[Federal Register Volume 64, Number 150 (Thursday, August 5, 1999)]
[Rules and Regulations]
[Pages 42610-42614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20015]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1883-F]
RIN 0938-AI80


Medicare Program; Revision of the Procedures for Requesting 
Exceptions to Cost Limits for Skilled Nursing Facilities and 
Elimination of Reclassifications

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

ACTION: Final rule.

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SUMMARY: This final rule revises the procedures for granting exceptions 
to the cost limits for skilled nursing facilities (SNFs) and retains 
the current procedures for exceptions to the cost limits for home 
health agencies (HHAs). It also removes the provision allowing 
reclassification for all providers.

EFFECTIVE DATE: This final rule is effective September 7, 1999.

FOR FURTHER INFORMATION CONTACT: Steve Raitzyk, (410) 786-4599.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 223 of the Social Security Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1)(A) of the Social Security Act (the Act) 
to authorize the Secretary to establish ``* * * limits on the direct 
and indirect overall incurred costs or incurred costs of specific items 
or services or groups of items or services * * *'' as a presumptive 
estimate of reasonable costs. Under section 1861(v)(1)(A), if a 
provider's cost exceeds its Medicare cost limit, it is deemed to be 
unreasonable for the efficient delivery of needed health care services. 
The Congress, however, in the House Committee report ``H.R. Rep. No. 
92-231, 92nd Congress, 1st Session 5071 (1971),'' stated that providers 
could obtain relief from the effect of the cost limits based on 
evidence of the need for an exception.
    We published a final rule on June 1, 1979 (44 FR 31802) to 
implement the legislation. The provisions are presently in 42 CFR 
413.30 and concern principles of reasonable cost reimbursement.
    Section 413.30 describes the general principles and procedures for 
establishing cost limits and the process by which providers may appeal 
the applicability of these cost limits. Under Sec. 413.30(c), a 
provider may seek relief from the effects of applying cost limits, 
either by requesting an exemption from its limit as a new provider of 
inpatient services, by requesting a reclassification of its provider 
status, or by requesting an exception to the cost limit.
    On August 11, 1998, we published a proposed rule concerning 
procedures for requesting exceptions to cost limits in the Federal 
Register (63 FR 42797). We proposed to revise the approval process for 
granting exceptions to the cost limits for skilled nursing facilities 
(SNFs) and to remove the provision for obtaining a reclassification for 
all providers. In that proposed rule, we traced the development of cost 
limits since 1972.
    In the proposed rule, we stated that we may find it inappropriate 
to apply particular limits to a class of providers because of provider 
class characteristics, the data on which the limits are based, or the 
method by which the limits are determined (63 FR 42800). We further 
stated that we may explain our reasoning for exclusion in a notice 
setting forth the limits for the appropriate cost reporting periods. We 
explained that estimates of the costs necessary for efficient delivery 
of health services may be based on cost reports or other data providing 
indicators of current costs. Current and past period data would be 
adjusted to arrive at estimated costs for the prospective periods to 
which limits are being applied.
    We described the process of establishing cost limits and the basis 
on which they were calculated. We also explained that the servicing 
intermediary would have to notify each SNF or HHA of its cost limit at 
least 30 days before the applicable cost reporting period. Each 
intermediary cost limit notification would have to contain the 
following:
     The provider's classification and calculation of the 
applicable limit.
     A statement that, if the provider believes it has been 
incorrectly classified, it is the provider's responsibility to furnish 
to the intermediary evidence that demonstrates the classification is 
incorrect.
     A statement that the provider may be entitled to an 
exemption from, or an

[[Page 42611]]

exception to, the cost limits under the provisions of Sec. 413.30.

II. Provisions of the Proposed Rule

A. Provider Reclassification

    In the proposed rule, we noted that under current Sec. 413.30(d), a 
provider may obtain a reclassification of its provider status if it can 
show that its classification is at variance with the criteria specified 
in establishing the limits. We noted that when cost limits were first 
developed, we manually arrayed the data collected from the providers' 
cost reports and classified them by type (hospital-based or 
freestanding) and location (metropolitan area or nonmetropolitan area). 
We stated there were instances when providers were misclassified. Thus, 
we allowed providers to file reclassification requests if they could 
show that the data we used for the classification were incorrect.
    We noted that HHAs and SNFs now file specific cost reports, and 
metropolitan and nonmetropolitan area designations have become linked, 
through automation, to the county and State where each provider is 
located. As a result, a SNF or HHA cannot be misclassified. 
Reclassifications for hospitals, now filed with the Medicare Geographic 
Review Board, are governed under the provisions of subpart L (The 
Medicare Geographic Classification Review Board) of part 412 
(Prospective Payment System for Inpatient Hospital Services). Hospitals 
no longer apply for reclassifications under Sec. 413.30. Therefore, we 
proposed to remove Sec. 413.30(d) to discontinue the use of 
reclassifications.

B. Exceptions to Cost Limits

    In the preamble to the June 1979 final rule (44 FR 31806), we 
clarified the difference between an exemption and an exception. If a 
provider receives an exemption, it is not affected at all by the cost 
limits and it is paid under the standard rules for reasonable cost or 
customary charges. If a provider receives an exception, it is paid on 
the basis of the cost limit, plus an incremental sum for the reasonable 
costs warranted by the circumstances that justified the exception.
    Our current regulation at Sec. 413.30(f) (Sec. 413.30(c) in this 
final rule) allows a provider that is subject to cost limits to request 
an exception to the cost limits if its costs exceed, or are expected to 
exceed, the limits as a result of one of the following unusual 
situations: Atypical services; extraordinary circumstances; providers 
in areas with fluctuating populations; medical and paramedical 
education costs; and unusual labor costs. A SNF may request an 
exception for cost reporting periods occurring before July 1, 1998.
    We stated that an adjustment is made only to the extent that the 
costs are reasonable, attributable to the circumstance specified, 
separately identified by the provider, and verified by the 
intermediary. The provider must file a request for an exception to the 
cost limits no later than 180 days from the date of the intermediary's 
notice of program pay. The intermediary reviews the request with all 
supporting documentation. The intermediary also makes and submits to us 
a recommendation on the provider's request. We make a final 
determination and respond to the intermediary within 180 days from the 
date of the intermediary's recommendation. If we do not respond within 
180 days, it is considered good cause for the granting of an extension 
of the time limit to apply for a Provider Reimbursement Review Board 
review.
    In July 1994, we published manual instructions (HCFA Pub. 15-1, 
Transmittal No. 378) that give SNFs detailed instructions for 
requesting exceptions to the SNF cost limits. Under this transmittal, 
in section 2531.1, intermediaries are required to submit their 
recommendations on a SNF's exception request within 90 days of receipt. 
We stated that we notify the intermediary of our final determination on 
the exception within 90 days of the date the request is received. We 
further stated that our current regulation at Sec. 413.30(c) allows us 
180 days to make our final determination.
    We explained that after reviewing SNF exception requests submitted 
by intermediaries under the rules in Transmittal 378, we identified six 
intermediaries that were proficiently adjudicating SNF exceptions 
within the required time frame. The resulting increase in 
administrative efficiency has benefited SNFs, fiscal intermediaries, 
and the Medicare program.
    We proposed in the August 1998 rule to revise Sec. 413.30(c) to 
give all intermediaries the authority to make final determinations on 
SNF exception requests. We stated that this would result in an increase 
in administrative efficiency benefiting all SNFs who file SNF exception 
requests and fiscal intermediaries that process those exception 
requests.
    We also stated our intent to work with the Blue Cross Association 
to perform additional training for all fiscal intermediaries and to 
designate a single contact person to handle all inquiries from fiscal 
intermediaries regarding exception requests.
    Under our proposed Sec. 413.30(c), if the intermediary determines 
that the SNF did not provide adequate documentation from which a proper 
determination can be made, the intermediary would notify the SNF that 
the request is denied. The intermediary would also notify the SNF that 
it has 45 days from the date on the intermediary's denial letter to 
submit a new exception request with the complete documentation, that we 
continue to allow the SNF to request a review by the Provider 
Reimbursement Review Board (PRRB), and that the time we need to review 
the request (through the intermediary) is considered good cause for 
extending the time limit for a PRRB review. Otherwise, the denial is 
our final determination.
    We stated, in accordance with section 4432 of the Balanced Budget 
Act of 1997 (Pub. L. 105-33), that effective with cost reporting 
periods beginning on or after July 1, 1998, there will be a 3-year 
transition period to the prospective payment system. During the 
transition period, SNFs will be paid a blended payment that is based 
partially on a facility-specific rate and a prospective payment rate. 
The base period for the facility-specific rate is cost reporting 
periods beginning during the period October 1, 1994 through September 
30, 1995. Exceptions for SNFs will no longer be available for cost 
reporting periods beginning on or after July 1, 1998.
    The procedures for HHA exception requests would remain unchanged 
and are set forth in this final rule at Sec. 413.30(c)(1). We note that 
we will not make exception payments to an HHA that is subject to the 
per-beneficiary limit described in a final rule with comment period 
that we published on March 31, 1998 (63 FR 15718).

C. Technical Changes

    We proposed to remove paragraph (h) of Sec. 413.30, pertaining to 
hospital cost report adjustments, because it is obsolete, and we also 
proposed to make minor editorial changes to other portions of 
Sec. 413.30.

III. Analysis of and Responses to Comments

    We received comments on the proposed rule from an organization 
representing nursing homes and from a consulting company. The comments 
and our responses to those comments are as follows:
    Comment: The commenter expressed concerns that fiscal 
intermediaries have a mounting workload due to the implementation of 
the SNF prospective payment system, and that this

[[Page 42612]]

regulation will create additional workload responsibilities for fiscal 
intermediaries.
    Response: Fiscal intermediaries have been processing SNF exception 
requests since July 1994, under Transmittal No. 378 of HCFA Pub. 15-1. 
An intermediary processes an exception within 90 days of receipt from 
the SNF and sends its recommendation to our staff who also makes a 
final determination within 90 days. This final regulation will allow an 
intermediary to implement its recommendation without having to submit 
it to us for a final determination. Not only is there no additional 
workload required of an intermediary, this regulation will actually 
reduce the intermediary's workload by not having to submit the 
exception to us and wait for our response. We have designated Joseph 
Menning as the contact person available to assist the intermediaries 
with any questions or problems and we will monitor the performance of 
the intermediaries. He may be reached by telephone at (410) 786-4594, 
or by e-mail at [email protected], or by mail at: HCFA, 7500 Security 
Boulevard, Room C5-06-05, Baltimore, MD 21244.
    Comment: One commenter requested that we establish a separate 
arbitration board to hear SNF claims relating to disagreements about 
exception decisions made by a fiscal intermediary.
    Response: If errors in either computations or the application of 
exception methodologies are detected by the SNF, the SNF should notify 
the fiscal intermediary and the intermediary will review the SNF's 
claim. If there is still a disagreement, the SNF can ask that its 
intermediary contact the HCFA-designated exceptions contact person in 
an effort to resolve the disagreement between the SNF and the 
intermediary. If the SNF still disagrees with the intermediary's 
determination, it can request a review by the PRRB.
    Comment: A commenter claimed that there are inconsistencies in the 
methodology and calculation of SNF exceptions among intermediaries and 
that some intermediaries consistently miss responding to a SNF's 
exception request within the required 90-day timeframe.
    Response: We have trained all intermediaries to follow the 
instructions in Transmittal No. 378 of HCFA Pub. 15-1. We are not aware 
of any inconsistent applications of exceptions policies among 
intermediaries. We monitor the performance of intermediaries on various 
pay issues, including exceptions, under the Contractor Performance 
Evaluation Program (CPEP). Also, if the intermediary misses the 90-day 
timeframe to respond to a SNF's exception request, this failure to 
respond is considered good cause for an extension of the time limit for 
the SNF to apply for a review by the PRRB.
    Comment: One commenter expressed the view that many intermediaries 
know very little about SNF operations or regulatory compliance issues 
and this makes it difficult for them to make a proper decision on 
exceptions issues such as the ``low occupancy'' adjustment.
    Response: All intermediaries employ personnel who deal with 
operational and regulatory compliance issues. We know of no 
intermediaries that have had problems in this area. If a fiscal 
intermediary or SNF encounters a problem concerning any exceptions 
policy, including operational and regulatory compliance issues, it may 
contact the HCFA-designated contact person for assistance. Also, a SNF 
that encounters a problem may contact the HCFA-designated exceptions 
contact.
    Comment: The same commenter indicated that in its estimation, many 
intermediaries ignore low occupancy arguments and calculations made by 
SNFs and either make arbitrary partial adjustments or 100 percent low 
occupancy adjustments.
    Response: We have instructed fiscal intermediaries to submit all 
alternate proposals to the low occupancy adjustment to us for a 
determination. We have received many alternate proposals to the low 
occupancy adjustment submitted by fiscal intermediaries on behalf of 
SNFs and their representatives. We issued program instructions to the 
fiscal intermediaries based on these proposals.

IV. Provisions of the Final Rule

    Based on our review and analysis of comments, we are adopting the 
proposed rule as final. We are making, however, a technical 
clarification to the proposed Sec. 413.30(d) to indicate that SNF 
exemptions apply only to cost reporting periods beginning before July 
1, 1998. We are revising the approval process for granting exceptions 
to the cost limits for SNFs (Sec. 413.30(c)) and retaining the current 
procedures for exceptions to the cost limits for HHAs 
(Sec. 413.30(c)(1)). We are also removing the current provision 
allowing reclassification for all providers (Sec. 413.30(d)).

V. Regulatory Impact Statement

    Consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612), we prepare a regulatory flexibility analysis unless we 
certify that a rule will not have a significant economic impact on a 
substantial number of small entities. For purposes of the RFA, all SNFs 
and HHAs are considered to be small entities. Individuals and States 
are not included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds.
    This rule to eliminate reclassifications for HHAs and SNFs has no 
effect on them since they currently do not need to be reclassified. 
Hospitals can obtain any needed reclassifications and exceptions under 
subpart L of part 412. The change in the method of processing requests 
for exceptions to cost limits has no economic impact on either the 
providers or the Medicare program.
    For these reasons, we are not preparing an analysis for either the 
RFA or section 1102(b) of the Act because we have determined, and we 
certify, that this rule will not have a significant economic impact on 
a substantial number of small entities or a significant impact on the 
operations of a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and recordkeeping requirements.
    For the reasons set out in the preamble, 42 CFR, part 413, is 
amended as follows:

PART 413--[AMENDED]

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

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

    2. Section 413.30 is revised to read as follows:


Sec. 413.30  Limitations on payable costs.

    (a) Introduction--(1) Scope. This section implements section 
1861(v)(1)(A) of the Act by setting forth the general rules under which 
HCFA may establish limits on SNF and HHA costs recognized as reasonable 
in determining Medicare program

[[Page 42613]]

payments. It also sets forth rules governing exemptions and exceptions 
to limits established under this section that HCFA may make as 
appropriate in considering special needs or situations.
    (2) General principle. Payable SNF and HHA costs may not exceed the 
costs HCFA estimates to be necessary for the efficient delivery of 
needed health care services. HCFA may establish estimated cost limits 
for direct or indirect overall costs or for costs of specific services 
or groups of services. HCFA imposes these limits prospectively and may 
calculate them on a per admission, per discharge, per diem, per visit, 
or other basis.
    (b) Procedure for establishing limits. (1) In establishing limits 
under this section, HCFA may classify SNFs and HHAs by factors that 
HCFA finds appropriate and practical, including the following:
    (i) Type of services furnished.
    (ii) Geographical area where services are furnished, allowing for 
grouping of noncontiguous areas having similar demographic and economic 
characteristics.
    (iii) Size of institution.
    (iv) Nature and mix of services furnished.
    (v) Type and mix of patients treated.
    (2) HCFA bases its estimates of the costs necessary for efficient 
delivery of health services on cost reports or other data providing 
indicators of current costs. HCFA adjusts current and past period data 
to arrive at estimated costs for the prospective periods to which 
limits are applied.
    (3) Before the beginning of a cost period to which revised limits 
will be applied, HCFA publishes a notice in the Federal Register, 
establishing cost limits and explaining the basis on which they are 
calculated.
    (4) In establishing limits under paragraph (b)(1) of this section, 
HCFA may find it inappropriate to apply particular limits to a class of 
SNFs or HHAs due to the characteristics of the SNF or HHA class, the 
data on which HCFA bases those limits, or the method by which HCFA 
determines the limits. In these cases, HCFA may exclude that class of 
SNFs or HHAs from the limits, explaining the basis of the exclusion in 
the notice setting forth the limits for the appropriate cost reporting 
periods.
    (c) Requests regarding applicability of cost limits. For cost 
reporting periods beginning before July 1, 1998, a SNF may request an 
exception or exemption to the cost limits imposed under this section. 
An HHA may request only an exception to the cost limits. The SNF or HHA 
must make its request to its fiscal intermediary within 180 days of the 
date on the intermediary's notice of program pay.
    (1) Home health agencies. The intermediary makes a recommendation 
on the HHA's request to HCFA, which makes the decision. HCFA responds 
to the request within 180 days from the date HCFA receives the request 
from the intermediary. The intermediary notifies the HHA of HCFA's 
decision. The time required by HCFA to review the request is considered 
good cause for the granting of an extension of the time limit for the 
HHA to apply for a PRRB review, as specified in Sec. 405.1841 of this 
chapter. HCFA's decision is subject to review under subpart R of part 
405 of this chapter.
    (2) Skilled nursing facilities. The intermediary makes the final 
determination on the SNF's request and notifies the SNF of its 
determination within 90 days from the date that the intermediary 
receives the request from the SNF. If the intermediary determines that 
the SNF did not provide adequate documentation from which a proper 
determination can be made, the intermediary notifies the SNF that the 
request is denied. The intermediary also notifies the SNF that it has 
45 days from the date on the intermediary's denial letter to submit a 
new exception request with the complete documentation and that 
otherwise, the denial is the final determination. The time required by 
the intermediary to review the request is considered good cause for the 
granting of an extension of the time limit for the SNF to apply for a 
PRRB review, as specified in Sec. 405.1841 of this chapter. The 
intermediary's determination is subject to review under subpart R of 
part 405 of this chapter.
    (d) Exemptions. Exemptions from the limits imposed under this 
section may be granted to a new SNF with cost reporting periods 
beginning before July 1, 1998 as stated in Sec. 413.1(g)(1). A new SNF 
is a provider of inpatient services that has operated as the type of 
SNF (or the equivalent) for which it is certified for Medicare, under 
present and previous ownership, for less than 3 full years. An 
exemption granted under this paragraph expires at the end of the SNF's 
first cost reporting period beginning at least 2 years after the 
provider accepts its first inpatient.
    (e) Exceptions. Limits established under this section may be 
adjusted upward for a SNF or HHA under the circumstances specified in 
paragraphs (e)(1) through (e)(5) of this section. An adjustment is made 
only to the extent that the costs are reasonable, attributable to the 
circumstances specified, separately identified by the SNF or HHA, and 
verified by the intermediary.
    (1) Atypical services. The SNF or HHA can show that the--
    (i) Actual cost of services furnished by a SNF or HHA exceeds the 
applicable limit because the services are atypical in nature and scope, 
compared to the services generally furnished by SNFs or HHAs similarly 
classified; and
    (ii) Atypical services are furnished because of the special needs 
of the patients treated and are necessary in the efficient delivery of 
needed health care.
    (2) Extraordinary circumstances. The SNF or HHA can show that it 
incurred higher costs due to extraordinary circumstances beyond its 
control. These circumstances include, but are not limited to, strikes, 
fire, earthquake, flood, or other unusual occurrences with substantial 
cost effects.
    (3) Areas with fluctuating populations. The SNF or HHA meets the 
following conditions:
    (i) Is located in an area (for example, a resort area) that has a 
population that varies significantly during the year.
    (ii) Is furnishing services in an area for which the appropriate 
health planning agency has determined does not have a surplus of beds 
or services and has certified that the beds or services furnished by 
the SNF or HHA are necessary.
    (iii) Meets occupancy or capacity standards established by the 
Secretary.
    (4) Medical and paramedical education. The SNF or HHA can 
demonstrate that, if compared to other SNFs or HHAs in its group, it 
incurs increased costs for services covered by limits under this 
section because of its operation of an approved education program 
specified in Sec. 413.85.
    (5) Unusual labor costs. The SNF or HHA has a percentage of labor 
costs that varies more than 10 percent from that included in the 
promulgation of the limits.
    (f) Operational review. Any SNF or HHA that applies for an 
exception to the limits established under paragraph (e) of this section 
must agree to an operational review at the discretion of HCFA. The 
findings from this review may be the basis for recommendations for 
improvements in the efficiency and economy of the SNF's or the HHA's 
operations. If recommendations are made, any future exceptions are 
contingent on the SNF's or HHA's implementation of these 
recommendations.

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


[[Page 42614]]


    Dated: January 19, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: April 22, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-20015 Filed 8-4-99; 8:45 am]
BILLING CODE 4120-01-P