code. Left all remaining bills in 
OPD category.
    As discussed in the above description of our methodology, a number 
of factors prevented us from disaggregating the total Part B allowable 
charges precisely into distinct high level categories (for example, 
laboratory services). However, we decided to attempt to provide an 
approximate breakout by category to provide SNFs some notion of what 
their Part B service mix may have looked like in the FY 1995 base year.
    While we did note in the listing of Part B add-ons provided to FIs 
that the categorization of charges was only an approximation, this 
qualification may not have always been understood by providers. We 
regret any confusion caused by this breakout. We would note that our 
purpose in developing the total estimate of Part B allowable charges 
did not go beyond providing an accurate account of the total allowed 
charges to be included in the PPS rates, and we believe our estimate 
accomplished this. However, even if our purpose had been to map every 
charge and HCPCS code precisely to some broad category, once again, the 
data and structure of Medicare's billing system would not have 
permitted it.
    Beyond issues related to the categorization of Part B charges, we 
received no comments that contained substantiated evidence of 
systematic defects in the methodology or data. We would note that 
section 1888(e)(8)(B) of the Act limits administrative review of this 
estimate.
    Comment: We received numerous comments indicating that we should 
publish, or otherwise make available to the public and the industry, 
the complete and itemized data that were included in the computation of 
the rates. Of particular concern was the percentage of the nursing 
case-mix component of the rate that is attributable to nursing services 
and non-therapy ancillary costs. Some commenters suggested that they 
were

[[Page 41653]]

unable to replicate the rates we published with the data currently 
available.
    Response: Much of the data necessary to compute the rates have been 
available for some time, including the 1995 SNF cost reports and the 
MEDPAR files. We have also put data and information related to the 
computation of the case-mix indices on our SNF PPS website, at: 
<www.hcfa.gov/medicare/snfpps.htm>. A public use file containing the 
most significant data items relating to the calculation of the 
unadjusted Federal rates can also be found on the website. The 
standardization and case-mix correction factors are included with the 
public use data.
    It is our understanding from conversations with a number of users 
of the data that the public use file, along with the data that were 
already available, has been quite helpful in understanding the 
calculation of the rates. In addition, we have honored several requests 
under the Freedom of Information Act for data associated with the rate 
calculations, and have provided further information through data 
release agreements.
    Regarding the percentage of the nursing case-mix component of the 
rate that is attributable to nursing services and social services and 
non-therapy ancillary costs, we agreed with earlier comments to the 
interim final rule that the public would benefit by knowing the 
percentages for nursing and social services and non-therapy ancillary 
services included in the rate. Accordingly, on November 27, 1998, we 
published a notice in the Federal Register (63 FR 65561) to reopen 
comments to the interim final rule. We also provided the public with a 
percentage breakdown of the nursing case-mix component of the rates to 
the extent feasible.
    Comment: We received a number of comments concerning our discussion 
in the interim final rule related to OIG's proposal to adjust the 
Federal rates to account for costs in the 1995 base year cost data that 
result from medically unnecessary services or improper payments. These 
comments strongly recommended that we not proceed with such an 
adjustment, citing the already significant downward impact on the 
Federal rates of the BBA budgetary savings, the inadequate statistical 
basis for pursuing such an adjustment, and insufficient statutory 
authority for proceeding with an actuarial adjustment of this type to 
the rates.
    Response: We are concerned about the application of an adjustment 
that would have a downward impact on the Federal rates in light of the 
substantial reduction already incorporated into the calculation under 
the BBA requirements. According to the impact analysis contained in the 
interim final rule, this reduction is 17 percent on average. However, 
there is a substantial body of evidence, in the form of OIG and GAO 
studies, that at least suggests there were inappropriate services or 
improper payments associated with SNF services during the 1995 base 
year. Consequently, it could reasonably be argued that exclusion of the 
costs of these services from the cost base used to compute the Federal 
payment rates is appropriate.
    However, we believe that in considering the level of budgetary 
savings to incorporate into the statutory formula for establishing the 
Federal rates, the Congress took into account the existing cost base 
and aggregate SNF payment levels to determine an appropriate level of 
budgetary savings. Our policy with regard to this issue will be not to 
proceed with such an adjustment in the absence of specific statutory 
direction from the Congress.

D. Facility-specific Rates-Transition

    Section 1888(e)(2) of the Act provides, for most facilities, a 
phased transition from facility-specific payment rates (which reflect 
the individual facility's historical cost experience) to the Federal 
rates. During such a facility's first three cost reporting periods 
under the SNF PPS, it receives a blended payment rate, in which the 
Federal portion initially represents 25 percent of the facility's total 
payment rate, and then increases by 25 percent increments in each 
succeeding period until the facility is paid at the full Federal rate.
    In this section of the preamble, we are providing responses to 
comments on a number of issues related to the PPS transition period and 
the calculation of the facility-specific rates. These include issues 
related to the eligibility of certain SNFs for the transition. In 
addition, this section includes policy changes related to the 
calculation of the Federal rates for certain SNFs with short cost 
reporting periods and the eligibility for the transition of SNFs with 
cost reporting periods beginning in FY 1994 but including the entire FY 
1995 period.
    Comment: We received several comments suggesting that we should 
define a new SNF as one that first furnished patient care on or after 
October 1, 1995, rather than one that first received payment on or 
after October 1, 1995, as our present policy dictates.
    Response: We understand that there are many concerns regarding the 
issue of eligibility for the PPS transition. However, we believe 
current policy is consistent with the statute. Section 1888(e)(2)(E) of 
the Act specifically refers to the date an SNF first received payment 
from Medicare on or after October 1, 1995, as the threshold date. 
However, it is important to understand that the threshold for 
determining eligibility for the transition period affects providers in 
different ways, creating both winners and losers. Thus, while many 
providers may want to receive PPS transition payments, many other 
providers would rather be paid on the basis of the full Federal rate. 
We do not see the benefit of a policy change that creates losers under 
the system from winners and vice versa.
    Comment: We received a number of comments recommending that we 
modify our policy with regard to the PPS transition, to allow existing 
SNFs to elect to bypass the transition and be paid 100 percent of the 
Federal rate if they had experienced significant shifts in case-mix or 
significant capital expenditures after the 1995 base year used for 
determining the facility-specific rate. One commenter included a 
detailed assessment of this proposed policy, including an estimate of 
the aggregate costs to the Medicare program of its adoption.
    Response: We understand the concern of SNFs that have operated 
under the Medicare program since 1995 or earlier and yet find 
themselves disadvantaged by the PPS transition due to changes in their 
care delivery model or significant capital expenditures that occurred 
after the 1995 base year used for computing the facility-specific rate. 
However, we believe our present policy to be reasonable and consistent 
with the plain language of the statute. Section 1888(e)(2)(E)(ii) of 
the Act sets forth the requirements concerning whether a facility 
receives payment under the PPS transition or solely according to the 
Federal rates. This section provides that for SNFs that ``first 
received Medicare payment for services under this title on or after 
October 1, 1995, payment for such services shall be made under this 
subsection as if all services were furnished after the transition 
period.'' In our view, this language establishes clear criteria related 
to provider eligibility for the transition and the appropriate basis 
for Medicare payment. Accordingly, we have established a policy which 
relies on the date an SNF first received payment (interim or otherwise) 
from Medicare to determine the basis of their payment.
    Comment: We received one comment asking us to reconsider our policy 
regarding eligibility for the transition for providers that do not have 
a cost

[[Page 41654]]

reporting period beginning in FY 1995, but whose period contains the 
entire 1995 FY. Examples of these cost reporting periods include a 13-
month cost reporting period beginning September 1, 1994, and ending on 
September 30, 1995 or reporting periods with a floating beginning date 
(that is, tied to a specific day of the week) of September 27, 1994.
    Response: In Transmittal 405 of the Provider Reimbursement Manual 
(PRM, HCFA Pub. 15-1), we had initially required these providers to be 
paid at the Federal rate without a transition period, since these 
providers did not have a cost reporting period beginning in FY 1995 
(the statutory basis for computing the facility-specific transition 
rate). However, we have reconsidered our policy, because these 
providers did receive their first payment from Medicare before October 
1, 1995. These providers will now be eligible for the transition 
period.
    In addition, any provider that has been paid the full Federal rate 
based on our original policy contained in Transmittal 405 of the 
Provider Reimbursement Manual will be held harmless, since they have 
already transitioned to the PPS. In short, this means that providers 
with a cost reporting period beginning date in 1994 and whose period 
contains the full 1995 fiscal year (that is, the 12 months beginning 
October 1, 1994, through September 30, 1995), will be able to elect 
either a PPS transition based payment or the full Federal rate. 
Whichever rate the provider chooses must be used for all the years of 
the transition period.
    Comment: We received a number of comments regarding our policy on 
changes of ownership and mergers as they relate to a provider's 
eligibility for the PPS transition.
    Response: As discussed earlier in this section, SNFs that first 
received payment from Medicare on or after October 1, 1995 receive 
payment based on the Federal rate only while SNFs that first received 
payment from Medicare prior to October 1, 1995 are paid according to 
the transition rate and are precluded from receiving payment solely 
based on the Federal rate. In addition, our policy, as stated broadly 
in transmittal 405 of the Provider Reimbursement Manual, requires that, 
for purposes of determining a provider's eligibility for the 
transition, Medicare makes its determination based on the date of first 
Medicare payment (interim or otherwise) under the present provider 
number.
    For example, when an SNF undergoes a change in ownership, such as a 
merger or a consolidation, the payment is determined by the payment 
history of the surviving entity as indicated by the surviving SNF's 
provider number. This conforms with longstanding reimbursement policy 
and payment principles as applied under the former reasonable cost 
payment system and provides administrative simplicity in addressing 
complex transactions among SNFs, hospitals, and other entities.
    Comment: We received several comments recommending that we adopt a 
policy where SNFs would be allowed to elect to bypass the transition 
period and receive payment based on the full Federal rate.
    Response: Similar to our response to an earlier comment, we 
understand how the transition payment methodology may disadvantage 
certain providers. However, section 1888(e)(1) and (2)(E) of the Act 
specifically addresses the issue of which providers are paid the full 
Federal rate and which ones must receive transition payments. As we 
discussed, the statute requires that SNFs that received their first 
payment under Medicare before October 1, 1995, are to be paid based on 
the transition payment methodology described in the interim final rule.
    Comment: We received a number of comments related to the Part B 
add-on and the methodology for computing facility-specific rates for 
SNFs that participated in the Multistate Nursing Home Case-Mix and 
Quality Demonstration (NHCMQD) in 1997. Under the interim final rule, 
these facilities did not receive a Part B add-on as part of their 
facility-specific rate. The commenters argued that a Part B add-on is 
appropriate for these SNFs. Several commenters provided detailed 
arguments asserting that a Part B add-on for these providers is legally 
supportable under the statute.
    Response: It appears to us that a Part B add-on to the facility-
specific rate for providers participating in the NHCMQD in 1997 could 
well be an appropriate payment policy in light of the historical 
circumstances.
    During the NHCMQD, many Medicare Part A patients in these SNFs 
received certain ancillary items or services provided by suppliers who 
then billed Medicare directly under Part B. However, we find that the 
statutory language at section 1888(e)(3)(B) of the Act, that provides 
the formula for computing facility-specific rates for NHCMQD providers, 
does not support this policy outcome.
    Accordingly, we are maintaining the policy, set forth in the 
interim final rule, of not including a Part B add-on in the calculation 
of facility-specific rates for SNFs participating in the NHCMQD in 
1997. We believe this policy is consistent with the statute. The 
statute treats NHCMQD providers differently from other facilities. For 
most facilities, the statute directs the Secretary to use a 1995 base 
year and provides for a Part B ``add-on''; for NHCMQD facilities, the 
statute directs the Secretary to use a later base year (1997) and does 
not provide for a Part B ``add-on.'' Although a Part B add-on for 
NHCMQD facilities might be appropriate as a conceptual matter, the 
statute does not provide for a Part B add-on and we do not believe the 
lack of a Part B add-on leads to an absurd result.
    In our effort to ensure the appropriateness of the payment 
methodology set forth in the interim final rule, we have decided to 
make a modification to one aspect of the calculation of the facility 
specific rates. This change only affects the methodology for 
determining the inflation factor applied in the calculation of the 
facility specific rates for certain providers with short cost reporting 
periods (that is, less than 12 months).
    There were three different types of short periods discussed in the 
interim final rule:
    a. A short period in the base year,
    b. A short period in the initial period, and
    c. A short period between the base year and the initial period.
    The interim final rule included separate instructions on how to 
determine which factor to use for an SNF having a short period. There 
was, however, no discussion of how to determine which factor to use if 
a SNF had more than one short period. For example, an SNF could have a 
short period in the base year and a short period between the base year 
and the initial period of the PPS.
    We now believe that the instructions for item c should not be 
applied to SNFs which have both a short period in the base year and a 
short period between the base year and the initial period. If an SNF 
has a short period in the base year and a short period between the base 
year and the initial period, the instructions in section (a) should be 
applied using the short period in the base year.

E. MDS Assessments

    Under the SNF PPS, the Federal rate incorporates adjustments to 
account for case-mix, using a resident classification system that 
accounts for the relative resource utilization of different patient 
types. This classification system, RUG-III, assigns beneficiaries into 
one of 44

[[Page 41655]]

groups, using assessment data from the MDS that the SNF completes 
according to an assessment schedule specifically designed for Medicare 
payment.
    In the interim final rule, we discussed issues relating to the use 
of the RUG-III classification system under the SNF PPS, including 
scheduling and other requirements pertaining to the MDS, use of the 
RUG-III ``grouper'' software, and the use of an Other Medicare Required 
Assessment (OMRA) in certain situations following the discontinuation 
of rehabilitation therapy services.
    In this section of the preamble, we are providing responses to 
comments on a number of issues related to the use of the OMRA, grace 
days, and the Health Insurance Prospective Payment System (HIPPS) codes 
used to bill Medicare Part A covered SNF stays. We also address 
comments and questions about the midnight rule and its effect on the 
MDS schedule, and provide clarification regarding counting therapy 
minutes on the MDS, as well as the requirements for the therapy plan of 
treatment. In addition, we are responding to comments concerning 
recognition of respiratory therapy and recreational therapy in the 
payment rates and on the MDS.
    Comment: We received numerous suggestions of ways to improve the 
MDS instrument, the assessment schedule, and the classification system. 
These comments included suggestions both to increase and decrease the 
frequency of required MDS assessments, to improve the MDS staging of 
pressure ulcers, ideas for modifications to individual RUG-III groups, 
and commenters' requests that we be more directive in our rules about 
how facilities are to spend the payments they receive from Medicare.
    Response: We appreciate all of the suggestions and will consider 
them in our future work in these areas. The comments were very specific 
and too numerous to address in this context. Rather, the subject matter 
and degree of specificity of some of these suggested changes would be 
more appropriately addressed through manual issuances.
    It is also worth noting that at this time, the SNF PPS has been in 
effect in most facilities for less than 12 months. In the future, when 
providers have achieved greater stability and familiarity with the 
system, and we have additional data to guide our decisions, we can 
consider making additional refinements such as those suggested by the 
commenters.
1. Billing Issues
    Comment: There were several questions submitted with the comments 
regarding the HIPPS codes used for billing SNF PPS claims. The 
questions focused on how to use these codes for billing as 
distinguished from MDS coding instructions.
    Response: Although these codes were not mentioned in the interim 
final rule, we believe that it would be helpful and appropriate to 
explain here what the HIPPS codes are as distinct from the MDS 
information. The HIPPS codes are 5-character codes used solely for 
billing the Medicare FI for the Part A SNF stay. The codes reflect the 
RUG-III group into which the beneficiary classified and the reason for 
the assessment used for determining the classification. The HIPPS code 
does not appear anywhere on the MDS. The reason for assessment 
reflected in the HIPPS code is based on information coded in items A8a 
and A8b of the MDS, but is not a duplication of the data reported on 
the MDS. Rather, a conversion must be made from the information on the 
MDS to the reason for assessment identifier that comprises the last two 
digits of the HIPPS code.
    For instructions for billing on the Unified Billing Form 92 (UB-
92), see Transmittal 405 of the Provider Reimbursement Manual (PRM, 
HCFA Pub. 15-1, 7/98) published on our website. These instructions are 
sent to our FIs and are also available through them.
    Further, in the context of billing procedures, we would also like 
to use this opportunity to clarify our policy on Periodic Interim 
Payments (PIP). Since the inception of the Medicare program, SNFs 
reimbursed on the basis of reasonable costs received interim payments 
during their cost reporting year for the cost of Part A services 
provided to Medicare beneficiaries. For many years, SNFs have also been 
permitted to receive PIP--interim payments paid in equal biweekly 
amounts--for these services if they met the requirements in 
Sec. 413.64(h) and received intermediary approval. Since July 1987, the 
statutory authority for PIP for qualifying SNFs has been in section 
1815(e)(2) of the Act. Section 1815(e)(1) of the Act was added to 
include certain requirements, in addition to the requirements in 
Sec. 413.64(h), specifically applicable to hospitals receiving 
prospective payments under section 1886(d) of the Act in order for the 
hospitals to receive PIP. Section 1815(e)(2) of the Act clarified that 
the additional requirements applicable to those hospitals were not 
applicable to other types of providers, including SNFs, entitled to 
PIP. Accordingly, the regulations at Sec. 413.64(h) were revised to 
provide for the continuing availability of PIP after July 1987 for 
these other types of providers, including for Part A services provided 
by SNFs.
    Interim payments, including PIP, provide cost reimbursed providers 
with estimated payments during the cost reporting year pending 
submittal and subsequent settlement of a Medicare cost report. A 
provider can submit its cost report to the intermediary as late as the 
last day of the fifth month after the end of the cost reporting period. 
Following submittal, the intermediary's determination of Medicare cost 
reimbursement to the provider for services provided to beneficiaries 
during the year cannot be made until the cost report is reviewed, 
sometimes including audit of the provider's records. Because 
determination of Medicare reimbursement takes place after the end of 
the cost reporting year, interim payments are needed during the year 
until this final payment can be determined.
    Because a cost report is not required to calculate prospective 
payments, interim payments are not necessary to a provider for services 
paid on the basis of prospective payments. Nevertheless, with the 
exception of special requirements for hospitals receiving prospective 
payments under section 1886(d) of the Act, section 1815(e) currently 
provides for the availability of PIP for certain services, including 
Part A services provided by SNFs, if the requirements in Sec. 413.64(h) 
are met. It does not prohibit PIP for SNFs receiving prospective 
payments.
    While the BBA eliminated PIP under the provisions mandating a PPS 
for home health agencies (HHAs), the Congress made no such requirement 
under the statutory provisions related to SNF PPS. This may be because, 
like the preceding SNF payment system, the SNF PPS continues to rely on 
a daily payment amount, while for the HHA PPS, changes in the unit of 
payment were contemplated. However, at this time, we see no reason to 
discontinue administratively our existing policy of allowing PIP for 
qualified SNFs, though we may choose to evaluate its continuing need in 
the future.
    Therefore, we are permitting the continued availability of PIP for 
services of SNFs paid under the PPS. For those services, PIP is based 
on estimated prospective payments for the year rather than on estimated 
cost reimbursement. An SNF receiving prospective payments, whether or 
not it received PIP prior to receiving prospective payments, may 
receive PIP if it meets the requirements in Sec. 413.64(h) and receives 
approval by its intermediary. Likewise, if an intermediary determines 
that an SNF which received PIP prior to

[[Page 41656]]

receiving prospective payments is no longer entitled to receive PIP, it 
will remove the SNF from PIP. As provided in Sec. 413.64(h)(5), 
intermediary approval of PIP is conditioned upon the intermediary's 
best judgment as to whether payment can be made under the PIP method 
without undue risk of its resulting in an overpayment to the provider.
    An SNF can receive Medicare payment for the bad debts of Medicare 
beneficiaries if it meets the requirements at Sec. 413.80 and 
implementing instructions. Payment for these bad debts are not included 
in the prospective payments but rather are claimed on the Medicare cost 
report. Also, some SNFs may incur costs for an approved medical 
education program or may incur other costs that are not included in the 
prospective payment. Payment for these costs are determined based on 
the completion of a Medicare cost report. Because final payment for 
Medicare bad debts and for costs paid outside the prospective payment 
system is not determined until the cost report is settled, it is 
appropriate that SNFs which receive prospective payments should receive 
estimated interim payments during the year for bad debts and for costs 
paid outside the prospective payment system. Payments for these costs 
are made in equal biweekly payments in the same manner as PIP. There is 
no requirement for an SNF to meet in order to receive biweekly payments 
for these costs because it is the only type of interim payment made for 
them.
    The new regulations providing for PIP for SNFs receiving 
prospective payments and for biweekly interim payments for costs 
outside the prospective payment system closely follow the regulations 
at Sec. 412.116 which provide for PIP for hospitals receiving 
prospective payments under section 1886(d) of the Act, as adjusted to 
remove provisions specifically applicable to those hospitals. As with 
Sec. 412.116 for hospitals and Sec. 413.64 for SNFs under the previous 
cost-based system, these regulations for SNFs also provide for 
accelerated payments in certain situations.
2. Corrections
    Comment: We received several comments with questions and 
suggestions regarding the policies governing the correction of MDS 
errors and billing errors.
    Response: The MDS corrections policy is set forth in the State 
Operations Manual (SOM, HCFA Pub. 7) by HCFA's Center for Medicaid and 
State Operations. The corrections policy applies to all users of the 
MDS and, thus, is beyond the scope of this regulation. We address 
issues and provide clarification of Medicare policy regarding how to 
correct or adjust SNF Part A bills to the Medicare program in the 
Provider Reimbursement Manual.
3. Other Medicare Required Assessment (OMRA)
    Comment: There were a number of questions about the OMRA. These 
included questions about when the OMRA is to be performed and whether 
it is a full or comprehensive assessment.
    Response: An OMRA is required 8 to 10 days after rehabilitation 
therapy is discontinued for Medicare beneficiaries who have been 
receiving rehabilitation therapy in the SNF. Specifically, there is 
confusion regarding whether or not this assessment type is required in 
certain circumstances. For example, when the beneficiary has no further 
need for skilled care and has been moved out of the Medicare-certified 
portion of the institution before the eighth day following the 
cessation of rehabilitation services or when one or two of three 
therapy services are discontinued. As stated in our corrections notice 
to the interim final rule, published in the Federal Register on October 
5, 1998 (63 FR 53301), the OMRA is not required to be a comprehensive 
assessment. There are no PPS requirements for comprehensive assessments 
(that is, those including Resident Assessment Protocols (RAPs)). 
Comprehensive assessments are only required for clinical reasons, as 
they have been since implementation of the nursing home reform 
requirements enacted in the Omnibus Budget Reconciliation Act of 1987 
(OBRA 87, Public Law 100-203).
    An SNF must perform an OMRA only for those beneficiaries who 
continue to have skilled care requirements after their rehabilitation 
therapy services have been discontinued. For those beneficiaries who 
are not ready for discharge from the facility, and who continue to 
require a Medicare covered skilled level of care, an OMRA must be 
performed in order to obtain an accurate classification into one of the 
non-therapy RUG-III groups.
    The assessment reference date of the OMRA must be set on day 8, 9, 
or 10 after the last day any rehabilitation therapy services were 
provided. This timing ensures that no therapy minutes will be captured 
on the OMRA and that the beneficiary's new classification will be into 
one of the non-therapy RUG-III groups. An OMRA will always result in 
classification into a non-therapy RUG-III group. For the days between 
the cessation of rehabilitation therapy and the assessment reference 
date of the OMRA, the beneficiary continues to be covered at the 
therapy RUG-III group level to which he or she was classified before 
cessation.
    We expect that there will be many cases in which the beneficiary 
will be discharged from the facility shortly after rehabilitation 
therapy services end. Before PPS, beneficiaries were often discharged 
from the SNF immediately upon the discontinuation of rehabilitation 
therapies. Likewise, many SNF residents who received rehabilitation 
therapy services under Medicare Part A were moved to a non-Medicare 
level of care following the cessation of therapy services. These same 
patterns are expected to continue under the PPS.
    In circumstances in which the beneficiary is discharged from the 
facility (or from the Medicare-certified portion of a larger, 
noncertified institution) before the eighth day following the end of 
all rehabilitation therapy, there is no expectation by Medicare that an 
OMRA will be performed. If the beneficiary remains in the Medicare-
certified facility through the eighth day following rehabilitation 
therapy discontinuation, there must be some clinical reason for his or 
her continuing skilled stay that is supported by documentation in the 
medical record. We realize that there will be cases in which the 
beneficiary stays in the SNF for a number of days after rehabilitation 
therapy ends, in order for the facility staff to verify that his or her 
status is stable and to assure that the plans for his or her next 
destination are appropriate and in the best interests of the 
beneficiary.
    By contrast, always waiting to perform the OMRA to verify that the 
beneficiary is stable and no longer in need of skilled nursing or 
therapy services is not appropriate. A pattern of OMRA assessments 
immediately preceding discharge from the facility, or from the Medicare 
level of care within the facility, would indicate that perhaps the 
facility is at times using those 8 to 10 days inappropriately. We 
believe it is unfair to the beneficiary to use any of the 100 Medicare 
SNF benefit days available in a benefit period unless he or she is 
actually in need of skilled services. Likewise, it is an inappropriate 
use of Medicare trust fund dollars for Medicare to pay for SNF days 
that are not needed by the beneficiary.
    The beneficiary should not be kept in a Medicare Part A stay if 
skilled services are neither needed, nor being provided. We believe 
that nursing homes' clinical staff should know when there are no

[[Page 41657]]

skilled services being provided to a beneficiary. Our guidelines 
provided in the PRM (Transmittal 405) reinforce the expectation that 
facilities may, and in fact are expected to, act in the best interest 
of the beneficiary with regard to use of the beneficiary's limited SNF 
benefit days, by ending Medicare Part A coverage appropriately. (See 
also the discussion below regarding circumstances that serve to 
discontinue a presumption that the SNF level of care requirement is met 
by a beneficiary who has classified into one of the upper 26 RUG-III 
groups.)

F. Certification and Recertification

    Comment: We received a few comments regarding the statutory 
requirement for initial certification and periodic recertification as 
to level of care, as required under section 1814(a)(2) of the Act.
    Response: The comments regarding this particular provision are 
addressed later, in the discussion on coverage and level of care 
determinations under the SNF PPS. However, we would like to take this 
opportunity to clarify that the required certification and 
recertification statements are not the same as any requirements 
specifically related to the plan of treatment for therapy that is 
required for purposes of coverage, or to the overall requirement for 
the multidisciplinary plan of care required by the long-term care 
facility requirements for participation at section 1819(b)(2) of the 
Act.

G. MDS Scheduling Requirements

1. Grace Days
    Comment: We received several comments asking about the appropriate 
use of the 3-day grace period provided for the Medicare 5-day 
assessment. There is some confusion about when use of the grace days 
could result in the facility being at a high risk for an audit.
    Response: Days six, seven, and eight, of the Medicare covered stay, 
were provided as grace days for setting the assessment reference date 
for the Medicare 5-day assessment. This assessment is to have an 
assessment reference date (MDS 2.0 Item A3a) of any day one through 
eight of the Medicare Part A stay. Days one through five are optimal 
but days six through eight are also acceptable, and for some residents 
may actually be more appropriate; for example, to allow maximum 
flexibility for nurses to determine when to set the assessment 
reference date for the beneficiary's MDS, and thereby lessen the burden 
of the increased frequency of assessments that accompanied the PPS. 
Thus, the resident can be assessed using any one of these first eight 
days as the assessment reference date for the Medicare-required 5-day 
assessment.
    However, we discourage the routine use of grace days for assessing 
every Medicare admission. We plan to identify patterns of inappropriate 
use as we gain a better understanding of what facilities' practice 
patterns are. When a facility routinely uses a grace day as the 
assessment reference date for the 5-day assessment, it loses the 
cushion that these days provide against performing the MDS later than 
day eight and, thus, risks being faced with payment at the default 
rate.
    At this time our main interest is to encourage facilities to 
perform assessments timely and to recognize the grace days as a cushion 
and to use them as such, rather than as deadlines for setting each 
beneficiary's assessment reference date. The grace days are also 
provided to offset any incentive that facilities may have to initiate 
therapy services before the beneficiary is able to tolerate that level 
of activity.
    Our discussion in the interim final rule about the possibility of 
audits was intended to address the possible practice of routinely using 
grace days for Medicare assessments. We were cognizant that the routine 
use of a grace day for the 5-day assessment would pose a temptation to 
back-date the assessment fraudulently when day eight was missed. We 
believed that any facility that routinely used grace days for the 
required assessments was liable to have assessments billed at the 
default rate; and that the absence of default rate billings in the 
facility's claims might indicate that some misrepresentation of the 
assessment reference dates had occurred.
    Unlike the routine use of grace days described above, we do expect 
that many beneficiaries who classify into the rehabilitation category 
will have 5-day assessment reference dates that fall on grace days. 
There are many cases in which the beneficiary is not physically able to 
begin therapy services until he or she has been in the facility for a 
few days. Thus, for a beneficiary who does not begin receiving 
rehabilitation therapy until the fifth, sixth, or seventh day of his or 
her SNF stay, the assessment reference date may be set for one of the 
grace days in order to capture an adequate number of days and minutes 
in section P of the current version of the MDS to qualify the resident 
for classification into one of the rehabilitation therapy RUG-III 
groups.
    Another reason for the provision of three grace days for the 5-day 
assessment was to make it possible for beneficiaries to classify into 
the two highest RUG-III rehabilitation sub-categories. Classification 
into the Ultra High and Very High Rehabilitation sub-categories is not 
possible unless the beneficiary receives the sub-category's minimum 
level of services during the first seven days of the stay.
    We also intended to minimize the incentive to facilities to provide 
too high a level of rehabilitation therapy to newly admitted 
beneficiaries. Having these extra few days allows time for those 
beneficiaries who need it, to stabilize from the acute care setting and 
be prepared for the beginning of rehabilitation in the SNF. We expect 
facilities will not compromise any beneficiary's health by beginning 
rehabilitation therapy prematurely or at a level that is too rigorous 
for the individual's status. In summary, use of grace days is 
acceptable and permitted for patients with any condition. However, a 
facility that uses grace days routinely may be subject to audit to 
determine that assessment reference dates are accurately reflected.
    Comment: One commenter requested that we modify the statement at 
section II.B.7 of the interim final rule that states SNFs ``must submit 
the Resident Assessment Protocols (RAPs) with either the 5-day or the 
14-day assessment'' to indicate that the SNFs must submit the completed 
RAP Summary Form, section V of the MDS with either the 5-day or 14-day 
assessment.
    Response: This may be a helpful clarification for providers; 
however, we want to be certain that providers fully understand this 
requirement. We will take this opportunity to make clear that the RAPs 
are not a PPS requirement. The requirements for completion of section V 
and the care planning responsibilities of facility clinical staff are 
unchanged by the PPS. We included the clinical requirement for RAPs in 
the interim final rule in an effort to help providers to understand how 
the Medicare required SNF PPS assessments coordinate with the required 
clinical assessments.
    The requirement for RAPs is entirely outside of the SNF PPS. In 
fact, if the clinical initial admission assessment (item AA8a of the 
MDS 2.0 = ``01'') was performed before the beneficiary started his 
Medicare covered SNF stay, neither the Medicare required 5-day, nor the 
Medicare 14-day assessment is required to have a completed section V. 
There are no care planning requirements associated with any full MDS 
assessment performed solely for the purpose of complying with the 
Medicare assessment schedule for a Part

[[Page 41658]]

A Medicare beneficiary's SNF stay. The Medicare PPS requirements are 
separate from the clinical requirements. However, we have designed the 
Medicare requirements so that an SNF can coordinate the scheduling of 
assessments to avoid duplication of effort.
2. Completion and Locking
    For Medicare payment, we are requiring that any assessment, 
including the 5-day, must be ``completed'' (that is, signed by all 
members of the care team) within 14 days of the assessment reference 
date (MDS item A3a). That is, the completion date at MDS item R2b, must 
be a date that is within 14 days of the date at A3a. Then the 
assessment must be ``locked'' within seven days of the date at R2b, and 
transmitted to the State in which the SNF operates within 31 days of 
the final lock date (State Operations Manual, HCFA Pub. 7).
    However, there are other considerations to keep in mind. There is 
still the clinical requirement that an Initial Admission Assessment 
must be ``completed'' by the 14th day of the nursing home stay. This 
means that for a Medicare beneficiary who is newly admitted to the SNF 
for a covered Part A stay, the SNF must complete a comprehensive MDS by 
day 14, regardless of the assessment reference dates on the Medicare-
required 5 day and 14 day assessments.
    As has been the case since the OBRA 1987 requirements were 
implemented, a comprehensive assessment (Initial Admission Assessment) 
is due to be completed by the 14th day of the SNF stay. In addition, 
for Medicare beneficiaries in the SNF for a covered Part A stay, a 5-
day assessment must be performed, with an assessment reference date on 
any day one through eight of the Medicare Part A covered stay, and must 
be completed within 14 days of the assessment reference date. Also, by 
the end of the second week in the Medicare Part A covered stay, the 
Medicare 14-day assessment must be performed. This assessment must have 
an assessment reference date of any day 11 through 19 (including the 5-
day grace period provided for this assessment).
    Given these requirements during the first weeks of the SNF stay, 
and considering that Medicare Part A coverage often begins on the day 
of admission, we believe that in many cases nursing homes will opt to 
complete a single assessment to satisfy the requirements for both the 
5-day (or 14-day) assessment and the Initial Admission Assessment. In 
this example, the Medicare 5-day assessment, with an assessment 
reference date of any day, one through eight of the stay, will be a 
comprehensive assessment and will have to be completed within 14 days 
of the start of the SNF stay. The day of admission is counted as day 
one. The assessment must comply with the requirements for the Initial 
Admission Assessment. That is, it must be a comprehensive assessment, 
including the RAPs.
    When the Medicare 5-day assessment is also used to fulfill the 
requirement for the Initial Admission Assessment, the Medicare 14-day 
assessment may be performed using any day 11 through 14 of the stay as 
the assessment reference date (MDS item A3a) and, in addition, the SNF 
may use the five available grace days (through day 19), if necessary. 
The Medicare 14-day assessment must then be completed (dated at item 
R2b) 14 days after the assessment reference date, locked in seven days, 
and so forth. Keep in mind that there are no grace days for completion 
of the Initial Admission Assessment. As always, the Initial Admission 
Assessment must be completed by day 14. Another factor to consider in 
timing completion and locking of assessments is that bills may only be 
sent for assessments that have been locked.
3. Discharge and Leave of Absence
    Comment: One commenter asked for a definition of ``leave of 
absence'' as distinguished from a ``discharge.''
    Response: Although this is not a distinction that is specific to 
the PPS, we would like to define these terms in the context of 
clarifying another somewhat misunderstood aspect of Medicare coverage, 
the so-called ``midnight rule'' and the clinical requirements for 
Discharge forms and Re-Entry Tracking forms. We received questions from 
other commenters on how to handle cases in which the beneficiary is out 
of the facility at the time of census-taking, midnight. These 
activities are all interrelated and have generated many questions 
during the initial phase of PPS implementation. There are a number of 
reasons why a beneficiary may leave the SNF for a ``leave of absence.'' 
These include a temporary home visit, a temporary therapeutic leave, or 
a hospital observational stay of less than 24 hours in which the 
beneficiary is not formally admitted to the hospital and is not 
discharged from the SNF. In each of these situations, there is no 
requirement for the SNF to complete a Discharge or a Re-Entry Tracking 
form.
    When a beneficiary goes to an acute care hospital emergency room 
(ER) during his or her SNF stay and is in the ER at midnight, there is 
an additional aspect with regard to Medicare payment. According to 
Medicare rules, the day preceding the midnight on which the beneficiary 
was absent from the facility becomes a day for which the SNF may not 
bill Part A of Medicare. This is known as the ``midnight rule.'' 
However, for clinical purposes, as long as the beneficiary returns to 
the facility in less than 24 hours, was not admitted to the hospital, 
and was not discharged from the SNF, this time in the ER is considered 
a ``leave of absence'' and requires no discharge form.
    Likewise, from the perspective of Medicare payment under PPS, there 
is no requirement for any additional assessment. The day preceding the 
midnight is not a covered Part A day and, therefore, the Medicare 
assessment ``clock'' is altered by skipping that day in calculating 
when the next Medicare assessment is due. From a clinical standpoint, 
the leave of absence does not affect the ``clock'' for the clinical 
assessments.
    For example, if the beneficiary is due for his 30-day assessment on 
March 30 (day 30 of his Medicare covered stay), but he spends midnight 
of March 27 in the ER, day 30 of his Medicare Part A covered stay now 
falls on March 31, as March 27 does not count as one of the 
beneficiary's 100 days of Medicare SNF care. In other words, the count 
of days in the Medicare covered stay changes when there is a noncovered 
day because the facility cannot count that day as one of the 
beneficiary's benefit days. Given the flexibility of the assessment 
windows for the Medicare assessments, altering the count of days as 
described here should have no more than a negligible effect on 
assessment scheduling for facilities.
    Of course, a beneficiary who is required to be in the ER at 
midnight may well have experienced a significant change in clinical 
status. In that case, the facility must comply with the clinical 
requirement to complete a Significant Change in Status Assessment when 
the beneficiary returns to the SNF. The Medicare payment requirements 
and the midnight rule have no bearing on this requirement for 
completion of a Significant Change in Status Assessment.
    Alternatively, if the beneficiary is in the ER for more than 24 
hours, or is actually admitted to the hospital or discharged from the 
SNF, a Discharge Tracking form is required. In addition, when the 
beneficiary returns to the SNF, a Re-Entry Tracking form is required, 
and a Return/Readmission Assessment (MDS 2.0 item A8b=5) must be 
performed to restart the Medicare assessment schedule. The Return/

[[Page 41659]]

Readmission Assessment fulfills the requirement for a Medicare 5-day 
assessment in this situation, and the next required assessment would be 
the Medicare 14-day assessment.
    Finally, with regard to MDS scheduling requirements, we are taking 
this opportunity to clarify the regulations text at Sec. 413.343(b), 
which specifies the assessment schedule required under the SNF PPS. The 
current language requires the performance of such assessments on the 
5th, 14th, 30th, 60th, and 90th days ``following admission.'' However, 
as indicated in the preceding discussion, it is not the admission date 
per se that determines the start of the Medicare assessment schedule, 
but rather, the commencement of Medicare-covered care in the SNF. 
Although Medicare-covered posthospital SNF care often does begin 
immediately upon a beneficiary's admission to the SNF, the existing 
language fails to address those situations in which such care does not 
commence until sometime after the day of admission. The Medicare 
required assessment schedule is based only on those days in the 
Medicare Part A covered stay and, thus, cannot be scheduled based on 
the day of admission per se. Therefore, we are revising the language in 
the regulations text to take into account the possibility that a 
beneficiary's ``posthospital SNF care'' (that is, SNF care that is 
covered under Medicare Part A) may begin subsequent to the day of his 
or her actual admission to the facility. The Medicare required 
assessments are to be performed so that, using the first day of 
posthospital SNF care as day 1, there is a full MDS assessment on the 
5th day, the 14th day, the 30th day, the 60th day and the 90th day of 
the SNF stay.

H. Other Medicare MDS Requirements

    In the interim final rule, we stated that collection of medication 
information using a revised version of section U of the MDS would be 
required under PPS, beginning October 1, 1999. The criteria we 
established for this process anticipated that a refined section U would 
be developed to facilitate streamlined data collection, maximize data 
accuracy, and minimize burden to facilities. We have, to date, made 
considerable progress in our work on the section U refinements. 
However, due to systems constraints resulting from the need to achieve 
Year 2000 (Y2K) compliance (see the further discussion of the Y2K issue 
below in the context of the partial delay in SNF consolidated billing 
implementation), we will not be able to implement the refined version 
of section U until after the first months of the year 2000 have passed. 
Therefore, we have determined that the most straightforward and least 
burdensome approach is to defer section U implementation until October 
1, 2000.

I. Medical Review

    Comment: We received several comments requesting that we publish 
the medical review criteria to be used now that PPS is in place. Also, 
there were requests that we institute consistent medical review 
policies across FIs.
    Response: We are currently formalizing the medical review criteria 
that will be used in the review of SNF PPS bills. Certainly, one of the 
primary goals of the new policy is to provide reviewers with guidelines 
that will facilitate consistent national medical review policy, one of 
the initial goals of implementing the PPS. We recently published a PM 
(PM transmittal No. A-99-20, May 1999) to instruct medical reviewers in 
the new process. One aspect of the reviews of SNF PPS bills to be 
performed by the FIs focuses on the MDS information and its consistency 
with the documentation in the rest of the medical record. In addition, 
the review process focuses on identification of instances in which 
inappropriate services were provided or in which the beneficiary did 
not meet the requirements for Medicare Part A coverage in an SNF.
    Comment: There were questions about how the MDS information might 
be matched to claims data to facilitate monitoring or auditing of SNF 
reporting practices.
    Response: The process for matching the bill to the MDS takes place 
at HCFA. We use the bill data forwarded to us by the FIs to match to 
the appropriate MDS from the HCFA MDS Repository. From these matched or 
unmatched files, we generate various reports for use by HCFA and the 
FIs in their audit functions.
    Comment: We received a comment requesting that we instruct FIs to 
give demand bills a high priority within the review process and to 
process these submissions no later than 30 days from the date of the 
request.
    Response: The policy governing how demand bills will be processed 
under the SNF PPS will be determined by considering the FIs' overall 
workloads, of which the SNF PPS represents only a small portion.
    Comment: A commenter requested that we generate and disseminate to 
the nursing home industry and to the payers, the full process of 
transmission of clinical Medicare Part A information and claims 
submission requirements, including documentation requirements needed by 
the fiscal intermediary for late assessment reference dates.
    Response: The requirements for the transmission of all MDS 
assessments can be found in the Federal Register published on December 
23, 1997 (62 FR 67174). There are no separate requirements for Medicare 
Part A information. The facility must submit the MDS to the State in 
which it operates and the State transmits it to us. In contrast, the 
SNF submits claims to the FI, as they did before PPS. Each claim is 
transmitted to us by the FI after it has been paid, and we match the 
claim to the appropriate MDS. The FI may request any information it 
deems to be necessary to verify the level of services billed by the 
facility.
    Comment: We received one comment suggesting that we should exempt 
from post-payment review or on-site audit, any 5-day assessment with an 
assessment reference date on one of the grace days that results in the 
beneficiary's classification into a Low Rehabilitation group.
    Response: This comment reflects a misunderstanding of our policy 
regarding grace days. As explained above in this final rule, the grace 
days are available for use, without penalty. The reference to audits in 
the interim final rule was not intended to preclude any appropriate use 
of the grace days. Therefore, although the comment indicates that 
beneficiaries who classify into one of the low rehabilitation groups 
should be exempt from review (presumably because of the requirement for 
six days of nursing rehabilitation services in order to qualify for 
this RUG-III group), there is no reason for us to consider excluding 
any type of Medicare SNF claims from post-payment review.
    Comment: Several commenters cited the BBA mandate that we must 
implement a quality monitoring system. Section 4432(c) of the BBA 
requires the Secretary to establish a medical review process to examine 
the effects of the SNF and PPS related provisions on the quality of SNF 
services furnished to Medicare beneficiaries, with particular emphasis 
on the quality of non-routine covered services and Medicare-covered 
physician services.
    Response: The quality of care provided to beneficiaries is 
paramount in our view. We will use our existing survey and enforcement 
activities (along with the new techniques and data that are now 
becoming available with the advent of prospective payment) to ensure 
the quality of SNF services provided to Medicare beneficiaries.

[[Page 41660]]

    In addition to the more traditional medical review process we are 
establishing, as described above, we have also begun work toward the 
establishment of a quality medical review process that is specifically 
designed to fulfill the BBA mandate. We have developed an SNF PPS 
Quality Medical Review Pilot project that uses MDS and other data to 
monitor and target quality and program integrity problems. This 
monitoring will be accomplished by testing a more integrated and 
cooperative approach to medical review of SNF services using several 
pilot states to partner Peer Review Organizations (PROs), FIs, State 
Survey Agencies, and Medicaid agencies to assess, monitor, and improve 
the quality of Medicare SNF services under the PPS.
    We are implementing a two-tier strategy using the PRO Special 
Project process. This strategy is expected to strengthen program 
integrity and quality review in SNFs, promote SNF quality improvement, 
deter fraud and abuse, and enhance beneficiary protection. The first 
tier is a statistical analysis PRO (StatPRO), that is testing a data 
driven approach which analyzes MDS data to flag potential quality of 
care and program integrity problems. The MDS data set will be linked 
with other HCFA data sets (such as, Medicare Part A and B claims, 
OSCAR-Online Survey Certification and Reporting System, HCIS-HCFA 
Customer Information System, FI payment, and program integrity data) to 
identify patterns and trends in care. The second tier of the project 
pilot tests a data based approach using StatPRO and other data to 
examine State trends and variations in SNF data and patient care 
through the collaboration of quality medical review (QMR) teams 
composed of the PRO, FI, and State survey agency in two States (NC and 
CO) and in three States (AZ, MA, and MD) the Medicaid Agency is added. 
The QMR pilots will field test an integrated model where they will work 
together to better understand each other's program integrity and 
quality review roles, develop collaborative approaches within their 
regulatory authority, test a targeted clinical data driven intervention 
strategy, target beneficiary protection, and deterrence of fraud and 
abuse. Finally, we will use the vast data resources available from the 
national MDS data repository to support our quality initiatives.

J. Rehabilitation Therapy Services and PPS

    Comment: Many commenters questioned when rehabilitation therapy may 
begin in the SNF stay.
    Response: Although rehabilitation therapy may begin as early as day 
one of the Medicare Part A SNF stay, we note that all of the 
rehabilitation therapy services (PT, OT, and SLP) must meet each of the 
following criteria in order to be coded in the MDS as minutes of 
rehabilitation therapy:
     The service must be ordered by a physician.
     The therapy intervention must relate directly and 
specifically to an active written treatment regimen established by the 
physician after any needed consultation with the qualified 
rehabilitation therapy professional and must be reasonable and 
necessary to the treatment of the beneficiary's illness or injury 
(section 230 of the Medicare Skilled Nursing Facility Manual, HCFA Pub. 
12).
     An appropriately licensed or certified individual must 
provide or directly supervise the therapeutic service and coordinate 
the intervention with nursing services.
    Even though these three criteria are not new with PPS, the 
establishment of a new payment system has heightened interest in 
understanding and satisfying these standards. For instance, in addition 
to the commenters' question about when rehabilitation therapy services 
can begin, we have received many questions during the first year of PPS 
implementation regarding standards for supervision of rehabilitation 
therapy assistants and aides, and many questions regarding the 
physician signature requirements for the rehabilitation therapy plan of 
treatment. Accordingly, we will take this opportunity to provide 
further clarification of those issues. The rehabilitation therapy 
service must be ordered by a physician. The Medicare policy regarding 
the requirement for the physician signature on the therapy plan of 
treatment has not changed. As is stated in the SNF Manual, 
rehabilitation therapy services provided to a beneficiary in a SNF must 
be directly and specifically related to an active written treatment 
plan established by the physician after any needed consultation with a 
qualified therapist. Implementation of the PPS did nothing to alter 
this guideline. We will, however, take this opportunity to clarify what 
is required for coverage of rehabilitation therapy.
    As stated in the language in the SNF Manual cited in the preceding 
paragraph, Medicare requires the physician to make decisions regarding 
the amount and intensity of rehabilitation therapy services provided to 
Medicare beneficiaries in SNFs after consulting with the professional 
therapist. This requirement is based on our commitment to ensuring 
quality care for Medicare beneficiaries, and also reflects the 
requirements for participation (at section 1819(b)(6)(A) of the Act), 
which specify that the medical care of every SNF resident must be 
provided under the supervision of a physician. Our policy has not 
changed, and we are taking this opportunity to clarify that policy. The 
physician's responsibility in the development of a rehabilitation 
therapy plan of treatment ensures that the services to be provided will 
not exceed the beneficiary's abilities as constrained by his clinical 
status. In addition, we believe that the physician's clinical judgement 
is an important aspect in preventing injuries that can result from the 
provision of inappropriate rehabilitation therapy. For example, the 
rehabilitation plan of treatment for a beneficiary with a hip fracture 
should be developed with an awareness of his or her limitations due to 
severe osteoporosis and emphysema. Unless the beneficiary's entire 
clinical condition is taken into account, there is a significant risk 
of injury and of a compromised medical status.
    We expect that the same care will be taken by the physician and SNF 
staff to document physician responsibility for developing the therapy 
plan of treatment, including precautions, that is reasonably expected 
to be taken for any other element of the medical record. We realize, 
however, that in the SNF setting there may not be a physician on the 
premises every day. Therefore, Medicare allows the professional 
therapist to develop a suggested plan of treatment and to begin 
providing services based on that plan prior to obtaining the 
physician's signature on the plan. We continue to require that the plan 
of treatment must be a physician's responsibility after any needed 
consultation with a qualified therapist, and that the requirement for 
physician verification of the suggested plan of treatment will be 
obtained within a reasonable amount of time. However, a physician 
signature must be obtained before the facility bills Medicare for 
payment for the rehabilitation therapy services provided to the 
beneficiary based on the plan of treatment he or she has approved. In 
this way, the facility can be sure that the level of therapy for which 
it bills Medicare is the level the physician deems to be medically 
necessary. We expect that the type and intensity of therapy billed will 
always match the type and intensity of therapy on the signed therapy 
plan of treatment.
    We understand that many physicians use the fax to participate 
actively in the review of written plans of care and so

[[Page 41661]]

believe that it is appropriate to accept physicians' faxed signatures 
for the plan of treatment. As always, whenever the plan of treatment is 
altered in any way, the modification must be made in writing. If the 
physician is not the person making the modification, the therapist who 
is making the change must notify the physician timely, and the 
physician must sign the change within a reasonable amount of time.
    In addition to the issues discussed above, we would like to clarify 
the requirements for the rehabilitation therapist's initial evaluation 
of a Medicare beneficiary in a SNF stay and the requirements for 
licensed therapist supervision of therapy assistants and therapy aides 
when they provide therapy services to Medicare beneficiaries. The 
initial evaluation, performed by the licensed therapist and necessary 
for the development of the plan of treatment, must be performed during 
the beneficiary's SNF stay. It is not acceptable to use an evaluation 
that was performed for instance, in the acute care hospital or the 
rehabilitation hospital setting as the evaluation of the beneficiary in 
the SNF, because the beneficiary's status must be evaluated as he or 
she presents in the SNF setting. The evaluation, and the resultant plan 
of treatment, developed in the acute care hospital or rehabilitation 
hospital is relevant to the specific type of setting and is not 
interchangeable with an evaluation and plan of treatment developed for 
the beneficiary in the SNF setting. The time that it takes for the 
therapist to perform this evaluation may not be recorded as minutes of 
therapy received by the beneficiary.
    An appropriately licensed or certified individual must provide or 
supervise the therapeutic service and coordinate the intervention with 
nursing services. As stated above, Medicare expects that services will 
be provided by, or supervised by, appropriately licensed or certified 
professionals.
    Physical and occupational therapy assistants may provide 
rehabilitation therapy services under the supervision of the 
professional therapist. A rehabilitation therapy assistant must be 
under the general supervision of a professional therapist who is 
accessible while the assistant is providing services to the 
beneficiary. The therapy assistant cannot supervise a therapy aide. It 
is up to the professional therapist to ensure that the assistant is 
capable of performing therapy services without the more stringent 
``line-of-sight'' level of supervision required by therapy aides.
    A therapy aide must be supervised personally by the professional 
therapist in such a way that the therapist has visual contact with the 
aide at all times. Therapy aides are not to perform any services 
without ``line-of-sight'' supervision. Similarly, a therapy aide must 
never be responsible for provision of group therapy services, as this 
is well beyond the scope of services that they are qualified to 
provide.
    A therapy student who is participating in field experience must 
also be under the ``line-of-sight'' level of supervision of the 
professional therapist. Even though these students may become licensed 
therapists within months of the field training portion of their school 
program, they are not licensed or certified for practice in an 
unsupervised status. Further, none of the minutes of therapy services 
provided by the students may be recorded on the MDS as minutes of 
therapy received by the beneficiary. Medicare recognizes the costs 
associated with approved educational activities as a pass-through (see 
Sec. 413.85).
    Comment: Many commenters had questions about the correct counting 
and recording in the MDS of minutes of rehabilitation therapy.
    Response: Section P of the current version of the MDS contains the 
items that capture the amount of time each nursing home resident spends 
receiving rehabilitation therapy. Thus, it is in section P that the 
clinician records the number of days and minutes of rehabilitation 
therapy (PT, OT, ST) received by the individual beneficiary during the 
past seven days, or since admission to the SNF, whichever is shorter.
    The directions for completion of section P instruct the assessor to 
look back over the ``last 7 calendar days,'' counting only post 
admission days and minutes of therapy, when counting the days and 
minutes of rehabilitation therapy received by the beneficiary. The 
number of minutes recorded here must be the actual number received by 
the beneficiary. Seven calendar days are, by definition, consecutive 
days.
    In the case of a Medicare 5-day assessment, however, the nurse 
assessor will choose as the assessment reference date (MDS item A3a), 
any day one through eight of the covered stay, and will look back over 
the prior seven calendar days (or over the days since admission if 
there are fewer than seven days since admission) to count the number of 
days upon which more than 15 minutes of therapy were received and the 
number of minutes that were received by the beneficiary during those 
days. It is irrelevant if there is a break in therapy (for example, for 
a weekend or holiday) during that time. For example, if day five of the 
stay is chosen as the assessment reference date, the assessor would 
look back to admission to count the patient's PT, OT, and ST time. If 
the beneficiary received PT for 50 minutes on both the second and fifth 
days of the Part A covered stay, that would be recorded as two days of 
PT and 100 total minutes of PT. The actual number (not rounded) of 
minutes must be recorded on the MDS. Minutes cannot be rounded to 
multiples of 10 or 15.
    The rehabilitation therapy time reported on the MDS is a record of 
the time the beneficiary spent receiving therapy services, not a record 
of the therapist's time. As stated in the August 1996 publication, Long 
Term Care Resident Assessment Instrument Questions and Answers, Version 
2.0, the beneficiary's ``therapy time starts when he begins the first 
treatment activity or task and ends when he finishes with the last 
apparatus and the treatment is ended.''
    Set-up time is included, as is time under the therapist's or 
therapy assistant's direct supervision. PT, OT, and ST provided outside 
the building may be counted and recorded on the MDS, as long as the 
staff who provide therapy are qualified to provide the service. In the 
State Operations Manual (SOM, HCFA Pub. 7) Transmittal #272, pp. R64, 
``The therapy treatment may occur inside or outside the facility.'' 
This includes the time it takes for the therapist to take the 
beneficiary to his or her home for a home visit before discharge as 
long as the therapist uses the time in the car to teach or discuss the 
beneficiary's treatment or treatment goals, and for family conferences 
when the beneficiary is also present.
    Whether the time spent evaluating the beneficiary is counted 
depends on whether it is the formal initial evaluation or an evaluation 
performed after the course of therapy has begun. The time it takes to 
perform the formal initial evaluation and develop the treatment goals 
and the plan of treatment may not be counted as minutes of therapy 
received by the beneficiary. However, a reevaluation--that is, a hands-
on examination of the beneficiary and not simply an update to the 
documentation and revision of the care plan--that is performed once a 
therapy regimen is underway (for example, evaluating goal achievement 
as part of the therapy session) may be counted as minutes of therapy 
received.
    This policy was established because we do not wish to provide an 
incentive for facilities to perform initial evaluations for therapy 
services for patients who have no need of those specialized services. 
However, we

[[Page 41662]]

believe that the initial evaluation is an appropriate cost of doing 
business. Therefore, the cost of the initial assessment is included in 
the payment rates for all Medicare beneficiaries in covered Part A SNF 
stays.
    For beneficiaries who do not classify into one of the 
Rehabilitation RUG-III groups, the therapy non-case-mix component is 
part of the daily rate. The amount, $0.91, is reflected in the rate for 
all of the non-therapy RUG-III groups.
    The Long Term Care Resident Assessment Instrument Questions and 
Answers Version 2.0, clarifies how to account for therapy provided to 
an individual within a group setting. It states that if the group has 
four or fewer participants per supervising therapist (or therapy 
assistant under general supervision by the therapist) then it is 
appropriate to report the full time as therapy for each patient. The 
example used is that of a therapist working with three patients for 45 
minutes on training to return to the community. Each patient's MDS 
would reflect receipt of 45 minutes of therapy for this session.
    Although we recognize that receiving PT, OT, or ST as part of a 
group has clinical merit in select situations, we do not believe that 
services received within a group setting should account for more than 
25 percent of the Medicare resident's therapy regimen during the SNF 
stay. For this reason, no more than 25 percent of the minutes reported 
in the MDS may be provided within a group setting. This limit is to be 
applied for each therapy discipline; that is, only 25 percent of the PT 
minutes reported in the MDS may be minutes received in a group setting 
and, similarly, only 25 percent of the OT, or the ST minutes reported 
may be minutes received in a group setting.
    To summarize, the minutes of therapy provided by at least one 
supervising therapist (or therapy assistant under general supervision 
by the therapist) within a group of four or fewer participants, may be 
fully counted, provided that those minutes account for no more than 25 
percent of the resident's weekly therapy in that discipline, as 
reported in the MDS. The supervising therapist may not be supervising 
any individuals other than the four or fewer individuals who are in the 
group at the time of the therapy session. Naturally, provision of group 
therapy time in excess of the 25 percent threshold is allowable, but 
those minutes may not be counted in section P of the MDS for purposes 
of RUG-III classification for Medicare Part A beneficiaries.
    Under section 1814(a)(2)(B) of the Act, a covered SNF level of care 
is defined in terms of those services that necessitate the involvement 
of skilled personnel, are needed and received on a daily basis and, as 
a practical matter, can be provided only in an SNF on an inpatient 
basis. Additionally, the requirements for participation at section 
1819(b)(4)(A) of the Act require an SNF to furnish the full range of 
nursing and specialized rehabilitative services needed to attain or 
maintain each resident's highest practicable state of well-being, in 
accordance with the comprehensive plan of care. This means that there 
are to be no limits placed on the services to be provided to the 
beneficiary due to the facilities interpretations of how many minutes 
are ``allowed'' by the given RUG-III group.
    The RUG-III classification system uses minimum levels of minutes 
per week as qualifiers for classification into the rehabilitation 
therapy groups. These minutes are minimums and are not to be used as 
upper limits for service provision. Similarly, there are instances in 
which beneficiaries in the so-called ``clinical categories,'' Extensive 
Services, Special Care and Clinically Complex, will need some limited 
amounts of rehabilitation therapy services, which they should receive, 
even though they may not require a level that would qualify them for 
one of the rehabilitation groups. The SNF PPS is based on averages, and 
a facility that continues to provide services as they are needed by its 
beneficiaries should receive payments that, in the aggregate, are 
adequate to pay for those services. Any policy of holding therapy to 
the bare minimum, regardless of beneficiary need, is inconsistent with 
the statutory requirements discussed above, and will result in poor 
outcomes, longer lengths of stay, and a degradation in the facility's 
quality of care.
    Section T of the current version of the MDS must be included with 
each Medicare PPS assessment, but in the case of a Medicare five day 
assessment, the clinician captures minutes of therapy that are 
anticipated for the beneficiary during the first two weeks of the 
nursing home stay. This makes it possible for the beneficiary to 
classify into the appropriate RUG-III rehabilitation group based on the 
anticipated receipt of rehabilitation therapy, even though the 
assessment is done during the first few days of the SNF stay.
    Section T of the current version of the MDS contains three items, 
T1b, T1c and T1d, in which the assessor is to record ``ordered 
therapies.'' The T1b item asks, ``Has physician ordered any of the 
following therapies to begin in FIRST 14 days of stay--PT, OT, or 
speech pathology service?'' If the answer to this question is yes, then 
the number of expected minutes and days is completed in items T1c and 
T1d of the current version of the MDS. If the answer is no, then there 
is nothing to report in T1c or T1d.
    If the physician orders therapy for 10 days, the projected number 
of days in section T will be 10 rather than 14; likewise, if the 
physician does not order a limited number of days, the projection will 
be based on the entire two weeks, assuming the beneficiary's continued 
stay and receipt of services.
    The RUG-III grouper takes into consideration both the days and 
minutes already received by the beneficiary, as reported in section P 
of the current version of the MDS, and the days and minutes expected to 
be received in the first two weeks of the stay. The number of days and 
minutes expected, as reported in section T, should include those 
already received.
    For example, the beneficiary received an hour of OT on both the 
fourth and fifth days (a Monday and Tuesday) of the SNF stay. The 
prescribed regimen calls for the beneficiary to receive an hour of OT 
daily, Monday through Friday, during the first two weeks in the SNF. 
The assessment reference date was set for the fifth day of the stay; 
two days and 120 minutes were reported as having been received in 
section P of the MDS, and 10 days and 600 minutes were reported as 
anticipated in section T. The 10 days and 600 minutes recorded in 
section T include the 2 days and 120 minutes already received, in 
addition to the upcoming three days and 180 minutes expected to be 
received in the first week, and the five days and 300 minutes of 
therapy in the second week.
    We realize that reporting therapy time that has not yet been 
provided is a significant change for providers, but it is in compliance 
with the grouper logic and allows the facility to provide the most 
accurate representation of the services to be provided to the 
beneficiary during the first assessment period.

K. RUG-III Groups

    Comment: We received a few comments stating that the ``limits'' on 
therapy minutes imposed by the RUG-III groups were too low, and that 
more than 720 minutes should be allowed for beneficiaries in the 
highest RUG-III groups.
    Response: The RUG-III system does not impose limits on the services 
a resident may receive; rather, it is used to determine how much 
Medicare pays for the services that the resident

[[Page 41663]]

receives. The minutes used to classify beneficiaries into RUG-III 
groups are in no way to be taken as upper limits. The 720-minute 
threshold for the Ultra High sub-category is a minimum for purposes of 
classifying residents. In fact, during the demonstration, there were 
beneficiaries who were receiving more that 1,000 minutes per week, and 
we expect that there will be similar instances during the national 
implementation. All of the groups were created based on a continuum of 
minutes being provided, including Ultra High. Just as we expect to see 
beneficiaries in the High Rehabilitation sub-category receiving 450 
minutes per week, we expect that as many minutes as are needed will be 
provided to beneficiaries in the Ultra High groups.
    Comment: We received a comment requesting that we explain how the 
RUG-III grouper works. The commenter believed that we failed to explain 
fully in the interim final rule the grouping logic that restricts 
classification into the Rehabilitation Ultra High and Very High sub-
categories to beneficiaries who have a full week of therapy recorded in 
section P of the MDS.
    Response: The grouper software uses the minutes and days recorded 
in sections P and T together to classify beneficiaries into the RUG-III 
rehabilitation groups. However, in order for a beneficiary to classify 
into the upper two sub-categories, Ultra High and Very High, he or she 
must have received at least one full week (five days) of therapy at the 
level that would qualify for these groups.
    For example, suppose a beneficiary is admitted on Monday, May 1 and 
begins PT and OT on May 4. The beneficiary receives 90 minutes of PT 
and 60 minutes of OT on the 4th, 5th, 6th, 7th, and 8th of May. The 
assessment reference date for the Medicare 5-day assessment is Monday, 
May 8. The beneficiary will classify into the Ultra High sub-category 
based on having received more than 720 minutes of therapy across at 
least two disciplines during the past seven days, as recorded in 
section P of the MDS. If, on the other hand, the beneficiary received 
this level of therapy on only four of the first seven days in the SNF, 
he or she would classify into the High Rehabilitation sub-category 
since this is the highest level of classification that is possible when 
a minimum of 500 minutes and five days of therapy have not been 
provided.
    We have posted a tool on our web site that allows the user to 
follow the grouper logic manually. It walks through each step of the 
grouping logic and we believe it is a useful learning tool. The website 
address is:

<www.hcfa.gov/medicare/hsqb/mds20/>.

    Comment: There were a few comments regarding the use of the 
combination of physician visits and order changes to qualify 
beneficiaries for the Clinically Complex RUG-III category. One of the 
commenters argued that these criteria are unacceptable because an SNF 
represents not a medical model but rather a nursing model; as such, the 
physician's involvement and participation may be limited, or may result 
from consultation sought by the facility's nursing staff due to changes 
in a resident's condition or the need for specific services. Another 
commenter inquired about the specific definition being used to define a 
``physician order change.''
    Response: These comments are representative of concerns that have 
been expressed during the initial implementation of the SNF PPS. While 
we are aware that many facilities operate using a nursing model as 
opposed to a medical model of care delivery, the commenter's further 
observation on why the nursing staff would consult with the physician 
provides the explanation for why physician order changes and visits are 
qualifiers for the RUG-III groups.
    The RUG-III system uses clinical events, conditions, and services 
as indicators of severity. The results of the research that is the 
basis of the RUG-III system showed that an increased frequency of 
physician visits and order changes are indicators of a beneficiary's 
clinical instability. As in the commenter's example, the nursing staff 
may consult with the physician due to changes in the beneficiary's 
condition that require medical intervention or the need for specific 
services that require a physician order.
    We would also like to make clear what constitutes an order change. 
The specific issues that have been raised include whether an order to 
continue a specified treatment is a new order and, therefore, counts as 
an order change; whether a sliding scale medication order counts as a 
new order every time the clinician administers one of the different 
dosages specified in the scale; whether orders written to clarify a 
previous order count; and, whether all doctor's visits count in the 
number of physician visits item.
    A physician's order to continue or renew some specified treatment 
or regimen would not be considered to be an order change, nor would an 
order written solely to clarify an earlier order. As stated in the Long 
Term Care RAI User's Manual, the definition of an order change does not 
include admission orders, return admission orders, or renewal orders 
without changes. Similarly, a sliding scale dosage schedule that is 
written to cover different dosages depending on lab values, does not 
count as an order change simply because a different dose is 
administered based on the sliding scale guidelines. ``Physician 
visits'' are also defined in the Long Term Care RAI User's Manual. The 
physician is defined to include an ``MD, osteopath, podiatrist, or 
dentist who is either the primary physician or consultant. Also include 
an authorized physician assistant or nurse practitioner working in 
collaboration with the physician.'' The visit is defined as a partial 
or full exam at the facility or in the physician's office.

L. Nurse Staffing and the Staff Time Measurement Studies

    Comment: We received a variety of questions related to the staff 
time measurement (STM) studies performed in 1995 and 1997 that were 
used to set the case-mix indices. These included questions about what 
portion of the nurses' time was accounted for in the study, whether all 
nursing minutes (resident specific and non-specific) were used, whether 
medication aide time was counted, and what nurse staffing mix was used. 
Also, the suggestion was made that we should conduct another STM study 
after the PPS has been in place for a year.
    Response: Before addressing the specific comments, we are taking 
this opportunity to provide a brief background explanation of the STM 
studies. As stated in the interim final rule, we conducted the STM 
studies in 12 States across 154 SNFs and 3,900 residents. The 1997 STM 
was performed to supplement the 1995 study to secure additional STM 
data from SNFs identified as providing both high quality care and more 
than an average level of rehabilitation therapy to patients on their 
Medicare-certified nursing units, and to include a broad geographic 
distribution of providers.
    The STM data collection accounted for all nursing staff time during 
the 48-hour collection period. This time included that of the 
registered nurses (RNs), licensed practical nurses (LPNs), aides 
(certified nursing assistants (CNAs)), and medication aides. The 
resident-specific component counted all nursing time of 30 seconds or 
more spent in an activity directly attributable to a specific resident. 
The non-resident specific component included all time

[[Page 41664]]

not directly related to a specific resident, such as meetings, nursing 
unit administration, and staff meal times. Also, if the nursing staff 
member worked past the end of the shift, that time was counted as well.
    The therapy staff time was collected over a 7-day period. All time 
that the therapist, therapy assistant, and therapy aides spent working 
in the certified nursing unit was accounted for and was apportioned 
between resident specific and non-resident specific, following the same 
methodology as was used in the nursing time allocation. All of these 
collected time data were used in the development of the indices.
    The staffing levels and the nurse staffing mix on the units 
selected for the study met the OBRA 87 staffing requirements and 
provided more than 110 minutes of daily resident specific nurse staff 
time. Both freestanding and hospital-based facilities were used in the 
study. Salaries were adjusted based on the American Health Care 
Association's 1995 study of national nursing home salaries.
    The nurse staffing mix found on the certified nursing units in the 
study were determined per unit, based on the mix of residents on the 
nursing unit at the time of the data collection. Based on a case-mix of 
0.92, the average time across the two staff time studies was: 1.2 hours 
per resident, per day of RN time; 0.7 hours per resident, per day of 
LPN time; 2.6 hours per resident, per day of CNA time (including 
medication aides). This adds up to 4.6 hours per resident, per day of 
nursing time.
    An important point to understand about the nursing time is how it 
affects the rates. The nursing time associated with any one group in 
the RUG-III hierarchy does not represent the nursing minutes that must 
be provided (and that will be paid for by Medicare) to each of those 
beneficiaries. Rather, the minutes are a distributional value--an 
average for the RUG-III group--and were an important factor in the 
development of the case-mix indices. The weight for each of the 44 RUG-
III groups represents the average resources (including, of course, 
nursing) required to care for beneficiaries who classify to that group 
relative to the average resources required to care for beneficiaries in 
all of the other RUG-III groups. The RUG-III group with a value of 1.0 
is identified and the weights for the other groups are calculated once 
that has been done. The value of 1.0 indicates that the average 
resources required to care for beneficiaries in that group are the 
average compared to all of the other groups. Accordingly, the resource 
requirements to care for beneficiaries in the other 43 RUG-III groups 
are either higher or lower than for the group with the weight of 1.0. 
Depending on the distribution of beneficiaries across the RUG-III 
groups, the group with the relative value of 1.0 will vary. It is 
important to bear this concept in mind, in order to avoid the 
misconception that a RUG-III group with a relative weight that changes 
from one year to the next has staffing requirements that have changed 
from the original staff time measurement study. The RUG-III system does 
not impose any new staffing requirements. The data are available from 
the HCFA PPS website address:
<www.hcfa.gov/medicare/snfpps.htm.>

    Comment: One commenter requested that we explain why the Behavior 
Category is so low in the RUG-III hierarchy, even though beneficiaries 
who classify into that group require intensive amounts of staffing 
resources.
    Response: The reason for this is that the RUG-III hierarchy is in 
large part based on minutes of licensed nursing time and on the 
clinical conditions that require the attention of licensed staff. This 
is a result of early research findings that indicated that 
beneficiaries who have the clinical characteristics that would classify 
them into the medically complex categories, like Extensive Care, 
generally require much more RN and LPN time than do beneficiaries who 
classify into the groups in the lower end of the clinical scale. 
Similarly, beneficiaries who classify into groups lower in the 
hierarchy generally require less licensed nurse time but, as stated by 
the commenter, may require intensive amounts of staffing resources.
    Beneficiaries in the Behavior Category may not need much licensed 
nurse time, but instead may require a large amount of certified nurse 
assistant (CNA) time. Much of the care required in these lower-end RUG-
III groups is of the type provided by CNAs, such as assistance with 
activities of daily living (ADLs) and other types of maintenance care. 
In general, the need for CNA time is reflected in the beneficiaries' 
ADL sum scores, whereas the need for licensed nurse time is predicted 
by clinical complexity as reflected by the level in the hierarchy. 
Thus, beneficiaries who classify into the Extensive Services category 
where the ADL sum score is at least 7, have highly complex clinical 
needs and require high levels of both licensed nurse (RN/LPN) and CNA 
time. Beneficiaries in the lower-weighted RUG-III groups may also 
require skilled nursing care, but generally not as much as required in 
the higher groups.
    Comment: Several commenters had concerns that the STM was collected 
over too short a period, that too few facilities were used and that not 
enough of them were hospital-based facilities, and that too few of the 
facilities used were located in metropolitan statistical areas (MSAs) 
with populations in excess of 500,000 people.
    Response: We are confident that the methodology used for the STM 
studies was valid and appropriate for the task. Three STM studies were 
conducted. The first was in 1990, followed by another in 1995, and the 
last in 1997. The staff time studies were conducted in 13 States, in 
units of more than 300 nursing homes, representing care provided to 
about 12,000 residents. The States included were California, Colorado, 
Florida, Kansas, Maine, Maryland, Mississippi, Nebraska, New York, 
Ohio, South Dakota, Texas, and Washington. These States are 
geographically representative and include rural areas, as well as MSAs 
with populations in excess of 500,000.
    Within each of these States, the selection of SNFs was guided by 
the research design that called for a sample that would adequately 
represent units that provide high quality, high-acuity care. The 
facilities in the combined 1995 and 1997 study sample were 55 percent 
for-profit facilities, 45 percent non-profit, 22 percent hospital-based 
facilities; 36 percent of the facilities had a head trauma unit, a 
ventilator unit, a special rehabilitation therapy unit, or a dialysis 
unit, or had been recommended as a high intensity unit by the Technical 
Expert Panel. Although the amount of time spent collecting data on any 
particular unit was short, the studies were conducted during different 
years and each year's study was performed over a period of months. In 
this way, the study was reflective of practice in the facilities in the 
aggregate, if not precisely representative of any particular facility 
over time.
    Comment: One commenter argued that the staffing patterns (using 
1995 as the base year) used in developing the rate structure lock SNFs 
into historic staffing patterns. Another commenter asserted that since 
there is no language in the regulation requiring SNFs to use a certain 
proportion of the rate on direct care services, they will not do so, 
and suggested that we adopt the staffing recommendations of the 
Institute for Geriatric Nursing of the John A. Hartford Foundation.
    Response: As indicated earlier, the RUG-III system does not impose 
staffing requirements. We do not believe that our use of the 1995 base 
year locks facilities into any particular level of nurse staffing, 
either directly or indirectly. As stated above, the staffing

[[Page 41665]]

levels in the staff time studies were based on the unit's case-mix at 
the time. The study used units that had a mix of payor types. 
Nationally, of the 14,000 Medicare certified facilities, fewer than 
4,000 have an average daily census of more than 10 Medicare 
beneficiaries. We do not believe that it is appropriate to require 
staffing standards based on the needs of such a small portion of the 
facility's population, but this is an issue that is outside of this 
regulation's scope. We will carefully review and consider the findings 
of the National Academy of Sciences report (the report cited by the 
commenter is part of this larger effort) when it becomes available.
    Comment: One commenter suggested that we include speech language 
pathology assistant times when we perform our next staff time 
measurement study. The commenter recommended that we include the times 
for these care providers in our update of the RUG-III case-mix indices.
    Response: While we are not prepared to address the issue of when to 
conduct another staff time measurement study within the context of this 
final rule, we would note that services of speech language pathology 
assistants are not recognized for separate coverage under Medicare. In 
order for this class of providers to be eligible for Medicare payment, 
they must first achieve licensure or some other standard credential 
recognized at the national level. To date, these assistants have not 
obtained this standing.
    Comment: We received a number of comments regarding the treatment 
of respiratory therapy services under the RUG-III. Several commenters 
expressed concern that facilities would be using inappropriately 
trained nurses rather than appropriately trained personnel to provide 
respiratory therapy services.
    Response: We share the commenters' concern with regard to the 
quality of care. As stated in the SNF Manual at section 230.10.B.1, 
Medicare requires that respiratory services must be provided by 
respiratory therapists or technicians, physical therapists, nurses, or 
other qualified personnel. We currently have no evidence that 
unqualified personnel are administering respiratory treatments, but 
note that the State surveyors monitor long-term care facilities for 
such lapses in quality. The rules governing the provision of 
respiratory treatment were not altered by the implementation of PPS but 
certainly, in light of the PPS and its associated incentives, we are 
determined to monitor closely the provision of SNF care, including 
respiratory treatments. A key provision in implementing the new payment 
system is to safeguard quality of care for nursing home residents, and 
this issue warrants particular attention from our quality and 
enforcement initiative.
    Comment: Several commenters raised concerns with the manner in 
which respiratory therapy is recognized in the SNF PPS.
    Response: As discussed earlier in this preamble in the context of 
the Federal PPS rates, the treatment of respiratory therapy services in 
the SNF PPS was the result of careful consideration and extensive 
analysis. The RUG-III case-mix classification system, which forms the 
basis for the payment rates, does not include respiratory therapy in 
the same category as the rehabilitation therapies (occupational, 
speech, and physical therapy).
    The primary reason for this was the difference in treatment 
patterns between respiratory therapy and the rehabilitation therapies. 
A secondary reason is that the costs of respiratory therapy services 
are not always separately identifiable on SNF cost reports, since 
trained nurses are qualified to provide these services, and often do 
so. However, we note that all costs from the base year data associated 
with respiratory therapy were captured in the computation of the 
payment rates, and the provision of respiratory therapy, as indicated 
on the resident assessment, can result in a higher payment in the non-
rehabilitation RUG-III groups.
    We believe that the SNF PPS accounts for respiratory therapy 
appropriately, and we do not believe that the RUG-III classification 
system will discourage the provision of needed respiratory 
rehabilitation. However, as discussed earlier, we are engaged in 
research to determine the potential for making refinements to the 
current case-mix model to improve accuracy of the payments. Ancillary 
services, such as pharmacy and respiratory therapy, will be one focus 
of the research.
    Comment: One commenter noted that Medicare beneficiaries with more 
than $1,000 in paid respiratory therapy claims account for only 18 
percent of all Medicare beneficiaries who received respiratory therapy 
services in 1996, and that the top four diagnoses (excluding a generic 
category of ``other diseases of the lung'')--chronic bronchitis, 
chronic airway obstruction, pneumonia due to solids or liquids, and 
pneumonia--average between $75 and $100 per day in respiratory 
services. The commenter added that this amount far exceeds the payment 
amounts associated with the 42 RUG-III categories that do not have 
respiratory adjustments, and that this warrants the development of an 
outlier policy to insure adequate care for these beneficiaries.
    Response: Please refer to the preamble discussion on the Federal 
rates, in which we discuss ``outlier'' situations.
    Comment: One commenter suggested that any future revisions to the 
MDS 2.0 should include an expansion of data collection fields to 
capture critical respiratory therapy diagnoses and medication 
requirements, and that certain data items in the current MDS related to 
respiratory care should be considered in revising the RUG-III 
classifications, so that patient acuity and payment will be 
appropriately recognized.
    Response: These are important issues to consider as we revise the 
MDS and implement new versions in the future; however, we will not be 
making any changes to the MDS in this final rule.
    Comment: Several commenters raised issues in connection with 
recreational therapy. Some indicated that the definitions and language 
within section T should accurately reflect and comply with the 
recreational therapy profession's standards and practices. To provide 
an accurate picture of the resident's rehabilitation needs, sections 
T1c and T1d should include recreational therapy within the mix of 
comprehensive rehabilitation services.
    Response: Recreational therapy has long been among the services 
that Medicare has recognized as related to patient care in SNFs; 
however, it is not a therapy specifically identified for coverage in 
the statute. For this reason, recreational therapy services are not 
included in the RUG-III system in the same way as the rehabilitation 
therapies.
    Comment: One commenter expressed a belief that the RUG-III system 
fails to reflect the importance of interdisciplinary comprehensive 
rehabilitation services. The commenter argued that recreational therapy 
is identified as a viable and recognized treatment option within all 
rehabilitation treatment settings, and noted that within the present 
RUG-III version, Recreation Therapy treatment minutes are not used in 
identifying the RUG-III rehabilitation classification.
    Response: To the extent recreational therapy services were 
furnished in the SNF PPS base year, they are reflected in the SNF PPS 
payments. Thus, the SNF PPS reflects the provision of recreational 
therapy services to Medicare beneficiaries. Accordingly, we find no 
evidence to support the notion that the RUG-III classification system 
in any way prevents Medicare beneficiaries from receiving recreational 
therapy services.

[[Page 41666]]

M. SNF Coverage and Level of Care Determinations

    One of the prerequisites for coverage under the ``extended care'' 
(that is, Part A SNF) benefit is the beneficiary's need for and receipt 
of an SNF level of care. In the preamble to the interim final rule (63 
FR 26283-85), we designated the upper 26 of the 44 RUG-III groups as 
representing an SNF level of care. We specified that a beneficiary's 
assignment to one of the upper 26 RUG-III groups as the result of a 
resident assessment would automatically classify the beneficiary as 
meeting the SNF level of care definition. Beneficiaries assigned to one 
of the lower 18 RUG-III groups would not automatically classify as 
either meeting or not meeting the level of care definition, but would 
instead receive an individual determination under the longstanding 
level of care criteria in regulations at Part 409, subpart D.
    As discussed below, in this final rule we are clarifying the role 
played by a beneficiary's RUG-III assignment in the process of making 
SNF level of care determinations, and we are also restoring portions of 
the regulations text that appeared previously in Sec. 409.33(a) on 
management and evaluation, observation and assessment, and patient 
education, which were deleted by the interim final rule.
    Comment: We received numerous comments regarding the procedures for 
making SNF level of care determinations under the SNF PPS. Several 
commenters were under the impression that, in view of the prospective 
nature of the SNF PPS, and the interim final rule's designation of the 
upper 26 RUG-III groups as representing an SNF level of care, a 
resident assessment that triggers assignment to one of the upper 26 
groups would result in automatic coverage that continues for the entire 
duration of the period to which that assessment applies, regardless of 
any changes in condition or services provided that might occur 
subsequent to the completion of the assessment itself. This impression 
was reinforced, in their view, by a table (Table 2.D) on the Medicare 
Assessment Schedule, which appeared in the preamble of the interim 
final rule (63 FR 26267), and which included a column entitled ``Number 
of Days Authorized for Coverage and Payment.'' These commenters also 
asserted that making coverage determinations for a predetermined block 
of time was the approach that had been adopted under the NHCMQD, which 
served as the forerunner of the SNF PPS.
    Response: In order to understand the actual effect of an assignment 
to one of the upper 26 RUG-III groups in making level of care 
determinations under the SNF PPS, it is also necessary to consider how 
SNF coverage determinations were made before the inception of the PPS. 
Before the SNF PPS, when a beneficiary met the ``posthospital'' 
requirements for SNF coverage (that is, the timely initiation of SNF 
care following the beneficiary's discharge from a qualifying hospital 
stay), an individual level of care determination was made, using the 
longstanding criteria that appear in regulations at Secs. 409.31 
through 409.35, and manual instructions in the Medicare Intermediary 
Manual, Part 3 (MIM-3, HCFA Pub. 13-3), sections 3132ff and the Skilled 
Nursing Facility Manual, sections 214ff.
    As discussed in the interim final rule, this determination entailed 
a retrospective review by the Medicare FI, which focused primarily on a 
beneficiary's need for and receipt of specific, individual skilled 
services. Along with the posthospital and level of care requirements, 
the SNF services also had to meet additional requirements that apply to 
Medicare coverage generally; for example, the overall requirement that 
a service must be reasonable and necessary to diagnose or treat the 
beneficiary's condition (section 1862(a)(1) of the Act). Under this 
system of retrospective review, it was possible for an FI to issue a 
denial of coverage that was retroactive all the way back to--and even 
including--the day of SNF admission itself. As noted in the interim 
final rule, this situation made it extremely difficult for an SNF to 
predict with any degree of certainty that a particular admission 
ultimately would, in fact, be covered.
    In the interim final rule, we designated a beneficiary's correct 
assignment to one of the upper 26 RUG-III groups as representing an SNF 
level of care in an effort to bring more predictability and certainty 
to the process of making coverage determinations. However, this 
designation was made specifically with respect to the SNF level of care 
requirement itself, and was never intended to supersede any of the 
other existing criteria for coverage under the SNF benefit, such as the 
posthospital requirements, or the overall requirement for services to 
be reasonable and necessary to diagnose or treat the beneficiary's 
condition. Thus, under this approach, when the initial Medicare (that 
is, 5-day) required assessment results in a beneficiary being correctly 
assigned to one of the upper 26 RUG-III groups, this effectively 
creates a presumption of coverage for the period from admission up to, 
and including, the assessment reference date for that assessment, and 
the coverage that arises from this presumption remains in effect for as 
long thereafter as it continues to be supported by the actual facts of 
the beneficiary's condition and care needs. Relative to the situation 
that existed before the SNF PPS, we believe that this approach provides 
the SNF with far greater confidence in coverage at the outset of a 
resident's stay, and enables the SNF, once coverage is established, to 
continue to bill for the resident's care for as long as the resident's 
actual care needs continue to support coverage.
    The use of this presumption at the outset of a resident's SNF stay 
is supported by the SNF benefit's basic nature as a posthospital 
benefit, which is a major factor in determining the typical course of 
an SNF stay. In its July 1998 testimony before the House Ways and Means 
Committee (GAO/T-HEHS-98-214), the GAO noted that SNF residents tend to 
be relatively unstable and require fairly intensive skilled care during 
the period immediately following admission from the prior 
hospitalization, but that this tendency typically diminishes as they 
get further on in the SNF stay. The GAO indicated that a policy which 
continues to ``deem'' coverage for these individuals after they have 
clearly reached the point where they no longer need a skilled level of 
care would represent an unwarranted expansion in the SNF benefit.
    We concur with the GAO's conclusion and, in view of the 
misunderstanding expressed by commenters on this point, we believe it 
is appropriate to clarify in this final rule that the initial 
presumption of coverage that arises from a beneficiary's Medicare-
required 5-day assessment and his or her resulting RUG-III assignment 
encompasses the period from admission through the assessment reference 
date for the initial 5-day assessment, and is not intended to create an 
opportunity for continued payment beyond the point where SNF care is no 
longer reasonable and necessary; accordingly, the continuation of 
coverage, once established by the RUG-III presumption, would depend 
upon the subsequent course of the resident's actual condition and care 
needs.
    We also wish to clarify that this presumption does not arise in 
connection with any of the subsequent assessments, but applies 
specifically to the period ending with the assessment reference date 
for the initial Medicare-required 5-day assessment that occurs shortly 
after the beneficiary's admission

[[Page 41667]]

from the prior hospital stay. Accordingly, we are amending the 
regulations text at Sec. 409.30 to clarify that this presumption is 
valid up to and including the assessment reference date (that is, the 
last day of the observation period, which must occur no later than the 
eighth day of posthospital SNF care) for the initial Medicare-required 
5-day assessment.
    As the preceding discussion indicates, the course that SNF stays 
characteristically take over time means, in effect, that the basis for 
making any type of presumption with regard to coverage would tend to 
become progressively less conclusive as a resident moves farther into 
the SNF stay, and would be at its most conclusive at the very outset of 
the stay, during the period immediately following the resident's 
admission from the prior hospitalization. Accordingly, in situations in 
which a resident's condition upon admission is such as to warrant 
assignment to one of the upper 26 RUG-III groups, we regard this very 
tendency of SNF stays to be at their most intensive and unstable 
immediately following admission as justifying a presumption of coverage 
at the very outset of the SNF stay, during the period leading up to the 
assessment reference date for the initial Medicare-required 5-day 
assessment. This initial portion of the SNF stay provides the 
opportunity for the facility to initiate skilled nursing and 
rehabilitation services, and to begin its complete assessment of the 
beneficiary's clinical characteristics and care needs.
    In addition, we believe that the use of the coverage presumption 
during these first few days of a resident's stay may provide the 
additional benefit of enabling medical review resources to be deployed 
for maximum effectiveness: by combining the clinical criteria that are 
captured in the upper 26 RUG-III groups with the tendency (as discussed 
above) for the initial portion of an SNF stay to be the most intensive 
and unstable, the presumption should provide a more reliable way of 
identifying at the outset those residents who do, in fact, require a 
covered SNF level of care. This, in turn, will enable medical reviewers 
to focus their resources elsewhere, on other residents or other 
portions of the SNF stay that are far more likely to involve the 
provision of noncovered care.
    The underlying principle at work in the use of this administrative 
presumption at the outset of a covered stay is the fact that the RUG-
III groups themselves are expressions of a certain level of services--
skilled nursing care and skilled rehabilitation services, the need for 
which represents the SNF level of care described in the statute at 
section 1814(a)(2)(B) of the Act. We, therefore, believe that in 
situations in which a beneficiary's initial, Medicare-required 5-day 
assessment results in an accurate assignment to one of the highest 26 
of the 44 RUG-III groups, this assignment (in combination with the 
proximity to the prior qualifying hospital stay) makes it appropriate 
to presume that the beneficiary meets the SNF level of care definition 
at the outset of the stay. However, as is the case with all such 
administrative presumptions, this presumption is itself rebuttable in 
those individual cases in which the services actually received by the 
resident do not meet the basic statutory criterion of being reasonable 
and necessary to diagnose or treat a beneficiary's condition (according 
to section 1862(a)(1) of the Act). Accordingly, the presumption would 
not apply, for example, in those situations in which a resident's 
assignment to one of the upper 26 RUG-III groups is itself based on the 
receipt of services that are subsequently determined to be not 
reasonable and necessary.
    The role of this presumption in determining coverage is, in some 
ways, similar to that performed by a physician who correctly certifies 
that a beneficiary requires a covered level of care, in that both 
activities serve to identify a beneficiary's initial need for covered 
care. In this context, it is worth noting that the interim final rule 
amended the physician certification regulations to reflect the use of 
the RUG-III system specifically with regard to the initial 
certification (Sec. 424.20(a)(1)(ii)), but not the subsequent 
recertifications (Sec. 424.20(c)).
    Further, we note that the process of providing appropriate resident 
care in SNFs (which consists of a continuous loop of resident 
assessment, care planning, implementing specific interventions, and 
assessing the resident's response to and continued need for the 
interventions) serves to keep the SNF apprised, on an ongoing basis, of 
any changes in the resident's care needs. Thus, once the SNF determines 
that skilled care is no longer required, it must acknowledge this 
change in condition at that point and issue the appropriate written 
notice of noncoverage to the beneficiary.
    Under existing program policy, in situations involving a provider 
that has acted in good faith but has nonetheless had a claim for 
Medicare coverage denied, a separate statutory provision on limitation 
of liability at section 1879 of the Act might permit payment to be made 
on an exception basis. This provision specifically refers to denials 
based on the general exclusion from coverage for care that is not 
reasonable and necessary (section 1862(a)(1) of the Act), as well as 
the exclusion for custodial care (section 1862(a)(9) of the Act). Taken 
together, these provisions indicate that any presumption about the need 
for covered care at the outset of the SNF stay is rebuttable by one of 
these general coverage exclusions--and might be remediable by the 
limitation of liability provision.
    We do not agree with the commenters who argued that the prospective 
nature of the SNF PPS should result in coverage being granted 
prospectively for a predetermined block of time (that is, for the 
entire duration of the assessment period). Rather, the SNF PPS is 
prospective in the sense of paying a predetermined rate that 
represents--in the aggregate--the cost of SNF care that would typically 
be associated with a beneficiary who classifies to a particular RUG-III 
group. However, we note that a basic feature of the SNF PPS (and one 
that fundamentally distinguishes it from, for example, its inpatient 
hospital counterpart) is that it makes payment on a per day rather than 
a per episode basis. This means that while there may, in practice, be 
some variation in resource intensity from one resident to another 
within a particular RUG-III group (and even from one day to another 
within a particular resident's stay), the SNF PPS per diem payments, 
when taken in the aggregate, appropriately reflect the overall 
intensity of resources associated with that particular RUG-III group. 
Further, the per diem basis for payment recognizes that in practice, 
the levels and types of services required and the duration of the 
actual need for a covered SNF level of care may vary somewhat from one 
resident to another.
    The preamble discussion of the case-mix system in the interim final 
rule (63 FR) 26261) notes that in the nursing home setting, ``* * * 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.'' Accordingly, 
the framework set forth in the interim final rule supports the concept 
that the continuation of SNF coverage (once it has been initiated by 
the RUG-III presumption) must be supported by the resident's actual 
condition and care needs, and is not guaranteed for some predetermined 
block of time. To determine otherwise would effectively create a 
perverse incentive for SNFs to extend the length

[[Page 41668]]

of Medicare stays beyond the point where the provision of skilled care 
ceases to be reasonable and necessary. Additionally, with regard to 
dually-entitled residents, an SNF might have an additional incentive to 
prolong the period during which it receives Medicare per diem payments, 
in order to delay the change to a Medicaid payment that, in some 
States, is lower.
    Further, with regard to the comments on the NHCMQD, we note that in 
contrast to the SNF PPS itself, we intentionally refrained from 
conducting medical review under the demonstration, in order to observe 
facility practices and care patterns in its absence. The resulting 
facility activity under the demonstration did not appear to diverge 
significantly from prior experience. With regard to duration of 
coverage, it would appear that the primary factor in determining the 
cessation of coverage under the demonstration was not the resident 
assessment cycle but, rather, the interest of beneficiaries and their 
families in keeping the length of SNF stays as short as possible--in 
order to avoid or minimize their financial liability for the daily SNF 
coinsurance that begins on the 21st day of Part A coverage, and to have 
the beneficiary return home at the earliest possible moment (under the 
demonstration, patients were only in the SNF long enough to have an 
average of 2.5 Medicare-required assessments). Based on the 
demonstration experience, as well as the nature of the coverage 
presumption itself (that is, its validity up to the assessment 
reference date for the initial Medicare-required 5-day assessment), 
this presumption clearly is not designed to guarantee payment for the 
entire duration of the assessment period.
    Nevertheless, consistent with the averaging function of the PPS, 
the payment rate, once established, is guaranteed for as long as the 
beneficiary's care needs continue to fall within the range of covered 
care, even if the specific acuity of the beneficiary's care needs 
within this range decreases; thus, the SNF can continue to receive the 
higher payment rate for such a beneficiary's covered care up to the 
next assessment. Conversely, it is possible that a resident's acuity 
may decrease to the point where it actually falls below a covered level 
of care, even though it has not changed sufficiently to trigger a 
Significant Change in Status Assessment. At that point, the ongoing 
coverage is ended by Medicare's statutory coverage exclusion of 
custodial care at section 1862(a)(9) of the Act, which provides that 
``* * * [n]otwithstanding any other provision of this title, no payment 
may be made for any expenses incurred for items or services * * * where 
such expenses are for custodial care'' (emphasis added), and the SNF 
would be required to issue a notice of noncoverage. Under the 
implementing regulations at 42 CFR 411.15(g), this exclusion is invoked 
whenever a beneficiary receives care that does not meet the 
requirements for coverage as SNF care as set forth in Secs. 409.31 
through 409.35. The qualifying language in the statute means that the 
custodial care exclusion from coverage takes precedence over other 
provisions of the program--including any presumptions made with regard 
to coverage. Thus, under the SNF PPS, the introduction of the coverage 
presumption based on a beneficiary's RUG-III group assignment was 
intended to streamline and simplify the initial level of care 
determination (which, along with the posthospital requirements, governs 
access to coverage under the extended care benefit). However, once this 
presumption has served to establish a beneficiary's initial access to 
coverage under the extended care benefit, it does not in any way 
supplant or invalidate the remainder of the basic and longstanding 
process for determining the duration of that coverage. While we believe 
that the use of this coverage presumption at the outset of the SNF stay 
represents a significant advancement toward achieving greater 
simplicity, predictability, and consistency in the coverage process, we 
will continue to monitor coverage determinations under the SNF PPS with 
a view toward the possibility of making further refinements and 
improvements in the future.
    Finally, with regard to Table 2.D (Medicare Assessment Schedule), 
which appeared in the preamble to the interim final rule (63 FR 26267), 
we note that the heading to column four, Number of Days Authorized for 
Coverage and Payment, refers to the maximum period of coverage between 
assessments, but was not intended to prescribe coverage of a 
predetermined block of time consisting of a minimum number of days. In 
order to resolve any confusion that publication of this table may 
inadvertently have caused, we are now republishing the table below, 
with that particular column omitted.

                                    Table 2.D.--Medicare Assessment Schedule
----------------------------------------------------------------------------------------------------------------
                                  Reason for
 Medicare MDS assessment type     assessment         Assessment reference date       Applicable medicare payment
                                  (AA8b code)                                                    days
----------------------------------------------------------------------------------------------------------------
5 day.........................               1  Days 1--8*.........................  1 through 14.
14 day........................               7  Days 11--14 **.....................  15 through 30.
30 day........................               2  Days 21--29........................  31 through 60.
60 day........................               3  Days 50--59........................  61 through 90.
90 day........................               4  Days 80--89........................  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.

    Comment: One commenter questioned the appropriateness of using a 
resident's assignment to one of the upper 26 RUG-III groups as a 
determinant of a skilled level of care in situations in which the RUG-
III assignment is based solely on events that occurred during the 
``look-back'' period (for example, IV medications within the past 14 
days). The commenter noted that this could result in a resident being 
covered even though the qualifying skilled services that triggered the 
RUG-III assignment have themselves been discontinued before admission 
to the SNF, and the resident is no longer actually receiving any 
skilled care whatsoever by the time of the assessment itself.
    Response: We note that the use of the ``look-back'' period in 
making RUG-III assignments is essentially a clinical proxy that is 
designed to serve as an indicator of situations that involve a high 
probability of the need for skilled care. Thus, our expectation is that 
the occurrence of one of the specified events during the ``look-back'' 
period,

[[Page 41669]]

when taken in combination with the characteristic tendency (as 
discussed above) for an SNF resident's condition to be at its most 
unstable and intensive state at the outset of the SNF stay, should make 
this a reliable indicator of the need for skilled care upon SNF 
admission in virtually all instances. In particular, residents in such 
situations may need the types of services formerly listed in 
Sec. 409.33(a) of the regulations, that are discussed more fully below. 
If it should become evident in actual practice that this is not the 
case, it may become appropriate at that point to reassess the validity 
of the RUG-III system's use of the ``look back'' period in making 
assignments.
    Comment: In the interim final rule, we invited comments on the 
feasibility of dispensing with the level of care criteria in existing 
regulations, in favor of utilizing the RUG-III framework as the 
exclusive means for making level of care determinations. One commenter 
expressed support for this approach; however, many others supported the 
continuation of individual level of care determinations under the 
existing criteria for beneficiaries assigned to one of the lower 18 
RUG-III groups. A few of these commenters suggested that we might 
reassess this approach after the PPS has been in operation for a few 
years; at that point, they suggested, it might be possible to identify 
specific clusters of services within the lower 18 RUG-III groups that 
could serve as reliable indicators of skilled care, and to incorporate 
those indicators into the upper 26 RUG-III groups.
    Response: As requested by most of the commenters, we are retaining 
in the regulations the existing criteria with certain modifications, as 
discussed elsewhere in this preamble. To the extent that our continuing 
experience in implementing the SNF PPS may indicate at some future 
point that further revisions in these criteria are warranted, we will 
consider making appropriate refinements to them at that time.
    Comment: We received a number of comments concerning certain 
incremental adjustments that we made to the existing level of care 
criteria in the interim final rule. We made these revisions in order to 
achieve greater consistency with the general approach adopted under the 
SNF PPS with the use of the RUG-III groups, and also to reflect the 
significant advances in the state of long-term care practices that have 
occurred during the quarter century since the current SNF level of care 
regulations were first promulgated. Specifically, in view of changes in 
medical practice over time, we deleted the previous references to 
hypodermoclysis and subcutaneous injections as examples of skilled 
nursing services. We retained enteral feeding as an example of a 
skilled nursing service, but adopted specific qualifying criteria from 
the RUG-III framework (that is, that the enteral feeding must comprise 
at least 26 percent of daily calorie requirements and at least 501 
milliliters of fluid per day). Further, we deleted the categories 
previously listed in Sec. 409.33(a) of ``management and evaluation of a 
care plan,'' ``observation and assessment'', and ``patient education'' 
as examples of skilled services, in the belief that these categories 
were already effectively captured by the clinical proxies that have 
been incorporated into the upper 26 RUG-III groups.
    Additionally, in the preamble to the interim final rule (63 FR 
26284), we indicated that it might well be desirable to delete the 
insertion, irrigation, and replacement of urinary catheters as an 
example of a skilled service, in order to avoid providing a perverse 
incentive for their inappropriate use. However, we also invited 
comments on the desirability of retaining this example specifically 
with regard to suprapubic catheters.
    Of the comments we received on these changes, the largest number 
supported retaining suprapubic catheters as an example of a skilled 
nursing service, noting that this procedure is a major vector for 
infection that can be fatal if improperly performed, and that requires 
a greater amount of skilled care than foley catheters. One commenter 
favored deleting even suprapubic catheters from the examples of skilled 
nursing services, while another favored retaining all types of 
catheters in the examples. Several commenters advocated reinstating 
observation and assessment, management and evaluation, and patient 
education as explicit examples of skilled services in the SNF level of 
care regulations (or, alternatively, amending the regulations governing 
the home health benefit at Sec. 409.42(c)(1), which currently cross-
refer to the SNF regulations, to include them). A few commenters 
suggested retaining subcutaneous injections as an example of a skilled 
nursing service specifically with regard to those residents who, due to 
cognitive impairments such as those associated with dementia, are 
unable to self-administer the injections, and another favored retaining 
hypodermoclysis.
    Response: As noted above, our reason for deleting the explicit 
references in the regulations to management and evaluation, observation 
and assessment, and patient education was not that they no longer 
represented appropriate examples of skilled care, but rather, because 
we believed that these separate references were no longer necessary in 
view of the clinical indicators that have been incorporated into the 
upper 26 RUG-III groups. However, in order to avoid possible confusion 
on this point, we are accepting the commenters' suggestion to reinstate 
these categories as specific examples in the SNF level of care 
regulations.
    Further, while we continue to believe that it is inappropriate to 
cite the use of a urinary catheter as an example of a skilled service 
in most instances, we agree with the reasons advanced by the commenters 
who favored specifically retaining suprapubic catheters in the list of 
examples of skilled nursing services; accordingly, we are modifying the 
example regarding catheters to refer exclusively to this particular 
type of catheter. However, for the reasons discussed previously in the 
preamble to the interim final rule, we are not reinstating 
hypodermoclysis or subcutaneous injections as examples of skilled 
nursing services. Regarding the latter, we do not believe that the 
presence of a cognitive impairment in the person who receives the 
injection would significantly affect the skills required on the part of 
another person who actually administers it.
    Finally, we are taking this opportunity to correct a technical 
inaccuracy that appears in the regulations at Sec. 411.15(g), defining 
the term ``custodial care,'' as well as in the introductory material 
for Sec. 409.30. An earlier version of the custodial care definition 
(which appeared at Sec. 405.310(g)) correctly described this term in 
the SNF context as any care that does not meet the SNF level of care 
criteria, which at that time appeared in Sec. 405.126 through 
Sec. 405.128. When the SNF level of care criteria were redesignated as 
Sec. 409.31 through Sec. 409.35 (48 FR 12534, March 25, 1983), a 
conforming change was subsequently made to the cross-reference in the 
custodial care regulations (50 FR 33031, August 16, 1985).
    However, in addition to the level of care regulations at 
redesignated Sec. 409.31 through Sec. 409.35, this conforming change 
inadvertently revised the cross-reference erroneously to include the 
SNF benefit's posthospital requirements at redesignated Sec. 409.30. 
Since the posthospital requirements are not an element of the custodial 
care definition, we are deleting that portion of the citation from the 
cross-reference, which is revised to refer correctly to the SNF

[[Page 41670]]

level of care criteria at Sec. 409.31 through Sec. 409.35. Similarly, 
we are revising the cross-reference in the second sentence of the 
introductory material in Sec. 409.30 (regarding the use of the RUG-III 
groups in making level of care determinations) to refer solely to the 
level of care requirements in Sec. 409.31, and not to the posthospital 
requirements set forth in the remainder of Sec. 409.30 itself.
    Comment: Some comments reflected certain longstanding 
misconceptions regarding the SNF level of care definition, in terms of 
a beneficiary's need for and receipt of skilled services on a daily 
basis which, as a practical matter, can be furnished only in an SNF on 
an inpatient basis. One recurring misconception with regard to the 
``daily basis'' requirement (which some of the commenters expressed as 
well) is that Medicare coverage guidelines provide for specific breaks 
in skilled therapy services for the observance of a prescribed list of 
national holidays. Another longstanding misconception shared by some 
commenters is that the cessation of therapy for so much as a single day 
due, for example, to the beneficiary's temporary illness or fatigue, 
would mandate an automatic discontinuance of coverage. The recurring 
misconception with regard to the ``practical matter'' requirement is 
that a beneficiary's ability to have even an occasional, brief absence 
from the SNF in order to attend, for example, a holiday meal with 
family or friends, would result in the loss of Medicare coverage. As 
explained below, these interpretations of Medicare SNF coverage 
requirements are incorrect.
    Response: We note that the commenters' misunderstandings reflect 
certain recurring misconceptions about the SNF level of care criteria 
that long predate the SNF PPS. With regard to the ``practical matter'' 
requirement, it is true that a beneficiary's ability to have frequent 
or prolonged absences from the facility may raise a question as to 
whether the beneficiary, as a practical matter, can only receive the 
care that he or she needs on an inpatient basis in the SNF. However, 
this is not the case when a beneficiary is capable of having only 
occasional, brief absences from the facility. As section 214.6.C. of 
the Medicare SNF Manual indicates:

    An SNF should * * * not interpret the ``practical matter'' 
criterion so strictly that it results in the automatic denial of 
coverage for patients who have been meeting all of the SNF level of 
care requirements but who have occasion to be away from the SNF for 
a brief period of time. While most beneficiaries requiring an SNF 
level of care find that they are unable to leave the facility for 
even the briefest of time, the fact that a patient is granted an 
outside pass, or short leave of absence, for the purpose of 
attending a special religious service, holiday meal or family 
occasion, for going on a ride or for a trial visit home, is not by 
itself evidence that the individual no longer needs to be in an SNF 
to receive required skilled care. Very often special arrangements, 
not feasible on a daily basis, have had to be made to allow for 
absence from the facility.

    Thus, the requirement for daily skilled services should not be 
applied so strictly that it would not be met merely because there is a 
brief, isolated absence from the facility in a situation where 
discharge from the facility would not be practical. It is also worth 
noting that, in addition to the coverage guidelines discussed above, 
the Medicare certification requirements for SNFs, at Sec. 483.15(d), 
provide that each resident has the right to participate in social, 
religious, and community activities that do not interfere with the 
rights of other residents in the facility. Similarly, with regard to 
the ``daily basis'' requirement, the Medicare program does not specify 
in regulations or guidelines an official list of holidays or other 
specific occasions that a facility may observe as breaks in 
rehabilitation services, but recognizes that the resident's own 
condition dictates the amount of service that is appropriate. 
Accordingly, the facility itself must judge whether a brief, temporary 
pause in the delivery of therapy services would adversely affect the 
resident's condition.
    Comment: A commenter asked whether the certification and 
recertification statements for posthospital skilled nursing facility 
services required under section 1814(a)(2) of the Act must be performed 
only by a physician, or can be performed by an authorized facility 
staff member. Another requested that we authorize a physician assistant 
to perform certification and recertification statements (as nurse 
practitioners and clinical nurse specialists already are under current 
law). One commenter noted that the SNF benefit's requirement for a 
physician to certify (and periodically recertify) that a beneficiary 
needs an SNF level of care was waived under the NHCMQD, and argued that 
this requirement is a needless burden that should be permanently 
eliminated.
    Response: Section 1814(a)(2) of the Act requires that a physician 
(or a nurse practitioner or clinical nurse specialist who does not have 
a direct or indirect employment relationship with the facility, but who 
is working in collaboration with a physician) initially certifies, and 
periodically recertifies, the need for a skilled level of care. 
However, this provision does not currently authorize facility staff 
members or physician assistants to perform this function. Section 
424.20 sets forth the timing of the required certifications as follows: 
the initial certification must occur at the time of admission or as 
soon thereafter as is reasonable and practicable; the first 
recertification is required no later than the 14th day of posthospital 
SNF care; and, subsequent recertifications are required at least every 
30 days after the first recertification.
    Comment: One commenter noted that the upper 26 groups of RUG-III 
are designated as representing a covered SNF level of care only in the 
preamble to the interim final rule, and suggested that this designation 
should also be made explicit in the regulations text itself.
    Response: The reason that we declined to specify particular RUG-III 
groups in the regulations text itself was not to expand or contract 
coverage relative to the types of conditions that the upper 26 RUG-III 
groups currently identify, but rather, to allow for the possibility 
that the RUG-III groups themselves might be reconfigured in the future. 
This gives us the necessary flexibility to designate (in the routine 
annual update of Federal prospective rates described in regulations at 
Sec. 413.345) those reconfigured RUG-III groups that would correspond 
to the upper 26 groups under the current RUG-III configuration, without 
having to go through the full rulemaking process in order to make 
specific revisions in the regulations text itself. (Of course, any such 
reconfiguration in the RUG-III groups would itself be effected through 
rulemaking.)

N. SNF Consolidated Billing

    The consolidated billing requirement (established by section 
4432(b) of the BBA) places with the SNF itself the Medicare billing 
responsibility for virtually the entire package of services furnished 
to a resident of an SNF. In the interim final rule, we addressed both 
the scope of services and the definition of an SNF ``resident'' that 
apply for purposes of this provision. As discussed below, this final 
rule provides additional clarification on implementation timeframes for 
this provision and on the scope of services to which this provision 
applies, including the role played by the SNF care planning process.
    Comment: We received many comments regarding timeframes for 
implementation of the SNF consolidated billing provision, particularly 
with respect to those SNF residents who are

[[Page 41671]]

not in a covered Part A stay. Many expressed support for a delay in the 
implementation of this aspect of the provision, and requested that 
advance notification be given before implementing it.
    Response: Section 4432(d) of the BBA provides that, unlike the 
effective date for the PPS itself (which is tied to the start of the 
individual SNF's first cost reporting period that begins on or after 
July 1, 1998), the consolidated billing provision applies to items and 
services furnished on or after July 1, 1998. In April 1998, we 
published PM transmittal number AB-98-18, which contained operational 
instructions for Medicare contractors on consolidated billing 
implementation.
    As noted in the preamble to the interim final rule, in order to 
accommodate individual SNFs that lacked the capability to perform 
consolidated billing as of the July 1, 1998, effective date, the PM 
provided for a ``transition period,'' under which such a facility would 
be required to begin consolidating its bills for items and services 
furnished on or after the earlier of either (1) January 1, 1999 or, (2) 
the facility's PPS start date.
    However, this instruction was subsequently superseded by PM 
transmittal number AB-98-35 (July 1998), which eliminated the 
transition period described in PM transmittal number AB-98-18, and 
provided instead that an SNF must consolidate its bills as of its PPS 
start date, for those of its residents who are in a covered Part A 
stay. For those SNF residents who are not in a covered Part A stay (for 
example, who have exhausted their available days of coverage under the 
Part A SNF benefit, or who do not meet that benefit's posthospital or 
level of care requirements), the PM postponed implementation of 
consolidated billing indefinitely. This was necessitated by systems 
modification delays in connection with achieving Y2K compliance.
    The Y2K problem arose because computer programming, which has 
commonly employed only two digits to record the year in the date for 
transactions and other entries, will not be able to distinguish the 
year 2000 from the year 1900 without reprogramming. This problem must 
be corrected on a timely basis in order to avoid the potential for 
significant disruption of the automated systems that are essential to 
administering the entire Medicare program. (For a more detailed 
discussion of Medicare and the Y2K problem, please refer to the 
preamble for the proposed rule on the outpatient hospital PPS, 63 FR 
47605, September 8, 1998.) Making the necessary systems renovations to 
correct this problem is an extensive and complex process that must be 
given priority over other systems modifications.
    Accordingly, consolidated billing implementation with regard to 
those SNF residents who are in noncovered stays is being postponed at 
present, because it will require systems modifications that are far 
more extensive than those needed for the SNF PPS under Part A--
modifications of a magnitude that simply cannot be accomplished until 
the current actions to achieve Y2K compliance have been completed. We 
plan to publish a notice of the anticipated implementation date for 
this aspect of consolidated billing in the Federal Register at least 90 
days in advance.
    Comment: Numerous commenters recommended a wide variety of items 
and services that they believe should be categorically excluded from 
the SNF consolidated billing requirement and paid separately from the 
PPS. Some examples included: laboratory services, intravenous 
medications, medications for patients with acquired immune deficiency 
syndrome (AIDS), and various types of practitioner services. Some of 
these commenters noted our discussion in the preamble to the interim 
final rule regarding a technical amendment to section 1833(h)(5)(A) of 
the Act (which would specifically authorize SNFs to receive Part B 
payment for laboratory tests that they do not themselves either perform 
or supervise), and advocated deferring the application of consolidated 
billing to those services until after the actual enactment of this 
legislation. Other commenters argued that since the consolidated 
billing legislation specifically excludes several types of practitioner 
services, the services of certain additional types of practitioners, 
such as clinical social workers and audiologists, should similarly be 
excluded. One commenter mistakenly understood the exclusion of 
``physician services'' from consolidated billing to be the result of an 
administrative decision by us, and expressed support for this decision; 
another argued that the statute's categorical exclusion of ``physician 
services'' from this provision mandates the exclusion not only of a 
diagnostic test's professional component (representing the physician's 
interpretation of the diagnostic test), but also of the technical 
component (representing the test itself).
    Response: The only types of services furnished to SNF residents 
that are categorically excluded from the PPS and consolidated billing 
provisions are the ones specified in a short list of statutory 
exclusions at section 1888(e)(2)(A)(ii) of the Act, for which an 
outside supplier can still bill Medicare directly and receive a 
separate payment under Part B. All other services are subject to 
consolidated billing when furnished to an SNF resident, and are 
included in the PPS payment that Medicare makes to the SNF for a 
covered Part A stay. In addition, we note that the issue of an SNF 
receiving Part B payment for laboratory services under consolidated 
billing does not arise at present since, as discussed previously, the 
implementation of SNF consolidated billing is currently on hold for 
those residents who are not in a covered Part A stay.
    Further, we note that although the consolidated billing legislation 
does exclude the services of psychiatrists and clinical psychologists, 
it does not exclude the services of clinical social workers. (In this 
context, it is worth noting that the SNF consolidated billing 
requirement was modeled on the corresponding Medicare comprehensive 
billing or ``bundling'' requirement for inpatient hospital services 
(section 1862(a)(14) of the Act), which has been in effect for well 
over a decade and similarly includes clinical social worker services, 
while excluding the services of certain other types of mental health 
professionals.) Similarly, section 1888(e)(2)(A)(ii) of the Act does 
not exclude audiologists; in fact, it is quite explicit in specifying 
that ``speech language therapy'' services are always subject to 
consolidated billing, even when performed by a type of practitioner 
(such as a physician) whose services would otherwise be categorically 
excluded from this provision.
    We note that the exclusion of physician services themselves from 
consolidated billing is statutory rather than the result of an 
administrative decision; further, the implementing regulations at 
Sec. 411.15(p)(2)(i) define the excluded ``physician's services'' as 
those meeting the criteria of Sec. 415.102(a), and the latter provision 
specifies, in part, that this definition encompasses only those 
services that are furnished personally by the physician. Thus, under 
consolidated billing, only the professional component of a diagnostic 
test (representing the interpretation that the physician performs 
personally) is billed separately as a physician service, while the 
technical component represents the diagnostic test itself, which must 
be billed by the SNF.

[[Page 41672]]

    Finally, in connection with further defining the bundle of services 
subject to consolidated billing when furnished to an SNF resident, we 
are taking this opportunity to make a conforming change in the 
regulations governing Medicare provider agreements in subpart B of Part 
489. The interim final rule amended this subpart by adding a new 
paragraph (s) to Sec. 489.20 to implement section 1866(a)(1)(H)(ii) of 
the Act, which makes compliance with the consolidated billing provision 
a specific requirement under the terms of an SNF's Medicare provider 
agreement. We are now adding a new paragraph (h) to Sec. 489.21, which 
explicitly precludes an SNF from charging a resident for any items or 
services that are subject to the Medicare consolidated billing 
requirement. (We note that this new provision parallels the 
longstanding provision in paragraph (f) of Sec. 489.21, which similarly 
prohibits a hospital from charging its inpatient for any items or 
services that are subject to the Medicare hospital bundling provision.)
    Comment: Several commenters wrote regarding the provision in 
section 4541 of the BBA, which imposes a $1500 annual per beneficiary 
limit on Part B payments for outpatient PT services (including speech-
language therapy services) and a similar limit for outpatient OT 
services, but specifically excepts services furnished by a hospital's 
outpatient department from each of these annual limits. (This $1500 
Part B payment limit does not affect SNF residents who are in a covered 
Part A SNF stay, since the therapy services that they receive are 
bundled to the SNF and included in the PPS payment made under Part A, 
rather than being billed separately to Part B.)
    The commenters objected to the interim final rule's exclusion of 
beneficiaries who are considered SNF ``residents'' for consolidated 
billing purposes from the outpatient hospital exception to the Part B 
therapy payment limit (63 FR 26299). The commenters argued that this 
decision results in a reduction of an SNF resident's available Part B 
therapy benefits in relation to residents of a totally noncertified 
nursing home (who would, by comparison, get a richer benefit package), 
thus effectively depriving SNF residents of the ``escape hatch'' that 
would otherwise be afforded by the exception of services furnished in 
the outpatient hospital setting from the $1500 therapy payment limit.
    Another commenter cited the discussion in Program Memorandum 
transmittal number AB-98-63 (October 1998) of the $1500 limit on Part B 
therapy payment, and asked whether the SNF billing and tracking 
requirements for Part B therapy services described in the PM indicate 
that the decision to postpone consolidated billing implementation for 
residents in noncovered SNF stays has been reversed specifically with 
regard to therapy services.
    Response: As discussed in the preamble to the SNF PPS interim final 
rule, we decided not to except services furnished to SNF residents in 
the outpatient hospital setting from the Part B $1500 therapy payment 
limit, specifically in order to avoid creating a perverse incentive to 
have the hospital outpatient department furnish therapy services that 
the resident could appropriately receive from the SNF itself. We note 
that section 1819(a)(1) of the Act defines an SNF, in part, as an 
institution that is primarily engaged in furnishing skilled 
rehabilitation services to its residents. This means that the provision 
of therapy services to its residents is an inherent and essential 
function of this type of facility.
    Moreover, the long-term care facility requirements for 
participation (at section 1819(b)(4)(a)(i) of the Act) specifically 
require an SNF to provide ``. . . specialized rehabilitative services 
to attain or maintain the highest practicable physical, mental, and 
psychosocial well-being of each resident . . .'' Thus, an SNF that 
fails to provide medically necessary therapy services simply because a 
resident had reached the $1500 annual Part B payment limit for these 
services would be in violation of this requirement, and would be 
subject to appropriate enforcement remedies.
    In addition, we wish to clarify that the SNF billing and tracking 
responsibilities described in PM AB-98-63 arise solely in the context 
of implementing the $1500 Part B therapy payment limit, which 
represents an entirely separate BBA provision (and statutory authority) 
from SNF consolidated billing; as specified in PM AB-98-35 (July 1998), 
the consolidated billing provision itself currently remains on hold for 
all services furnished to SNF residents in noncovered stays.
    Finally, in addition to the comments on the $1500 therapy cap 
provision specifically as it affects SNF residents, several commenters 
included more general observations about the nature of the provision 
itself. However, these concerns are beyond the scope of this 
regulation, and were addressed instead in the June 5, 1998, proposed 
rule on Revisions to Payment Policies Under the Physician Fee Schedule 
for Calendar Year 1999 (63 FR 30818), and in the final rule published 
on November 2, 1998 (63 FR 58814).
    Comment: One commenter noted that the regulation at Sec. 413.335(b) 
concerning prospective payment for SNFs indicates that the PPS payment 
represents payment in full for the costs associated with furnishing 
inpatient SNF services to Medicare beneficiaries, but does not contain 
language that specifically excepts those types of services (such as 
physician services) that are categorically excluded by law.
    Response: The qualifying language that the commenter requested is, 
in fact, already contained in the regulations at Sec. 413.1(g)(2), 
which specify that, for an SNF resident in a covered Part A stay, the 
PPS determines the amounts paid for services furnished, ``other than 
those described in Sec. 411.15(p)(2) of this chapter.'' The latter 
provision lists the services that are categorically excluded from the 
PPS bundle.
    Comment: We received a large number of comments about the treatment 
of ambulance services under the consolidated billing provision. Some 
advocated exclusion of all ambulance services from the consolidated 
billing provision. Others expressed concern that confusion over the 
circumstances in which these services are subject to consolidated 
billing could result in payment delays. Several commenters specifically 
requested clarification on whether emergency and other outpatient trips 
to a hospital via ambulance are subject to consolidated billing. Others 
argued that the inclusion of ambulance services under consolidated 
billing is inconsistent with the negotiated fee schedule provisions for 
ambulance services in the BBA.
    Response: As discussed previously, the only types of services 
furnished to SNF residents that are categorically excluded from the PPS 
and consolidated billing provisions are the ones specified in a short 
list of statutory exclusions at section 1888(e)(2)(A)(ii) of the Act. 
Since ambulance services do not appear on this statutory excluded list, 
they are subject to consolidated billing when furnished to an SNF 
resident and are included in the PPS payment that Medicare makes to the 
SNF for a covered Part A stay.
    The statute specifies that the consolidated billing provision 
applies only to those services that are furnished to an SNF 
``resident.'' Thus, as explained in the preamble to the interim final 
rule, an ambulance trip is considered to be furnished to an SNF 
resident (and, thus, subject to consolidated billing) if it occurs 
during the course of an SNF stay, but not if it occurs at either the 
very beginning or

[[Page 41673]]

end of the stay. (This policy is comparable to the one governing 
ambulance services furnished in the inpatient hospital setting, which 
has been subject to a similar comprehensive Medicare billing or 
``bundling'' requirement for well over a decade.) Accordingly, the 
initial ambulance trip that first brings a beneficiary to an SNF is not 
subject to consolidated billing because the beneficiary has not yet 
been admitted to the SNF as a resident at that point. Similarly, the 
regulations at Sec. 411.15(p)(2)(x) provide that an ambulance trip that 
conveys a beneficiary from the SNF is not subject to consolidated 
billing when it occurs in connection with one of the events specified 
in Secs. 411.15(p)(3) (i) through (iv) as ending the beneficiary's SNF 
``resident'' status. The events are--
     A trip for an inpatient admission to a Medicare-
participating hospital or critical access hospital (CAH), or to another 
SNF.
     A trip to the beneficiary's home to receive services from 
a Medicare-participating home health agency under a plan of care.
     A trip to a Medicare-participating hospital or CAH for the 
specific purpose of receiving emergency services or certain other 
intensive outpatient services that are not included in the SNF's 
comprehensive care plan.
     A formal discharge (or other departure) from the SNF that 
is not followed within 24 hours by readmission to that or another SNF.
    With regard to the third bullet above, Sec. 411.15(p)(3)(iii) of 
the regulations excludes from consolidated billing those types of 
outpatient hospital services ``. . . that are not furnished pursuant to 
the [SNF's] comprehensive care plan.'' This outpatient hospital 
exclusion (as discussed in greater detail below, in the context of the 
SNF comprehensive plan of care) applies to a small number of 
exceptionally intensive services that lie well beyond the scope of care 
that SNFs would ordinarily furnish (and, thus, beyond the ordinary 
scope of SNF care plans), as well as emergency services (which, by 
their nature, cannot be anticipated and planned for in advance). This 
means that when an outpatient visit to a hospital occurs for the 
purpose of receiving one of these excluded types of services, the 
individual receiving the services ceases to be a ``resident'' of the 
SNF for consolidated billing purposes and, thus, the associated 
ambulance transportation to the hospital is also excluded from 
consolidated billing. We note that this exclusion applies to the return 
trip from the hospital to the SNF as well, since the beneficiary's 
status as an SNF ``resident'' for consolidated billing purposes (once 
ended by the receipt of an excluded outpatient hospital service) does 
not resume until he or she returns to the SNF.
    With regard to the concerns about the negotiated fee schedule 
provisions for ambulance services, section 4531 of the BBA--the same 
provision that mandates the development of an ambulance fee schedule 
through a negotiated rulemaking process--also prescribes an interim 
payment methodology to be used until the ambulance fee schedule takes 
effect. Under the interim payment methodology, Part B will continue to 
pay for ambulance services that an SNF furnishes (either directly with 
its own resources, or under arrangements made with an outside supplier) 
on a reasonable cost basis, in which the cost per trip is limited to 
the prior year's reasonable cost per trip, updated by an inflation 
factor (that is, the consumer price index for all urban consumers (CPI-
U) minus one percentage point). We note that the Medicare contractors 
have already received instructions (PM Number A-97-15 (November 1997) 
and PM Number A-98-2 (February 1998)) that describe this payment 
methodology in detail.
    Comment: One commenter noted that the regulations at 
Sec. 410.40(b)(4) require ambulance services furnished to an SNF 
resident to be furnished by, or under arrangements made by, the SNF 
itself. The commenter questioned whether this requirement is consistent 
with our policy of allowing certain ambulance services (such as those 
furnished in connection with the receipt of excluded outpatient 
hospital services) to be excluded from consolidated billing.
    Response: In discussing services furnished to an SNF resident, 
Sec. 410.40(b)(4) includes a specific cross-reference to the SNF 
``resident'' definition at Sec. 411.15(p)(3) which, in turn, specifies 
certain circumstances (such as the receipt of excluded outpatient 
hospital services) as ending a beneficiary's status as a ``resident'' 
of the SNF for consolidated billing purposes.
    Comment: One commenter noted that our designation of certain 
categories of outpatient hospital services as ending (for consolidated 
billing purposes) a beneficiary's status as an SNF ``resident'' also 
has the effect of unbundling ambulance transportation that is 
associated with the beneficiary's receipt of those services. The 
commenter then suggested that we should similarly designate a 
beneficiary's receipt of excluded dialysis services at an offsite 
location as ending his or her SNF resident status in order to permit 
the associated ambulance transportation to be unbundled as well.
    Response: We believe that this comment reflects a misunderstanding 
of the underlying purpose of the outpatient hospital exclusion. This 
exclusion from consolidated billing does not serve as a mechanism for 
unbundling ambulance services per se. Rather, as discussed above, this 
exclusion is intended to encompass those services--specific to the 
outpatient hospital setting--that are so exceptionally intensive, 
costly, or emergent as to lie well beyond the ordinary scope of SNF 
care. The resulting unbundling of ambulance services associated with 
these excluded outpatient hospital services occurs simply because the 
bundling of ambulance services is itself tied to a beneficiary's status 
as an SNF ``resident'' for consolidated billing purposes, which is 
suspended by the beneficiary's receipt of these excluded types of 
outpatient hospital services.
    By contrast, the performance of dialysis--even if it occurs offsite 
in the outpatient hospital setting--is a type of activity that clearly 
falls well within the normal scope of SNF care. (As discussed below, 
the effect of the exclusion of dialysis services from the SNF 
consolidated billing provision is that an SNF is not itself required to 
furnish--either directly or under arrangements--dialysis services to 
its residents; however, if an SNF nonetheless elects to furnish these 
services, they are included within the scope of the Part A extended 
care benefit, as well as in the PPS per diem payment that Part A makes 
to the SNF.) Accordingly, while the statute categorically excludes 
dialysis services themselves from the requirement for SNF consolidated 
billing, their receipt offsite does not have the effect of ending a 
beneficiary's status as an SNF resident for purposes of this 
requirement and, consequently, does not result in unbundling the 
associated ambulance transportation.
    We note, in addition, that the policy regarding ambulance services 
in the SNF setting is also affected by a final rule on ambulance 
services coverage that was published in the Federal Register on January 
25, 1999 (64 FR 3637). Although this rule was published well after the 
SNF PPS interim final rule, it has raised certain questions and 
concerns about ambulance trips (and transportation generally) in the 
SNF context.
    In addition to the specific service categories listed in sections 
1861(h)(1) through (6) of the Act, the extended care benefit includes 
coverage of ``. . . such other services necessary to the health of the 
patients as are generally provided

[[Page 41674]]

by, or under arrangements made by, skilled nursing facilities'' 
(section 1861(h)(7) of the Act). As explained in the interim final rule 
on the SNF PPS (63 FR 26302), the medical and other health services 
specified in section 1861(s) of the Act (which include ambulance 
services) are considered to be ``generally furnished'' by SNFs and, 
therefore, coverable under the Part A extended care benefit (see 
regulations at Sec. 409.27(a)).
    As discussed previously, under the SNF consolidated billing 
provision, the SNF itself is responsible for billing Medicare for 
virtually all of the services that a resident receives, except for a 
short list of excluded service categories specified in the statute at 
section 1888(e)(2)(A)(ii) of the Act. Since the Congress did not 
specify ambulance services as one of the excluded categories, such 
services must be billed to Medicare by the SNF when furnished to an SNF 
resident. As explained above and in the interim final rule (63 FR 
26298), the consolidated billing provision does not apply to an 
ambulance trip that conveys a beneficiary to the SNF for the initial 
admission, or from the SNF following a final discharge, but only to 
ambulance transportation that is furnished during the period that the 
beneficiary is actually an SNF resident.
    Nevertheless, as noted in the interim final rule (63 FR 26296), it 
is possible for particular service categories (such as preventive or 
screening services) to be subject to the SNF consolidated billing 
provision, and yet not be included within the scope of coverage under 
the Part A SNF benefit. It has been suggested that this is also the 
case with ambulance services, in view of instructions in the SNF Manual 
at sections 260.2 and 262 that indicate ambulance services are covered 
only under Part B. However, we note that these sections appear in a 
portion of the instructions that deal exclusively with situations 
involving SNF services covered under Part B when no payment under the 
Part A SNF benefit is possible (Part A benefits exhausted, no prior 
qualifying hospital stay, etc.); thus, the reference to ``ambulance 
services'' in this context applies specifically to the Part B benefit 
described in section 1861(s)(7) of the Act.
    By contrast, for situations that do involve payment under the Part 
A SNF benefit, the applicable SNF Manual instructions in this regard 
appear at section 230.10.A. These instructions correspond to section 
1861(h)(7) of the Act, which includes within the scope of the extended 
care benefit those services--not otherwise specified in section 
1861(h)--that are generally furnished by (or under arrangements made 
by) SNFs. As explained in the preamble to the interim final rule (63 FR 
26302), this provision is considered to include the full range of 
medical and other health services described in section 1861(s) of the 
Act, other than those particular service categories (such as preventive 
and screening services) that, under the statute, lie specifically 
beyond the scope of the extended care benefit. The remainder of the 
medical and other health services described in section 1861(s) of the 
Act are considered to be ``generally furnished'' by SNFs and, 
therefore, within the scope of the extended care benefit when furnished 
to a resident in a covered Part A stay.
    Thus, when an SNF provides or makes arrangements for a resident's 
transportation by ambulance during the course of a covered Part A stay, 
such services are not considered Part B ambulance services under the 
separate Part B benefit at section 1861(s)(7) of the Act, but Part A 
extended care services that SNFs generally furnish under section 
1861(h)(7) of the Act. This is essentially similar to the use of the 
term ``durable medical equipment'' (DME), which refers exclusively to 
the Part B benefit described in section 1861(s)(6) of the Act; however, 
when an SNF furnishes the same types of items to a resident during the 
course of a covered Part A stay, they are not covered as DME under the 
separate Part B benefit, but rather, ``as supplies, appliances and 
equipment'' under the Part A extended care benefit at section 
1861(h)(5) of the Act. Further, section 1833(d) of the Act prohibits 
Part B payment for any service that is payable under Part A.
    In order to clarify that the Part A SNF benefit covers ambulance 
transportation under the authority of section 1861(h)(7) of the Act, we 
are relocating the ambulance provision from Sec. 409.20(a)(8) to a new 
subparagraph of Sec. 409.27, the section of the regulations that 
implements this particular portion of the statute. We are also 
clarifying that the SNF benefit's coverage of ambulance transportation 
is limited to those circumstances meeting the general medical necessity 
requirements that would apply to Part B coverage under the separate 
ambulance services benefit (as set forth in Sec. 410.40(d)(1)) if the 
services were not covered under Part A--that is, those situations in 
which a beneficiary's medical condition is such that other means of 
transportation would be contraindicated.
    We note that the ambulance rule's primary objective in revising the 
extended care benefit regulations was to clarify that the scope of this 
benefit specifically includes coverage of transportation via ambulance. 
In the SNF PPS context, this effectively results in bundling the cost 
of all ambulance trips made in connection with an individual who has 
the status of an SNF resident, regardless of whether, prior to the PPS, 
the SNF undertook to furnish these services itself as ``patient 
transportation'' under Part A or, alternatively, allowed an outside 
supplier to furnish them as ``ambulance services'' under Part B.
    However, the ambulance rule's revision was made in a manner that 
also raises the issue of coverage of transportation generally, by modes 
other than ambulance. In the institutional context, the issue of non-
ambulance transportation arises mainly in the SNF setting, since this 
particular institutional setting is one in which a facility may 
routinely utilize offsite sources of services for its resident during 
the course of his or her stay, under circumstances that do not 
necessarily require the use of an ambulance.
    Further, we note that unlike transportation via ambulance (which 
involves a service that is precisely delineated in terms of vehicle 
type, appropriate destinations, etc., and is recognized as a specific 
benefit category), the concept of non-ambulance transportation is a 
more generalized one that denotes the basic function of conveying an 
individual from one place to another, rather than a particular benefit 
or mode of conveyance. Under the long-term care facility requirements 
for participation at Sec. 483.25, an SNF's essential obligation is to 
provide each resident with those services that are necessary ``* * * to 
attain or maintain the [resident's] highest practicable physical, 
mental, and psychosocial well-being. * * *'' The SNF can meet this 
obligation either by providing the needed services onsite at the SNF, 
or by securing them at an offsite location. SNFs that pursue the latter 
course have historically used a wide variety of means for conveying a 
resident to receive offsite services. Some of these (like community 
wheelchair transportation) were available at no cost and others 
generally involved various non-Medicare funding sources (such as 
Medicaid, or the resident's own family).
    We note that, unlike transportation via ambulance, no separate 
benefit category has ever existed under Part B of Medicare for coverage 
of non-ambulance modes of transportation. Thus, prior to the inception 
of the SNF PPS, non-ambulance transportation for SNF residents occurred 
in a wide variety of ways that did not generally

[[Page 41675]]

involve any Medicare payment under either Part A or Part B. In making 
the ambulance final rule's revision to the extended care benefit 
regulations, it was not our intent to create an SNF benefit expansion 
by establishing a new entitlement under the Medicare program that did 
not heretofore exist in this setting; nor is it our intent to define as 
part of the SNF PPS bundle any services for which the Medicare program 
did not previously assume financial responsibility under either Part A 
or Part B. Therefore, we are revising Sec. 409.27, as discussed above, 
to refer specifically to ambulance transportation rather than to 
transportation generally.
    Comment: Several commenters requested clarification regarding the 
status of dialysis services under consolidated billing. One commenter 
suggested that Part B should pay for dialysis performed at the hospital 
outpatient department or, alternatively, when furnished by a 
freestanding dialysis center on the SNF's premises.
    Response: Dialysis is one of the service categories that the BBA 
specifically excludes from the SNF consolidated billing provision. Most 
of the other excluded service categories are, by definition, outside 
the scope of the Part A extended care benefit. For example, an SNF 
cannot bill Part A for physician services, since section 1861(b)(4) of 
the Act defines these services as being outside the scope of the 
inpatient hospital benefit which, in turn, has the effect of excluding 
them as well from the extended care benefit under section 1861(h) of 
the Act (see the undesignated clause following section 1861(h)(7) of 
the Act).
    By contrast, dialysis services have always been included within the 
scope of the Part A extended care benefit under section 1861(h)(7) of 
the Act that provides for coverage of those services (not specified 
elsewhere in section 1861(h)) that are generally furnished by, or under 
arrangements made by, SNFs. Thus, the exclusion of dialysis from the 
consolidated billing provision means that an SNF is not itself required 
to furnish or make arrangements for this service. However, even though 
the SNF is not required to furnish or make arrangements for dialysis 
during the course of a covered Part A stay, if it nonetheless elects to 
do so, the dialysis is included within the scope of the Part A extended 
care benefit, as well as in the PPS per diem payment. Alternatively, 
since the exclusion of dialysis services from the consolidated billing 
provision allows the SNF the option of declining to furnish or make 
arrangements for dialysis services, those services that meet the 
following coverage requirements for the Part B dialysis benefit could 
be furnished and billed to Medicare directly by an outside dialysis 
supplier.
    There are two situations under which dialysis services would be 
considered a Part B service and billable by an end stage renal disease 
(ESRD) facility or supplier when provided to an SNF resident. The first 
is for institutional dialysis services received at a Medicare certified 
ESRD facility. Institutional dialysis services must be provided by 
entities that meet the ESRD conditions of coverage that are specified 
in regulations at part 405, subpart U. These regulations limit 
outpatient maintenance dialysis services to those services provided 
``on the premises'' of the facility. Thus, it is not possible for Part 
B institutional dialysis services to be provided at the site of a 
nursing facility or SNF that does not itself meet the ESRD conditions 
of coverage. The second situation involves Part B coverage of home 
dialysis services for residents of nursing facilities or SNFs, as these 
facilities may qualify as the residents' home for purposes of this 
benefit.
    In order for Medicare payment of home dialysis to be made, the 
resident must elect to become a home dialysis patient and have 
completed a training program provided by an approved ESRD facility. 
Once a patient has completed the training, he or she must elect either 
Method I, where an ESRD approved facility furnishes the dialysis 
equipment and supplies, or Method II, where the patient elects a single 
supplier other than the ESRD facility to furnish all of the dialysis 
equipment and supplies, other than laboratory services and support 
services which are provided by a certified ESRD facility. Each home 
patient must have his or her own supplies and equipment. These cannot 
be shared with other SNF residents. Also, home dialysis is intended to 
be self-dialysis performed by the patient or the patient's family. 
Therefore, Medicare does not cover the services of staff to assist with 
the home dialysis services.
    Comment: Many commenters requested clarification of the 
relationship between the SNF comprehensive care plan and a 
beneficiary's status as a ``resident'' of the SNF for consolidated 
billing purposes. Section 1862(a)(18) of the Act defines the 
applicability of the consolidated billing requirement in terms of 
services that are furnished to an individual who is a ``resident'' of 
an SNF. The implementing regulations at Sec. 411.15(p)(3) specify 
several circumstances that have the effect of ending a beneficiary's 
status as an SNF ``resident'' for consolidated billing purposes.
    Section 411.15(p)(3)(iii) specifies as one such circumstance the 
receipt of those types of outpatient hospital services ``. . . that are 
not furnished pursuant to the [SNF's] comprehensive care plan.'' Many 
commenters expressed confusion about the appropriate interpretation of 
this provision, along with the erroneous belief that a given outpatient 
hospital service is subject to the SNF consolidated billing provision 
only if it is actually specified in the individual care plan of the 
particular beneficiary to whom the service is furnished. Other 
commenters suggested additional types of outpatient hospital services 
for exclusion beyond the specific categories already identified in the 
preamble to the interim final rule. Still others advocated extending 
the exclusion to apply to services furnished in nonhospital settings as 
well (for example, MRIs performed at freestanding imaging centers).
    Response: The purpose of citing the SNF's comprehensive care plan 
in the context of an outpatient hospital visit is to clarify that the 
SNF retains the overall billing responsibility for essentially the 
entire package of care furnished during the outpatient visit, other 
than certain specifically excluded services. As explained in the 
interim final rule (63 FR 26298), in the outpatient hospital context, 
this exclusion applies to the small number of exceptionally intensive 
services that lie well beyond the scope of care that SNFs would 
ordinarily furnish (and, thus, beyond the ordinary scope of SNF care 
plans), as well as emergency services (which, by their nature, cannot 
be anticipated and planned for in advance).
    In November 1998, we issued PM transmittal number A-98-37, which 
provided additional clarification on the outpatient hospital exclusion, 
as well as a list of the specific HCPCS codes that identify the 
excluded services. The PM explains that this exclusion is not invoked 
merely because a particular outpatient hospital service does not appear 
in the individual SNF care plan of the person receiving the service; 
rather, the exclusion applies only to those specified categories of 
services that, by definition, lie well beyond the scope of SNF care 
plans generally. Currently, only those services that are specifically 
cited in the PM itself are excluded from consolidated billing on this 
basis: cardiac catheterization; computerized axial tomography (CT) 
scans; MRIs, ambulatory surgery involving the use of an operating room;

[[Page 41676]]

emergency room services; radiation therapy; angiography; and, lymphatic 
and venous procedures. However, as indicated in the interim final rule, 
we continue to consider further refinements in this policy as the new 
PPS for outpatient hospital services is being developed, and any 
further refinements would be made through future rulemaking.
    In this context, we note that a key concern underlying the 
development of the consolidated billing exclusion of certain outpatient 
hospital services specifically involves the need to distinguish those 
services that comprise the SNF bundle from those that will become part 
of the outpatient hospital bundle that is currently being developed in 
connection with the outpatient hospital PPS. Accordingly, we are not 
extending the outpatient hospital exclusion from consolidated billing 
to encompass any other, freestanding settings.
    Finally, in order to resolve the confusion that commenters 
expressed regarding the role of the comprehensive care plan, we are 
revising the parenthetical in Sec. 411.15(p)(3)(iii) to read as 
follows: ``. . .(but only with respect to those services that are 
beyond the general scope of SNF comprehensive care plans, as required 
under Sec. 483.20).'' This is to clarify that an outpatient hospital 
service is not excluded from consolidated billing merely because it 
does not appear in the particular care plan of the individual 
beneficiary receiving the service; rather, consolidated billing 
excludes only those types of outpatient hospital services that we 
specifically identify as being beyond the scope of SNF care plans 
generally. As indicated above, this exclusion currently encompasses 
only those particular service categories that we have specifically 
identified in PM A-98-37; however, as we continue to examine this 
issue, we may make further modifications in future instructions.
    Comment: Many commenters requested further clarification regarding 
the definition of ``emergency'' outpatient hospital services in terms 
of their exclusion from SNF consolidated billing. One commenter argued 
that it is unreasonable to define an emergency as including only ``life 
or death'' situations. Another commenter noted the interim final rule's 
description of emergency outpatient hospital services as being beyond 
the general scope of SNF care plans (since, by their nature, they 
cannot be anticipated and planned for in advance), and questioned 
whether this characterization would be appropriate in those instances 
where ``emergency'' situations actually are addressed in a resident's 
plan of care (for example, contingency plans that are based on risk 
factors identified in the resident assessment). Another inquired as to 
whether the exclusion of emergency services extends to other services 
that are clearly unrelated to the emergency itself, but that happen to 
be performed during the individual's visit to the emergency room.
    Response: As noted in the preceding discussion of the relationship 
between the outpatient hospital exclusion and the comprehensive care 
plan, PM transmittal number A-98-37 (November 1998) provided additional 
clarification on the exclusion of certain outpatient hospital services 
from SNF consolidated billing. As the PM indicates, we are not 
establishing a special definition of ``emergency'' services unique to 
consolidated billing, but instead are incorporating the longstanding 
definition contained in regulations at Sec. 424.101, ``services that 
are necessary to prevent death or serious impairment of health and, 
because of the danger to life or health, require use of the most 
accessible hospital available and equipped to furnish those services.'' 
This definition is not limited to ``life or death'' situations, since 
it specifically includes those that present a risk of ``serious 
impairment of health'' as well. The PM also explains that emergency 
services are excluded from consolidated billing by virtue of their 
designation as being beyond the scope of SNF care plans generally, 
which would be true regardless of whether the individual care plan of a 
particular resident may occasionally address contingency plans in the 
event of a medical emergency. The PM also clarifies that the exclusion 
from consolidated billing is limited to, ``Those services and supplies 
that are directly related and required to complete the procedure or 
treat the emergency condition for which the beneficiary came to the 
hospital, for example, anesthesia when used during ambulatory surgery 
involving the use of an operating room.'' All other services and 
supplies must be bundled back to the SNF and the hospital must look to 
the SNF for payment.
    Thus, for example, a laboratory test that is required to diagnose 
the condition that occasioned the emergency visit would be excluded 
from consolidated billing, and can be billed to Part B by the hospital. 
By contrast, a routine diagnostic test that is unrelated to the 
emergency condition itself would not be excluded from consolidated 
billing merely because it happens to be performed during the 
beneficiary's visit to the emergency room.
    Comment: Two commenters noted that the outpatient hospital 
exclusion of ambulatory surgery from SNF consolidated billing applies 
specifically to those procedures that involve the use of an operating 
room, and they requested clarification on whether this exclusion would 
encompass the insertion and replacement of a percutaneous esophageal 
gastrostomy (PEG) tube when performed in a hospital's gastrointestinal 
(GI) suite or endoscopy suite rather than in an operating room.
    Response: The procedure codes that specifically pertain to PEG 
tubes are 43750 (percutaneous placement of gastrostomy tube) and 43760 
(change of gastrostomy tube), both of which come under the general 
exclusion from SNF consolidated billing for ambulatory surgery 
involving the use of an operating room. The reason that the 
instructions in PM A-98-37 restrict the outpatient hospital exclusion 
for ambulatory surgery to those procedures that involve the use of an 
operating room is to avoid encompassing procedures that are simple 
enough to be performed at bedside in the SNF itself. Accordingly, with 
respect to PEG tube procedures, we regard the use of a GI suite or an 
endoscopy suite as equivalent to the use of an operating room for 
purposes of this exclusion.
    Comment: We received many comments on various aspects of an SNF's 
relationship with its suppliers. In the interim final rule (63 FR 
26300), we noted that section 1888(e)(9) of the Act provides that the 
amount of Part B payment to an SNF shall be determined in accordance 
with the applicable fee schedule for the particular service. We also 
noted the concern that if an SNF were to arrange with an outside 
supplier for the provision of a particular service for less than the 
applicable fee schedule amount, allowing the SNF to retain the 
difference could create a perverse incentive for the SNF to provide 
unnecessary services.
    We invited comments on possible ways to address this concern, 
including pursuing 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) or, alternatively, to require the 
SNF to pay its supplier the full fee schedule amount. A few commenters 
expressed support for limiting the SNF's Part B payment to the lower of 
the applicable fee schedule amount or the amount of the supplier's 
actual charge to the SNF, but only if the SNF is required to pass this 
entire

[[Page 41677]]

amount (as so limited) on to the supplier. A greater number supported 
requiring the SNF to pass the full fee schedule amount on to the 
supplier, regardless of the supplier's actual charge (some of these 
commenters advocated permitting the SNF to retain a ``reasonable'' 
administrative charge).
    By far the largest group of commenters, however, argued against 
imposing any restrictions in this area, noting that transactions 
between the SNF and its suppliers are a private contractual matter in 
which we should not intervene. They maintained that the appropriate way 
to address any abusive practices would be through more vigorous 
enforcement of existing statutes and regulations (such as medical 
review procedures), rather than to prescribe the specific terms of 
payment between the SNF and its suppliers. Other commenters expressed 
concerns about possible violations of the anti-kickback provisions at 
section 1128B(b) of the Act, as well as more general concerns about the 
timeliness and adequacy of the SNF's payment to its suppliers.
    Response: We agree that, under current law, an SNF's relationship 
with its supplier is essentially a private contractual matter, and the 
terms of the supplier's payment by the SNF must be arrived at through 
direct negotiations between the two parties themselves. Accordingly, we 
believe that the most effective way for a supplier to address any 
concerns that it may have about the adequacy or timeliness of the SNF's 
payment would be for the supplier to ensure that any terms to which it 
agrees in such negotiations satisfactorily address those concerns.
    We remain concerned, however, over the potential for the provision 
of unnecessary services, and will continue to evaluate possible 
legislative and other approaches to addressing this concern. In 
addition, we note that our discussion of the relationship between an 
SNF and its suppliers should not be construed as addressing in any 
manner the potential applicability of the statutory anti-kickback 
provisions, since matters relating specifically to the enforcement of 
these provisions lie exclusively within the purview of the Office of 
the Inspector General.

O. Scope of Extended Care Benefits

    Along with the promulgation of regulations specifically describing 
the SNF PPS itself, the interim final rule also included a number of 
conforming revisions in other portions of the regulations. One such 
revision was a reorganization of subpart C of part 409 (describing the 
scope of covered services under the Part A SNF benefit), which now 
tracks more accurately the corresponding portion of the Medicare 
statute at section 1861(h) of the Act.
    Comment: One commenter requested us to clarify that the regulations 
at Sec. 409.26(a) (coverage of transfer agreement hospital services) 
provide for separate Part B payment for the medical services of an 
intern or resident of the SNF's transfer agreement hospital.
    Response: The commenter's understanding of the purpose of this 
provision is incorrect. This section of the regulations implements 
section 1861(h)(6)(A) of the Act, which describes the scope of services 
included in the Part A extended care benefit. Accordingly, the medical 
services of interns and residents described in Sec. 409.26(a) are 
covered as SNF services under Part A, rather than being covered 
separately as practitioner services under Part B.

P. Impact Analysis

    As required by Executive Order 12866, the Unfunded Mandates Reform 
Act of 1995, and the Regulatory Flexibility Act (RFA) (Public Law 96-
354), the interim final rule included a Regulatory Impact Statement, on 
which we received numerous comments.
    Comment: Many commenters were concerned about the budgetary savings 
from the SNF PPS as indicated in the interim final rule, as compared 
with CBO's estimate at the time of the BBA. Many of these commenters 
felt that this ``extra'' money should be given back to the SNFs through 
the calculation of the rates to be used in the PPS.
    Response: CBO's estimate of savings of $9.2 billion over five years 
only shows the effect on SNFs under Medicare fee for service and does 
not include the indirect savings due to reduced managed care payments, 
which are based on average fee for service payments by county. The 
estimate of 5-year savings shown in the interim final rule (63 FR 
26304) of $12.87 billion includes both the fee-for-service effect and 
the managed care effect (which, as stated in the interim final rule, is 
about 25 percent of the total). If savings attributable to managed care 
are taken out, the result is very close to the $9.5 billion in savings 
which CBO had estimated.
    Comment: Many commenters were concerned about the behavioral offset 
which was assumed in the savings estimate. Some argued that there 
should have been no offset assumed whatsoever, and all believed that 
the offset that actually was assumed was much too large. In addition, 
many commenters expressed concern about the potential for nursing home 
closures and diminished beneficiary access to needed care.
    Response: The ``behavioral'' offset assumed for the impact analysis 
is only used as a device to assess impact. It is not used to adjust the 
payment rates. Along with the possible sources of this offset listed in 
the interim final rule, there are probably many additional factors 
which would also have the effect of offsetting the savings from this 
provision.
    We are aware and concerned about the statements being reported 
about potential closures of nursing homes and the delay in patient 
discharges from hospitals that are being attributed to the change in 
payments resulting from implementation of the PPS for SNFs. At this 
time, however, we do not have sufficient claims or MDS data either to 
confirm or refute these statements. It will be several months before we 
can establish a baseline and begin to assess the impact on access and 
quality. As we accumulate data and learn more about the effects of the 
new payment system, we will report the results.
    Regarding the issue of beneficiary access to care, we note that in 
terms of the impact analysis itself, if these beneficiaries had to 
remain in higher cost care as opposed to moving to SNFs, this could 
affect the budgetary savings to Medicare and, therefore, would be part 
of this offset factor. The final result is that this behavioral offset 
factor is only used to determine the total budget effect of a 
provision. It is not meant to indicate abusive behavior by the 
providers. The 45 percent factor that was used in our impact analysis 
is in the typical range for offset factors related to a significant 
payment system change like the SNF PPS. While little empirical data is 
currently available to estimate the overall impact of the PPS and 
consolidated billing on access to care in SNFs, this is an important 
issue in the context of the payment system, certification requirements 
and quality monitoring activities.
    However, from a broader policy perspective, this issue involves not 
only the payment characteristics of the PPS itself, but also a number 
of related requirements regarding provider participation in the 
Medicare program. Some commenters expressed concern that the payment 
rates under the SNF PPS may be inadequate and could result in SNFs 
withholding needed care and services from Medicare beneficiaries, or 
even denying admission to them. We note that in order to be certified 
for participation in the Medicare program as an SNF, a nursing home 
must first meet a set of requirements for

[[Page 41678]]

participation designed to protect and promote resident health and 
safety. These certification standards include the requirement to ``* * 
* provide services to attain or maintain the highest practicable 
physical, mental, and psychosocial well-being of each resident * * *'' 
(section 1819(b)(2) of the Act). Thus, an SNF that fails to provide or 
make the necessary arrangements for the care and services that a 
resident requires would jeopardize its program certification.
    Further, the statutory provision regarding Medicare provider 
agreements (section 1866(a)(1) of the Act) requires an SNF to accept 
the Medicare payment for covered SNF services as payment in full. The 
corresponding regulations at Sec. 489.53(a)(2) specify that one of the 
grounds for terminating a provider agreement is when the provider `` * 
* * places restrictions on the persons it will accept for treatment and 
it fails either to exempt Medicare beneficiaries from those 
restrictions or to apply them to Medicare beneficiaries the same as to 
all other persons seeking care.'' In addition, longstanding program 
guidelines in section 134 of the Medicare SNF Manual (HCFA Pub. 12) 
indicate that, while a provider may restrict the types of health 
conditions it accepts or may establish other criteria relating to the 
admission of patients, if those restrictions apply to Medicare 
beneficiaries, they must apply in the same manner to all other persons 
seeking care and treatment by the provider.
    Comment: One commenter felt that a 17 percent level of budgetary 
savings cited in the interim final rule was significant for providers 
of care.
    Response: The 17 percent savings factor is an average based on the 
Medicare business of a provider. When this factor is converted to a 
total facility basis, it is estimated to be a 1.7 percent savings on 
average. This does not meet the threshold of three percent which we 
have used in the past to determine that an anticipated impact is 
significant. We do realize that using average values does not totally 
reflect each individual SNF's effect, which was acknowledged in the 
impact analysis of the interim final rule. However, for many of the 
factors included in the calculation, only averages existed. Specific 
data were not available for each individual facility.
    Comment: One commenter stated that the 17 percent savings would be 
higher once the PPS was fully implemented. This factor only was for the 
first year of implementation, when most facilities would be paid based 
on 75 percent of their facility-specific rate and 25 percent of the 
Federal rate.
    Response: We agree with this comment that the estimated savings 
will be greater in future years. The effect of a system that paid all 
facilities entirely at the Federal rate as of the first year, instead 
of having the transition, would be that it would save 21 percent on 
average instead of 17 percent (see table IX.2). This effect would be 
felt much more heavily by hospital-based facilities (33 percent 
savings) as opposed to freestanding facilities (18 percent). This 
result was not included in the original interim final rule because that 
rule only deals with setting rates for the first year and not with what 
will happen when it is fully implemented. The results listed here have 
the same caveats as those done in the original impact analysis; 
primarily, that averages have been used and the effects on individual 
providers may differ. Future impacts will be shown as the rates are 
developed and published in the future.
    Comment: Several commenters stated that the 17 percent reduction 
may be true on average but specific providers may have much larger 
reductions (based on geographical characteristics).
    Response: As was stated in the interim final rule, we do not know 
the effect on individual providers. Some providers will have a greater 
than 17 percent reduction in payments while others will have less than 
that or even an increase. As more data becomes available through the 
implementation of this system, we will be able to complete a much more 
thorough analysis of the effects of this system on many of these 
smaller groups of characteristics.
    Comment: Several commenters asserted that the savings were 
understated because they did not take into account the added costs of 
implementing PPS for the facilities.
    Response: It is true that the savings estimate shown in the interim 
final rule in table IX.1 (63 FR 26304) does not include any additional 
costs due to implementing PPS. This is because these savings are the 
difference in payments to facilities under the PPS compared to the 
previous payment system (either based on reasonable cost or the 
optional low-volume PPS). In developing the impact analysis, the 
previous system payments would not include the costs of implementing 
PPS. Likewise, the estimates of the new PPS costs do not include the 
implementation costs. Therefore, the differences between these costs or 
the savings do not include any effect of this additional cost. On the 
other hand, the savings estimates do not reflect the lower costs which 
result from providing services more efficiently, which is a natural 
outcome of implementing a PPS.
    Comment: One commenter stated that the Congress had only intended 
to reduce the rate of growth in SNF payments and not actually reduce 
the level of payments.
    Response: The statute prescribes the methodology for calculating 
the payment rate. The statute specifies the base year and specifies the 
updates to the base year costs. The legislation which implemented this 
system called for only allowing a market basket minus 1 percentage 
point increase going back to 1995. This amounted to a total of about 
seven percent over the three years. In the meantime, costs on a per 
diem basis had been increasing at a total of about 40 percent during 
that same period. Some of that increase is due to an increase in case-
mix during that period, but as can easily be seen from these numbers, a 
very stringent limit had been placed on facilities' rate of growth for 
the last three years. Payments under this system are higher, on 
average, when compared to 1995 payments, but when compared to 1996 and 
1997 payments, could very well be lower.
    In addition, due to the formula expressed in the statute, many 
hospital-based facilities may face a reduction even in comparison to 
1995 payments, because the formula for calculating the Federal rate is 
more weighted to the freestanding average. Thus, because of the 
statutory formula, most facilities may see a drop in payments in their 
first year of PPS as opposed to their last year under the previous 
payment system.
    Comment: One commenter wished to know if we considered the 
probability of units closing or decertifying because of reimbursement 
levels. They wanted an estimate of the potential closings of small 
rural facilities since they are usually the only such units in these 
communities.
    Response: We did consider the chance of some facilities closing due 
to the implementation of PPS. As stated in the interim final rule, the 
effect on individual SNFs will depend on their ability to adapt to the 
incentives resulting from the new system. If a provider decides that it 
cannot (or will not) adapt to the PPS, then that provider may decide to 
drop out of the Medicare program. This certainly may be a consequence 
of this provision but, as shown in the impact analysis of the interim 
final rule, the effect of these provisions are fairly equitable across 
urban and rural and hospital-based and freestanding ranges. Of course, 
individual SNFs may be affected in very different ways and this may 
prompt a variety of responses, including an election to drop out of the 
program.

[[Page 41679]]

There is no way to estimate the number of facilities that will make the 
election to leave the Medicare program. However, as part of the offset 
factor development, this possibility was considered and, therefore, 
some of that offset is due to the possibility that beneficiaries may be 
required to stay in more expensive care settings in the absence of SNF 
care being available. This was one of the reasons reflected in the 
impact analysis to the interim final rule that budgetary savings from 
this provision would be diminished.
    Comment: Several commenters expressed concern that suppliers would 
be significantly affected by the changes made in this system.
    Response: The way suppliers do business will to some extent be 
affected by these provisions. Since the suppliers will now have to 
negotiate with facilities in order to receive payment for their 
services, this will be different from the current process for suppliers 
in situations involving an SNF that had not previously elected to do 
the Medicare billing for its residents' supplies. However, we do not 
anticipate that this change will be uniformly significant, even among 
this subset of suppliers, since its effect will be limited primarily to 
those particular areas that have an abundance of suppliers competing 
for the business of a relatively small number of SNFs. By contrast, we 
believe that in most situations suppliers should be able to negotiate a 
fair amount of payment from the facilities and, thus, will not be 
significantly affected economically by these provisions, as discussed 
further in section VI below.
    Comment: One commenter argued that since the interim final rule is 
a major rule (savings over $100 million), it appears inconsistent to 
state that an assessment of costs and benefits pursuant to the Unfunded 
Mandates Reform Act was not needed since local governments and the 
private sector would not be incurring costs of over $100 million. This 
commenter felt that there would be cost shifting and these entities 
would be picking up the amount of savings the Federal government was 
realizing.
    Response: The interim final rule implemented major changes in how 
SNFs will be paid by Medicare. Other payers, being prudent purchasers 
of health care services, will still be able to negotiate with the 
providers to reach a fair and equitable payment for services rendered 
to patients they cover. Because other payers are able to negotiate we 
believe that if providers attempt to shift costs due to SNF PPS other 
payers will quickly negotiate what they will pay to avoid being unduly 
burdened with additional costs. Therefore, there is a great amount of 
uncertainty regarding the amounts, if any, that other payers may have 
to bear due to the payment changes as a result of SNF PPS. In previous 
cases, what has occurred is that other payers have adjusted their 
policies after we changed our payment policy.
    The Unfunded Mandates Reform Act of 1995 requires that agencies 
prepare an assessment of anticipated costs and benefits before issuing 
any rule that may mandate an annual expenditure by State, local, or 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more. We believe that this final rule will not mandate 
expenditures in that amount. We do realize that using average values 
does not totally reflect each individual SNF's effect, which was 
acknowledged in the Impact section of the interim final rule, or the 
segmented aggregate effect on State, local, or tribal governments, and 
the private sector. However, for many of the factors in the calculation 
only averages existed, and facility-specific data were not available 
for each individual facility, not making such segmentation possible.

IV. Provisions of the Final Regulations

    This final rule incorporates the provisions of the interim final 
rule with the following revisions, as discussed previously in this 
preamble:
     We are amending the regulations text at Secs. 409.20 and 
409.27 to clarify that transportation by ambulance that meets the 
general medical necessity requirements set forth in Sec. 410.40(d)(1) 
is covered under the Part A SNF benefit as services that are generally 
furnished by (or under arrangements made by) SNFs.
     We are amending the regulations text at Sec. 409.30 (Basic 
requirements) to clarify that the initial presumption of coverage that 
arises from a beneficiary's first Medicare assessment and his or her 
resulting RUG-III assignment is valid as of the assessment reference 
date (that is, the last day of the observation period) for the initial 
5-day assessment. We are also correcting an erroneous cross-reference 
that appears in the introductory material for Sec. 409.30, as well as 
in the definition of custodial care at Sec. 411.15(g).
     In Sec. 409.33 (Examples of skilled nursing and 
rehabilitation services), we are restoring certain portions of the 
regulations text that the interim final rule deleted, with regard to 
the overall management and evaluation of the care plan; observation and 
assessment of the patient's changing condition; and, patient education. 
We are also clarifying that the use of insertion, sterile irrigation, 
and replacement of catheters as an example of a skilled nursing service 
applies solely with regard to suprapubic catheters.
     In Sec. 411.15(p)(3)(iii) we are revising the 
parenthetical phrase to clarify that our basis for determining that a 
particular type of outpatient hospital service is subject to the SNF 
consolidated billing provision is its inclusion within the customary 
scope of SNF care plans generally, without regard to whether it appears 
in the individual care plan of a particular beneficiary.
     We are adding a new Sec. 413.350 that provides for making 
periodic interim payments under the SNF PPS, and we are making a 
conforming revision in Sec. 413.64(h)(2)(iii). We are also revising the 
regulations text at Sec. 413.343(b), in order to clarify the language 
that describes the required Medicare assessment schedule.
     We are amending Sec. 489.21 by adding a new paragraph (h), 
which specifically precludes charging an SNF resident for an item or 
service that is subject to the consolidated billing requirement.

V. Collection of Information Requirements

    The information collection requirements associated or referenced in 
this rule, which are subject to the Paperwork Reduction Act, have been 
approved by the Office of Management and Budget. The titles, approval 
numbers and current expiration dates of the collection requirements are 
as follows: ``Medicare Common Claim Form,'' 0938-0008, 08/31/99; ``SNF 
Resident Assessment MDS Data,'' 0938-0739, 04/30/99.

VI. Impact Analysis

A. Background

Summary of the Interim Final Rule Regulatory Impact Statement
    Section 1888(e) of the Act specifies that the base year for 
computing the RUG payment rates is FY 1995 (that is, October 1, 1994, 
through September 30, 1995.) Pursuant to the statute, we incorporated 
several elements into the SNF PPS such as case-mix methodology, the MDS 
assessment schedule, a market basket index, a wage index, the urban and 
rural distinction used in the development or adjustment of the Federal 
rates, and coverage requirements.
    In the interim final rule, we stated that SNF PPS will result in 
estimated annual savings over five years ranging from $30 million in 
the first year to

[[Page 41680]]

$4.28 billion in the fifth year. Savings included both the savings from 
Medicare fee-for-service and managed care payments. It was projected 
that 8958 SNFs would experience a decrease in Medicare payments as a 
result of the SNF PPS. The percentage reduction in payments was 
estimated to be 17 percent.
    However, because Medicare SNF payments account for only 
approximately 10 percent on average of a SNF's total revenue the 
revenue reduction of a SNF as a result of the interim final rule was 
approximately 1.7 percent. These were average figures and we did not 
(and do not) have data that would allow us to determine if a 
substantial number of SNFs will experience revenue decreases greater 
than the estimated average.
    As stated in the interim final rule, we did not expect suppliers of 
services to SNFs to be significantly affected by the consolidated 
billing provisions. Total Medicare reimbursement to suppliers was 
estimated in the interim final rule to be about $4 billion each year. 
The reimbursement to suppliers for SNF services was estimated to be 
about $60 million each year. Therefore, we believed that the 
consolidated billing provisions related to the services provided to 
patients in Part A SNF stays would generally have a minimal impact on 
suppliers.
    As stated in the interim final rule 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 was a possibility that, for those services being 
consolidated as a result of the statute and the interim final rule, a 
sizeable number of these suppliers might be reimbursed by SNFs at rates 
lower than the rates at which they were reimbursed by Medicare under 
the previous system, we believed that this was highly dependent on the 
reaction each individual supplier had to the new payment system.
    In addition, with regard to consolidated billing related to 
services provided to SNF patients who are not in a 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 was anticipated that the total impact on suppliers 
would be minimal. However, determining the effect on individual 
suppliers was not possible due to a lack of data. Therefore we were not 
able to determine if the new SNF per diem rates would result in a 
substantial number of suppliers experiencing significant decreases in 
their total revenues.

B. Impact of This Final Rule

    We have examined the impacts of this final rule as required by 
Executive Order 12866, section 1102(b) of the Act, 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 purpose of this final rule is not to initiate significant 
policy changes with regard to the SNF PPS but, rather, to clarify and 
make minor modifications in the policies that were established in the 
SNF PPS interim final rule published on May 12, 1998 (63 FR 26251). 
Accordingly, we believe that the revisions and clarifications mentioned 
elsewhere in the preamble (for example, the adjustment to the nursing 
case-mix component of the urban and Federal rates) will have, at most, 
only a negligible overall effect upon the regulatory impact estimate 
specified in the interim final rule. As such, these revisions will not 
represent an additional burden to the industry.
    Columns A-C of Table IX.2 below, published in the interim final 
rule (63 FR 26304) depicted the number of facilities that were 
projected to experience a decrease in Medicare SNF payments under the 
new SNF PPS rates and the percentage change for the type of facility.

                                       Table IX.2.--Impact on SNFs by Type
----------------------------------------------------------------------------------------------------------------
                                                                                                     Estimated
                                                                                     Estimated        average
                                                                                      average       percentage
                                                   Total number   Number of SNFs    percentage     reduction in
                   Type of SNF                        of SNFs       with lower     reduction in    payments for
                                                                      payment      payments for        fully
                                                                                    first year      implemented
                                                                                    transition          PPS
                                                             (A)             (B)             (C)             (D)
----------------------------------------------------------------------------------------------------------------
MSA Freestanding................................            5617            5585              17              18
MSA Hospital Based..............................             683             679              19              34
Non-MSA Freestanding............................            2204            2189              17              18
Non-MSA Hospital Based..........................             533             531              18              30
    Total.......................................            9037            8984              17              21
                                                 ---------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

    Specifically, column (A) of the table depicted the total number of 
SNFs in the data base for FY 1995 cost reporting periods. Column (B) 
depicted 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.
    As described in the interim final rule, the payments received under 
SNF PPS would initially be based on a facility level case-mix score 
developed using the case-mix indices and the MEDPAR analog. The 
payments that would have been received under the former (pre-SNF PPS) 
system were estimated by using the same average inflation factor from 
the 1995 data for each facility. Column (C) depicts the estimated 
reduction in payments on a percentage basis between the two payment 
methodologies for the first year of transition. New column (D) depicts 
the estimated reduction in payments on a percentage basis between the 
two payment methodologies for the fully implemented SNF PPS.
    The estimated effect of the fully implemented SNF PPS (if, instead 
of having the transition, it paid all

[[Page 41681]]

facilities entirely at the Federal rate as of the first year) is that 
it would save 21 percent on average instead of 17 percent. This effect 
is felt much more heavily by hospital-based facilities (34 percent 
savings) as opposed to freestanding facilities (18 percent).
    As was stated in the interim final rule, the results listed in 
Table IX.2 should be viewed with caution and as illustrative of broad 
groupings of SNFs. Averages have been used and the effects on 
individual SNFs may differ. Future impacts will be shown as the rates 
are developed and published in the future.
    As stated in the interim final rule, in developing the estimate, 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 might be 
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 come from the Medicare program.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. The BBA mandates implementation of SNF PPS. For 
purposes of the RFA, small entities include small businesses, nonprofit 
organizations, and governmental agencies. Most SNFs and most other 
providers and suppliers are small entities, either by nonprofit status 
or by having revenues of $5 million or less annually. States and tribal 
governments are not considered to be small entities, nor are 
intermediaries or carriers.
    Under the RFA, an economic impact is significant if the annual 
total costs or revenues of a substantial number of entities will be 
increased or decreased by at least 3 percent. Medicare payments 
generally do not account for a high proportion of SNF revenue (about 10 
percent on average) and the estimated average percentage reduction in 
payments for the fully implemented SNF PPS reduces those payments by 
approximately 21 percent on average. Therefore, total revenues for SNFs 
will be reduced by about 2.1 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.

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. Such an 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds. We are not preparing 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.

D. Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 also requires (in section 
202) that agencies prepare an assessment of anticipated costs and 
benefits before issuing any rule that may mandate an annual expenditure 
by State, local, or tribal governments, in the aggregate, or by the 
private sector, of $100 million or more. We believe that this final 
rule will not mandate expenditures in that amount.

List of Subjects

42 CFR Part 409

    Health facilities, Medicare.

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 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 is revised to read as 
follows:

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

Subpart C--Posthospital SNF Care

    2. In Sec. 409.20, remove paragraph (a)(8).
    3. In Sec. 409.27, the word ``and'' is removed from the end of 
paragraph (a), the period at the end of paragraph (b) is removed and a 
semicolon followed by the word ``and'' is added in its place, and a new 
paragraph (c) is added, to read as follows:


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

* * * * *
    (c) Transportation by ambulance that meets the general medical 
necessity requirements set forth in Sec. 410.40(d)(1) of this chapter.

Subpart D--Requirements for Coverage of Posthospital SNF Care

    4. In Sec. 409.30, the second sentence in the introductory text is 
removed and two sentences are added in its place to read as follows:


Sec. 409.30  Basic requirements.

    * * * A beneficiary in an SNF is also considered to meet the level 
of care requirements of Sec. 409.31 up to and including the assessment 
reference date for the 5-day assessment prescribed in Sec. 413.343(b) 
of this chapter, 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. For the purposes of this 
section, the assessment reference date is defined in accordance with 
Sec. 483.315(d) of this chapter, and must occur no later than the 
eighth day of posthospital SNF care.
* * * * *
    5. In Sec. 409.33, paragraphs (a), (b), and (c) are redesignated as 
paragraphs (b), (c), and (d), respectively; a new paragraph (a) is 
added; and newly designated paragraph (b)(4) is revised to read as 
follows:


Sec. 409.33  Examples of skilled nursing and rehabilitation services.

    (a) Services that could qualify as either skilled nursing or 
skilled rehabilitation services. (1) Overall management and evaluation 
of care plan. (i) When overall management and evaluation of care plan 
constitute skilled services. The development, management, and 
evaluation of a patient care plan based on the physician's orders 
constitute skilled services when, because of the patient's physical or 
mental condition, those activities require the involvement of technical 
or professional personnel in order to meet the patient's needs, promote 
recovery, and ensure medical safety. Those activities include the 
management of a plan involving a variety of personal care services only 
when, in light of the patient's condition, the aggregate of

[[Page 41682]]

those services requires the involvement of technical or professional 
personnel.
    (ii) Example. An aged patient with a history of diabetes mellitus 
and angina pectoris who is recovering from an open reduction of a 
fracture of the neck of the femur requires, among other services, 
careful skin care, appropriate oral medications, a diabetic diet, an 
exercise program to preserve muscle tone and body condition, and 
observation to detect signs of deterioration in his or her condition or 
complications resulting from restricted, but increasing, mobility. 
Although any of the required services could be performed by a properly 
instructed person, such a person would not have the ability to 
understand the relationship between the services and evaluate the 
ultimate effect of one service on the other. Since the nature of the 
patient's condition, age, and immobility create a high potential for 
serious complications, such an understanding is essential to ensure the 
patient's recovery and safety. Under these circumstances, the 
management of the plan of care would require the skills of a nurse even 
though the individual services are not skilled. Skilled planning and 
management activities are not always specifically identified in the 
patient's clinical record. Therefore, if the patient's overall 
condition supports a finding that recovery and safety can be ensured 
only if the total care is planned, managed, and evaluated by technical 
or professional personnel, it is appropriate to infer that skilled 
services are being provided.
    (2) Observation and assessment of the patient's changing condition. 
(i) When observation and assessment constitute skilled services. 
Observation and assessment constitute skilled services when the skills 
of a technical or professional person are required to identify and 
evaluate the patient's need for modification of treatment or for 
additional medical procedures until his or her condition is stabilized.
    (ii) Examples. A patient with congestive heart failure may require 
continuous close observation to detect signs of decompensation, 
abnormal fluid balance, or adverse effects resulting from prescribed 
medication(s) that serve as indicators for adjusting therapeutic 
measures. Similarly, surgical patients transferred from a hospital to 
an SNF while in the complicated, unstabilized postoperative period, for 
example, after hip prosthesis or cataract surgery, may need continued 
close skilled monitoring for postoperative complications and adverse 
reaction. Patients who, in addition to their physical problems, exhibit 
acute psychological symptoms such as depression, anxiety, or agitation, 
may also require skilled observation and assessment by technical or 
professional personnel to ensure their safety or the safety of others, 
that is, to observe for indications of suicidal or hostile behavior. 
The need for services of this type must be documented by physicians' 
orders or nursing or therapy notes.
    (3) Patient education services. (i) When patient education services 
constitute skilled services. Patient education services are skilled 
services if the use of technical or professional personnel is necessary 
to teach a patient self-maintenance.
    (ii) Examples. A patient who has had a recent leg amputation needs 
skilled rehabilitation services provided by technical or professional 
personnel to provide gait training and to teach prosthesis care. 
Similarly, a patient newly diagnosed with diabetes requires instruction 
from technical or professional personnel to learn the self-
administration of insulin or foot-care precautions.
    (b) * * *
    (4) Insertion and sterile irrigation and replacement of suprapubic 
catheters;
* * * * *

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

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

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

Subpart A--General Exclusions and Exclusion of Particular Services


Sec. 411.15  [Amended]

    2. In Sec. 411.15:
    a. In paragraph (g), remove the citation ``Secs. 409.30'' and add, 
in its place ``Secs. 409.31''.
    b. Paragraph (p)(3)(iii) is revised to read as follows:


Sec. 411.15  Particular services excluded from coverage.

* * * * *
    (p) * * *
    (3) * * *
    (iii) The beneficiary receives outpatient services from a Medicare-
participating hospital or CAH (but only with respect to those services 
that are beyond the general scope of SNF comprehensive care plans, as 
required under Sec. 483.20 of this chapter); or
* * * * *

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

    C. Part 413 is amended as set forth below:
    1. The heading for part 413 is revised as set forth above.
    2. The authority citation for part 413 is revised 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).

    3. In Sec. 413.64, paragraph (h)(2)(iii) is revised to read as 
follows:


Sec. 413.64  Payments to providers: Specific rules.

* * * * *
    (h) * * *
    (2) * * *
    (iii) Part A SNF services furnished in cost reporting periods 
beginning before July 1, 1998. (For services furnished in subsequent 
cost reporting periods, see Sec. 413.350 regarding periodic interim 
payments for skilled nursing facilities).
* * * * *


Sec. 413.343  [Amended]

    4. In Sec. 413.343(b), remove the words ``following admission'' and 
add, in their place, the words ``of posthospital SNF care''.
    5. Add Sec. 413.350 to subpart J to read as follows:


Sec. 413.350  Periodic interim payments for skilled nursing facilities 
receiving payment under the skilled nursing facility prospective 
payment system for Part A services.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, SNFs receiving payment under the PPS for Part A 
services do not receive interim payments during the cost reporting 
year, and receive payment only following submission of a bill. 
Paragraph (d) of this section provides for accelerated payments in 
certain circumstances.
    (b) Periodic interim payments. (1) An SNF receiving payment under 
the prospective payment system may receive periodic interim payments 
(PIP) for Part A SNF services under the PIP method subject to the 
provisions of Sec. 413.64(h). To be approved for PIP, the SNF must meet 
the qualifying requirements in Sec. 413.64(h)(3). Moreover, as provided 
in Sec. 413.64(h)(5), intermediary approval is conditioned upon the 
intermediary's best judgment as to whether payment can be made

[[Page 41683]]

under the PIP method without undue risk of its resulting in an 
overpayment to the provider.
    (2) Frequency of payment. The intermediary estimates an SNF's 
prospective payments net of estimated beneficiary coinsurance and makes 
biweekly payments equal to \1/26\ of the total estimated amount of 
payment for the year. If an SNF has payment experience under the 
prospective payment system, the intermediary estimates PIP based on 
that payment experience, adjusted for projected changes supported by 
substantiated information for the current year. Each payment is made 2 
weeks after the end of a biweekly period of service as described in 
Sec. 413.64(h)(6). The interim payments are reviewed at least twice 
during the reporting period and adjusted if necessary. Fewer reviews 
may be necessary if an SNF receives interim payments for less than a 
full reporting period. These payments are subject to final settlement.
    (3) Termination of PIP. (i) Request by the SNF. An SNF receiving 
PIP may convert to receiving prospective payments on a non-PIP basis at 
any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the SNF no longer meets the requirements of Sec. 413.64(h).
    (c) Interim payments for Medicare bad debts and for Part A costs 
not paid under the prospective payment system. For Medicare bad debts 
and for costs of an approved education program and other costs paid 
outside the prospective payment system, the intermediary determines the 
interim payments by estimating the reimbursable amount for the year 
based on the previous year's experience, adjusted for projected changes 
supported by substantiated information for the current year, and makes 
biweekly payments equal to \1/26\ of the total estimated amount. Each 
payment is made 2 weeks after the end of a biweekly period of service 
as described in Sec. 413.64(h)(6). The interim payments are reviewed at 
least twice during the reporting period and adjusted if necessary. 
Fewer reviews may be necessary if an SNF receives interim payments for 
less than a full reporting period. These payments are subject to final 
cost settlement.
    (d) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to an SNF that is receiving payment 
under the prospective payment system and is not receiving PIP under 
paragraph (b) of this section if the SNF is experiencing financial 
difficulties because of the following:
    (i) There is a delay by the intermediary in making payment to the 
SNF.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the SNF's preparation and submittal of bills to the intermediary beyond 
its normal billing cycle.
    (2) Approval of payment. An SNF's request for an accelerated 
payment must be approved by the intermediary and HCFA.
    (3) Amount of payment. The amount of the accelerated payment is 
computed as a percentage of the net payment for unbilled or unpaid 
covered services.
    (4) Recovery of payment. Recovery of the accelerated payment is 
made by recoupment as SNF bills are processed or by direct payment by 
the SNF.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

    D. Part 489 is amended as set forth below:
    1. The authority citation for part 489 continues to read as 
follows:

    Authority: Secs. 1102, 1819, 1861, 1864(m), 1866, and 1871 of 
the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 1395aa(m), 
1395cc, and 1395hh).

    2. In Sec. 489.21, a new paragraph (h) is added to read as follows:


Sec. 489.21  Specific limitations on charges.

* * * * *
    (h) Items and services (other than those described in 
Sec. 489.20(s)(1) through (11)) furnished to a resident (as defined in 
Sec. 411.15(p)(3) of this chapter) of an SNF for which Medicare payment 
would be made if furnished by the SNF or by other providers or 
suppliers under arrangements made with them by the SNF. For this 
purpose, a charge by another provider or supplier for such an item or 
service is treated as a charge by the SNF for the item or service, and 
is also prohibited.

(Catalog of Federal Domestic Assistance Program Number 93.773, 
Medicare--Hospital Insurance; and Program Number 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: June 14, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: July 22, 1999.
Donna Shalala,
Secretary.
[FR Doc. 99-19478 Filed 7-29-99; 8:45 am]
BILLING CODE 4120-01-P