[Federal Register Volume 65, Number 69 (Monday, April 10, 2000)]
[Proposed Rules]
[Pages 19188-19291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8481]



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Part IV





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 411 and 489



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

  Federal Register / Vol. 65, No. 69 / Monday, April 10, 2000 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 411 and 489

[HCFA-1112-P]
RIN 0938-AJ93


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

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: This proposed rule sets forth updates to the payment rates 
used under the prospective payment system (PPS) for skilled nursing 
facilities (SNFs), for fiscal year 2001. Furthermore, it specifically 
proposes changes to the SNF PPS case-mix methodology. Annual updates to 
the PPS rates are required by section 1888(e) of the Social Security 
Act, as amended by the Medicare, Medicaid and State Child Health 
Insurance Program Balanced Budget Refinement Act of 1999, related to 
Medicare payments and consolidated billing for SNFs. In addition, this 
proposed rule sets forth certain conforming revisions to the 
regulations that are necessary in order to implement amendments made to 
the Act by section 103 of the Medicare, Medicaid and State Child Health 
Insurance Program Balanced Budget Refinement Act of 1999.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on June 9, 2000.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1112-P, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:
Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-15-03, 7500 Security Boulevard, Baltimore, MD 21244-8150.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1112-P. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 443-G of 
the Department's office at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 to 5 p.m. (phone: 
(202) 690-7061).

FOR FURTHER INFORMATION CONTACT:

Dana Burley, (410) 786-4547 or Sheila Lambowitz, (410) 786-7605 (for 
information related to the case-mix classification methodology).
John Davis, (410) 786-0008 (for information related to the Wage Index).
Bill Ullman, (410) 786-5667 (for information related to consolidated 
billing).
Steve Raitzyk, (410) 786-4599 (for information related to the facility-
specific transition rates).
Bill Ullman, (410) 786-5667 and Susan Burris (410) 786-6655 (for 
general information).

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-
7954. Please specify the date of the issue requested and enclose a 
check or money order payable to the Superintendent of Documents, or 
enclose your Visa or Master Card number and expiration date. Credit 
card orders can also be placed by calling the order desk at (202) 512-
1800 (or toll free at 1-888-293-6498) or by faxing to (202) 512-2250. 
The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

Table of Contents

I. Background
    A. Current System for Payment of Skilled Nursing Facility 
Services Under Part A of the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 for Updating 
the Prospective Payment System for Skilled Nursing Facilities
    C. The Medicare, Medicaid and State Child Health Insurance 
Program (SCHIP) Balanced Budget Refinement Act of 1999
    D. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rates
    2. Payment Provisions--Transition Period
    3. Payment Provisions--Facility-Specific Rate
      II. Update of Payment Rates Under the Prospective Payment 
System for Skilled Nursing Facilities
    A. Federal Prospective Payment System
    1. Cost and Services covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    B. Case-Mix Adjustment and Options
    C. Wage Index Adjustment to Federal Rates
    D. Updates to the Federal Rates
    E. Relationship of RUG-III Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
III. Three-Year Transition Period
IV. The Skilled Nursing Facility Market Basket Index
    A. Facility-Specific Rate Update Factor
    B. Federal Rate Update Factor
V. Consolidated Billing
VI. Provisions of the Proposed Rule
VII. Collection of Information Requirements
VIII. Response to Comments
IX. Regulatory Impact Analysis
    A. Background
    B. Impact of this Proposed Rule
X. Federalism
Regulations Text
Technical Appendix A
    A. Creation of the Analytic Sample
    B. Characteristics of the Sample
    C. Test and Validation Samples
    D. Creation of Measure of Non-Therapy Ancillary Charges from SNF 
Claims
    1. Cost-to-Charge Multiplier
    E. Analysis and Findings--RUG-III Refinements
    1. Costs for Beneficiaries Who Qualify for Both Extensive 
Services and Rehabilitation
    2. Non-Therapy Ancillary Index Models
    F. Model Performance
    1. RUG-III CMI Adjustment
    2. RUG-III (proposed, version 2001)
    3. Weighted Index Model (WIM1)
    4. Weighted Index Model 2 (WIM2)
    5. Unweighted Index Model (UWIM)
    G. RUG-III Medications Data
    1. Creation of MDS-Based Cost Measures
    2. RUG-Based Imputation Method
    3. State and Year-Based Imputation Method

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

ADL--Activity of Daily Living
BBA--Balanced Budget Act of 1997
BBRA--Balanced Budget Refinement Act of 1999
BLS--(U.S.) Bureau of Labor Statistics
CPI--Consumer Price Index
HCFA-- Health Care Financing Administration
HCPCS--HCFA Common Procedure Coding System
IFC--Interim Final Rule with Comments
MDS--Minimum Data Set
MSA--Metropolitan Statistical Area
PPI--Producer Price Index
PPS--Prospective Payment System
PRM--Provider Reimbursement Manual

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RUG--Resource Utilization Group
SCHIP--State Child Health Insurance Program
SNF--Skilled Nursing Facility

I. Background

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

    Section 4432 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 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. The SNF PPS 
payment methodology features a case-mix adjustment that utilizes data 
from the comprehensive assessment process required for every SNF 
beneficiary in order to group them clinically in terms of their degree 
of resource intensity. The case-mix adjustment is designed to ensure 
that the amount of the PPS per diem payment is appropriate to the 
individual beneficiary's actual condition, and is sufficient to 
purchase the full range of care and services that a beneficiary with a 
particular clinical profile would typically be expected to require. We 
are setting forth this proposed rule in accordance with section 
1888(e)(4)(H)(ii) of the Social Security Act (the Act), which requires 
us to publish each year in the Federal Register any changes in the 
case-mix classification system that we use to make the case-mix 
adjustment. Although we are not proposing any other changes in the 
overall PPS payment methodology at present, we are nonetheless 
including a detailed discussion of the overall payment methodology in 
section I.C. below, in order to provide a context for the proposed 
changes to the case-mix classification system. In addition, we are 
incorporating revisions based on the Medicare, Medicaid and State Child 
Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 
(BBRA). Major elements of the system were implemented in an interim 
final rule that was published in the Federal Register on May 12, 1998 
(63 FR 26252), and in a final rule that was published in the Federal 
Register on July 30, 1999 (64 FR 41644). These elements are discussed 
in greater detail in section I.C. below, and include:
     Rates: Per diem Federal rates were established for urban 
and rural areas using allowable costs from fiscal year (FY) 1995 cost 
reports. These rates also included an estimate of the cost of services 
that, before July 1, 1998, had been paid under Part B but furnished to 
Medicare beneficiaries in a SNF during a Part A covered stay. Rates are 
case-mix adjusted using a refined classification system (Resource 
Utilization Groups, version III (RUG-III)) based on beneficiary 
assessments (using the Minimum Data Set (MDS) 2.0). The proposed 
refinement to the RUG classification system is based on critical 
analysis which examined various options to account more precisely for 
the variation in non-therapy ancillary services in our payments and the 
care needs of medically complex patients. The proposed RUG refinement 
includes the addition of new categories and incorporation of an 
ancillary index, as discussed in further detail in section II.B. In 
addition, the Federal rates are adjusted by the hospital wage index to 
account for geographic variation in wages. At this time, data for the 
FY 2001 hospital wage index is not yet available; therefore, the index 
applied in this proposed rule is the same index used in the July 30, 
1999 update notice. We will be updating the wage index in the final 
rule using the latest hospital wage data. Further, the rates are 
adjusted annually using an SNF market basket index. Lastly, as a result 
of section 101 of the BBRA, for SNF services furnished on or after 
April 1, 2000, and before the later of October 1, 2000, or 
implementation by the Secretary of Health and Human Services of a 
refined RUG system, per diem adjusted payments are increased by 20 
percent for 15 RUGs falling under categories for Extensive Services, 
Special Care, Clinically Complex, High Rehabilitation and Medium 
Rehabilitation. This 20 percent increase serves solely as a temporary, 
interim adjustment to the payment rates and RUG-III classification 
system as published in the final rule of July 30, 1999, until we have 
had the opportunity to implement the case-mix refinements proposed in 
this rule. At that point, the temporary adjustment afforded by the 20 
percent increase will no longer be applicable, as payment will be made 
in accordance with the newly-refined RUGs. The RUG-III groups to which 
this adjustment applies are: SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, 
CB2, CB1, CA2, CA1, RHC, RMC and RMB. In addition, for FY 2001 and FY 
2002, the adjusted Federal per diem payment to a facility is increased 
by 4 percent in each year, calculated exclusive of the 20 percent RUG 
rate increase.
     Transition: The SNF PPS includes a 3-year, phased 
transition that blends a facility-specific payment rate with the 
Federal case-mix adjusted rate. The blend used changes for 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. As a result of section 102 of the BBRA of 1999, SNFs may elect 
immediate transition to the Federal rate on or after December 15, 1999 
for cost reporting periods beginning on or after January 1, 2000. There 
is no such election for cost reporting periods beginning before January 
1, 2000. SNFs may elect immediate transition up to 30 days after the 
start of their cost reporting period.
     Coverage: The PPS statute did not change Medicare's 
fundamental requirements for SNF coverage. However, because RUG-III 
classification is based, in part, on the beneficiary's need for skilled 
nursing care and therapy, we have attempted where possible to 
coordinate claims review procedures with the outputs of beneficiary 
assessment and RUG-III classifying activities. For example, we believe 
that when an initial Medicare required (5-day) assessment, properly 
completed, places the beneficiary in one of the upper RUG-III 
classifications that we designate as representing a covered level of 
SNF care (see section II.E. of this preamble), this provides the basis 
for us to assume that the beneficiary needed such care upon admission 
and at least up until the assessment reference date for the initial 
Medicare-required assessment. We will, however, continue to make 
individual review determinations for claims of those individuals who 
classify in one of the lower RUG-III categories.
     Consolidated Billing: The statute includes a billing 
provision that requires a SNF to submit consolidated Medicare bills for 
its beneficiaries 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). As discussed later in this preamble, section 103 of the 
BBRA has identified certain additional services for exclusion, 
effective April 1, 2000.
    As noted above, an interim final rule implementing the SNF PPS was 
published in the Federal Register on May 12, 1998, for which the 
comment period was initially scheduled to close on July 13, 1998. A 
subsequent notice extended the public comment period for an additional 
60 days (July 13, 1998, (63 FR 37498)), and a second notice reopened 
the comment period for another 30 days (November 27, 1998 (63 FR 
65561)). In addition, a correction notice was published October 5, 1998 
(63 FR 53301) that made a number of

[[Page 19190]]

minor technical and editorial corrections to the interim final rule. In 
the July 30, 1999, final rule we responded to the public comments 
received on the interim final rule and made a number of modifications 
in the regulation. This final rule was followed by a correction notice 
published on November 4, 1999 (64 FR 60122), which made a technical 
correction to the final rule's preamble. Also on July 30, 1999, we 
issued an update notice (64 FR 41684), followed by a correction notice 
published on October 5, 1999 (64 FR 54031). We have also issued several 
Program Memoranda 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>

B. Requirements of the Balanced Budget Act of 1997 for Updating the 
Prospective Payment System for Skilled Nursing Facilities

    As described above, section 1888(e)(4)(H) of the Act requires that 
we publish in the Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the FY.
    2. The case-mix classification system to be applied with respect to 
these services during the FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In addition, in the July 30, 1999 final rule, we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to Part A SNF services or to the RUG-III 
classifications.
    This proposed rule updates the rates as mandated by the Medicare 
statute.

C. The Medicare, Medicaid and State Child Health Insurance Program 
(SCHIP) Balanced Budget Refinement Act of 1999

    As a result of enactment of the BBRA, there are several new 
provisions that result in adjustments to the PPS for SNFs. The 
following highlights the major provisions involving the PPS for SNFs:
Temporary Increase in Payment for Certain High Cost Residents
    As noted previously, section 101 of the BBRA provides for a 
temporary, 20 percent increase in the per diem adjusted payment rates 
for 15 specified RUGs, falling under categories for Extensive Services, 
Special Care, Clinically Complex, High Rehabilitation and Medium 
Rehabilitation. The specific RUG-III groups to which this adjustment 
applies are: SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, CB2, CB1, CA2, 
CA1, RHC, RMC, and RMB. The statute provides that the 20 percent 
increase takes effect with SNF services that are furnished on or after 
April 1, 2000, and continues until the later of October 1, 2000, or 
implementation by the Secretary of a refined RUG system. Thus, the 20 
percent increase serves solely as a temporary, interim adjustment to 
the payment rates and RUG-III classification system as published in the 
final rule of July 30, 1999, until we have implemented the case-mix 
refinements that we now propose elsewhere in this document, which we 
expect to accomplish by October 1, 2000. Once we have implemented the 
case-mix refinements, the temporary adjustment afforded by the 20 
percent increase will no longer be applicable, as we will then make 
payment in accordance with the newly-refined RUGs.
    For FY 2001 and FY 2002, section 101 of the BBRA also provides for 
an across-the-board increase in the adjusted Federal per diem payment 
rates by 4 percent in each year, calculated exclusive of the 20 percent 
RUG rate increase discussed above. Unlike the 20 percent increase, 
which is targeted at certain particular RUG-III groups, this 4 percent 
increase will apply equally to all RUG groups.
Election For Immediate Transition to Federal Rate
    As noted earlier, under section 102 of the BBRA, all SNFs may now 
elect to bypass the transition and be paid based upon 100 percent of 
the Federal rate. This election applies to cost reporting periods 
beginning on or after January 1, 2000. There is no such election for 
cost reporting periods beginning before January 1, 2000. SNFs may make 
this election beginning on or after December 15, 1999 and up to 30 days 
after the start of their cost reporting periods. An election to bypass 
the transition is effective for all subsequent periods and cannot be 
rescinded once it is effective. Further information can be found in 
Program Memorandum A-99-53.
Special Payment Adjustment for Certain SNFs
    Section 155 of the BBRA provides that PPS payments to certain SNF 
providers located in Baldwin or Mobile County, Alabama, will be based 
on 100 percent of their facility specific rates for cost reporting 
periods that begin in FY 2000 or FY 2001. In addition, it requires that 
the facility specific portion of their payment rate be calculated using 
data from their cost reporting period beginning in FY 1998. In order to 
be eligible for this special payment, a SNF must meet the following 
criteria: began participation in the Medicare program before January 1, 
1995; have at least 80 percent of the total inpatient days of the 
facility in the cost reporting period beginning in FY 1998 comprised of 
persons entitled to Medicare; and, be located in Baldwin or Mobile 
County, Alabama.
Special SNF PPS Payment Provisions for SNFs with Certain Types of 
Patient Populations
    Section 105 of the BBRA adds paragraph (12) to section 1888(e) of 
the Act and permits certain SNFs to receive 50 percent of the facility 
specific rate and 50 percent of the Federal per diem rate, effective 
from November 29, 1999, until September 30, 2001. In order to be 
eligible, a SNF must: have been certified as an SNF under Medicare 
prior to July 1, 1992; be a hospital-based facility; and, in the cost 
reporting period beginning in FY 1998, have had a patient population, 
eligible for Part A benefits, of which at least 60 percent were 
``immuno-compromised secondary to an infectious disease,'' with 
``specific diagnoses specified by the Secretary.'' The statute gives 
the Secretary the authority to specify the diagnosis associated with 
this provision, and we believe the legislative history provides some 
guidance concerning the application of this provision. The House Ways 
and Means Committee report (H. Rep. 106-436, Part 1 at 47) indicates 
that this provision is directed at facilities that serve ``* * * very 
specialized patients * * * whose medical conditions are not well-
accounted for in the RUG classification system.'' The Senate Finance 
Committee Report (S. Rep. 106-199 at 8) indicates the need to study ``* 
* * alternative payment methods for skilled nursing facilities that 
specialize in providing care to extremely high cost, chronically ill 
populations * * *'' such as ``a facility that exclusively specializes 
in caring for AIDS patients * * *'' In light of this general 
Congressional intent, we believe that the scope of this provision 
should be limited and propose that this provision be applied to human 
immunodeficiency virus (HIV) as coded in ICD-9-CM with the following 
code: 042.
Provision for Part B Add-Ons for Facilities Participating in the 
Nursing Home Case-Mix and Quality (NHCMQ) Demonstration Project
    Under prior law, section 1888(e)(3) of the Act provided for an add-
on to the

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payment rates for Part B services furnished during the course of a Part 
A covered stay for those facilities that did not participate in the 
demonstration that preceded SNF PPS. However, the Act did not provide 
for a similar add-on for facilities that did participate in the 
demonstration project. Therefore, section 104 of the BBRA amended 
section 1888(e)(3) to provide that SNFs that had participated in the 
Nursing Home Case Mix and Quality Demonstration (NHCMQ) project are 
eligible for the inclusion of a Part B add-on amount in their facility 
specific PPS rates. This provision is effective as if included in the 
enactment of the BBA and, therefore, applies to all cost reporting 
periods subject to the PPS transition.
    For the purpose of computing facility specific rates, the base year 
for providers participating in the NHCMQ demonstration project is 
calendar year 1997 rather than FY 1995 (which is the base year for SNFs 
not participating in the demonstration project). Therefore, the Part B 
add-on amounts for the demonstration SNFs will be calculated using data 
from the appropriate periods in 1997. Because of the time period 
necessary for us to compute these amounts, existing Part B data from 
1995 will be updated for inflation and used as the bases for payment on 
an interim basis until we can develop the final amounts using the 1997 
data, at which point earlier payments will be adjusted to reflect the 
correct data.
Exclusion of Certain Additional Services from the SNF PPS Bundle and 
Consolidated Billing
    The original SNF PPS legislation in the BBA identified several 
service categories that were excluded from the SNF consolidated billing 
requirement, as well as from the bundled Part A payment made under the 
SNF PPS itself. Effective with services furnished on or after April 1, 
2000, section 103(a) of the BBRA has amended section 1888(e)(2)(A) to 
exclude certain additional types of services from the consolidated 
billing requirement, thus allowing these services to be billed 
separately to Part B. Section 103(b) of the BBRA has also amended 
section 1888(e)(4)(G) to provide for a corresponding proportional 
reduction in Part A SNF payments, beginning with FY 2001. We discuss 
these additional excluded service categories in section V. of this 
preamble, on consolidated billing.

D. Skilled Nursing Facility Prospective Payment--General Overview

    The Medicare SNF PPS was implemented for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, SNFs are paid 
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, before July 1, 1998, had been paid 
under Part B (other than physician and certain other services 
specifically excluded under the BBA) but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay. (For a complete 
discussion of these provisions, see the May 12, 1998 interim final rule 
(63 FR 26252)).
1. Payment Provisions--Federal Rate
    The statute sets forth a fairly prescriptive methodology for 
calculating the amount of payment under the SNF PPS. The PPS utilizes 
per diem Federal payment rates based on mean SNF costs in a base year 
updated for inflation to the first effective period of the PPS. We 
developed the Federal payment rates using allowable costs from 
hospital-based and freestanding SNF cost reports for reporting periods 
beginning in FY 1995. The data used in developing the Federal rates 
also incorporate an estimate of the amounts that would be payable under 
Part B for covered SNF services to individuals who were receiving Part 
A covered services in an SNF. In developing the rates for the initial 
period, we updated costs to the first effective year of PPS (15-month 
period beginning July 1, 1998) using a SNF market basket index, and 
standardized for facility differences in case-mix and for geographic 
variations in wages. Providers that received ``new provider'' 
exemptions from the routine cost limits were excluded from the database 
used to compute the Federal payment rates. In addition, costs related 
to payments for exceptions to the routine cost limits were excluded 
from the database used to compute the Federal rates. In accordance with 
the formula prescribed in the BBA, we set the Federal rates at a level 
equal to the weighted mean of freestanding costs plus 50 percent of the 
difference between the freestanding mean and weighted mean of all SNF 
costs (hospital-based and freestanding) combined. We compute and apply 
separately the payment rates for facilities located in urban and rural 
areas. In addition, we adjust the portion of the Federal rate 
attributable to wage related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix using a classification system that accounts for the 
relative resource utilization of different patient types. This 
classification system, RUG-III, utilizes beneficiary assessment data 
(from the Minimum Data Set or MDS) completed by SNFs to assign 
beneficiaries into one of 178 groups. The May 12, 1998 interim final 
rule (63 FR 26252) has a complete and detailed description of the 
original (44 group) RUG-III classification system. A detailed 
discussion of the proposed changes to the RUG classification system is 
found in Section II.B. of this proposed rule.
    The Federal rates reflected in this notice update the rates in the 
July 30, 1999 update notice (64 FR 41684) by a factor equal to the SNF 
market basket index minus 1 percentage point. According to section 
1888(e)(4)(E)(ii) of the Act, for FYs 2001 and 2002, we will update the 
rate by adjusting the current rates by the SNF market basket change 
minus 1 percentage point. For subsequent FYs, we will adjust the rates 
by the applicable SNF market basket change.
2. Payment Provisions--Transition Period
    Beginning with a provider's first cost reporting period beginning 
on or after July 1, 1998, there is a transition period covering three 
cost reporting periods. During the transition period, 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 transition, the composition of the blended rate 
varies depending on the year of 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

[[Page 19192]]

reporting periods, we base payments entirely on the Federal rates.
    As noted earlier, in accordance with section 102 of the BBRA, SNFs 
that would otherwise be subject to the statutory three-year, phased 
transition from facility-specific to Federal rates, may elect to bypass 
the transition and go directly to the full Federal rate. This amendment 
applies to elections made on or after December 15, 1999, except that no 
election will be effective for a cost reporting period beginning before 
January 1, 2000; an election is effective for a cost reporting period 
beginning no earlier than 30 days before the date of the election.
3. Payment Provisions--Facility-Specific Rate
    For most facilities, we compute the facility-specific payment rate 
utilized for the transition 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 that would be payable under Part B for covered SNF services 
furnished during FY 1995 to individuals who were beneficiaries of the 
facility and receiving Part A covered services. 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 FYs 
1998 and 1999, we updated this rate by a factor equal to the SNF market 
basket increase minus 1 percentage point, and in each subsequent year, 
we will update it by the applicable SNF market basket increase.
Appeals Rights
    In enacting SNF PPS, Congress imposed limitations on the rights of 
SNFs to appeal their new payment rates (section 1888(e)(8) of the 
Social Security Act). Similar to the hospital PPS, the new SNF system 
begins with a transition period, wherein a portion of the payment rates 
(that is, the facility-specific rate) is based upon the facilities' 
costs in a base period (cost reporting periods beginning in 1995). The 
facility-specific portion of the rate phases out over the course of a 
three year cost reporting transition period, after which the SNFs will 
be paid on a fully Federal rate. The statutory language removes the 
Federal portion of the rate from administrative and judicial review, 
while allowing for a limited review of the facility-specific portion of 
the rate related to an SNFs Part A historical costs from the 1995 base 
year. The language of the interim final rule with comment and the 
Medicare Provider Reimbursement Manual (PRM) contemplate situations 
where adjustments are made to the reimbursement amounts allowable in 
the base year that are used to set the facility-specific portion of a 
provider's PPS rate. Adjustments may be made in the cost report 
settlement process and/or providers may have appealed specific cost 
report adjustments. Where adjustments are made to the base year costs 
either through final settlement of the cost report or as a result of an 
appeal of the base year Notice of Program Reimbursement (NPR), such 
adjustments may be applied to the facility-specific portion of the PPS 
rate for any cost years that are open or are within the time periods 
subject to reopening under the regulations at 42 CFR 405.1885. 
Additionally, providers may challenge the facility-specific portion of 
their rates by appealing the facility-specific rate notice they receive 
from their fiscal intermediary before the start of SNF PPS. The fiscal 
intermediaries will apply any adjustments resulting from a successful 
challenge to this rate notice to all open transition years. Providers 
may also challenge their facility-specific rates by appealing their 
transition year NPRs. Adjustments obtained through a NPR challenge will 
only be applied to the year under appeal. Moreover, in accordance with 
the judicial review prohibitions contained in section 1888(e)(8)(B) of 
the Act, all reviews of facility-specific rates are limited to 
challenges relating to specific Medicare Part A costs in the base year.

II. Update of Payment Rates Under the Prospective Payment System 
for Skilled Nursing Facilities

A. Federal Prospective Payment System

    This rule sets forth a proposed schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2000. The schedule incorporates per diem Federal rates 
designed to provide Part A payment for all costs of services furnished 
to a beneficiary of an SNF during a Medicare-covered stay.
1. Cost and Services Covered by the Federal Rates
    The Federal rates apply to all costs (that is, routine, ancillary, 
and capital related costs) of covered SNF services other than costs 
associated with operating approved educational activities as defined in 
Sec. 413.85. Under section 1888(e)(2) of the Act, covered SNF services 
include posthospital SNF services for which benefits are provided under 
Part A (the hospital insurance program), as well as all items and 
services (other than those services excluded by statute) that, before 
July 1, 1998, were paid under Part B (the supplementary medical 
insurance program) but furnished to Medicare beneficiaries in a SNF 
during a Part A covered stay. (These excluded service categories are 
discussed in greater detail in section V.B.2. of the May 12, 1998 
interim final rule (63 FR 26295-97). Also, as mentioned previously, 
section 103 of the BBRA has identified certain additional types of 
services for exclusion from the SNF PPS bundle, and has provided for a 
corresponding proportional reduction in Part A SNF payments beginning 
with FY 2001.).
2. Methodology Used for the Calculation of the Federal Rates
    The methodology to compute the unadjusted Federal rates 
incorporates several changes since we published the final rule on July 
30, 1999 (64 FR 41684). First, to facilitate the incorporation of our 
proposed refinement to the case mix classification system, we are 
creating a new component of the payment rates to account for non-
therapy ancillary services. This component is being created by moving 
the non-therapy ancillary costs used in establishing the nursing case-
mix component of the payment rates to a separate component. For the 
payment rates associated with urban areas, 43.4 percent of the nursing 
case mix component is related to non-therapy ancillary services 
(including Part B services). For the payment rates associated with 
rural areas, 42.7 percent of the nursing case mix component is related 
to non-therapy ancillary services (including Part B services). These 
percentages were previously identified in a Federal Register notice 
dated November 27, 1998 (63 FR 65561). This new component of the 
payment rates is presented in Tables 1 and 2 of this proposed rule.
    In addition, in accordance with section 103 of the BBRA, the 
Federal rates will be adjusted to reflect the

[[Page 19193]]

exclusion of certain items and services from consolidated billing, as 
explained previously. The complexity and time necessary for computing 
the numeric adjustment itself does not allow us to present it in this 
proposed rule. However, we describe the general methodology that we 
plan to use later in this preamble (in the discussion of the PPS Rate 
Tables). As required by the statute, the rates are updated using the 
latest market basket percentage minus 1 percentage point. For a 
complete description of the multi-step process, see the May 12, 1998 
interim final rule. In addition, based on section 101 of the BBRA, we 
have provided for a 4 percent increase in the adjusted Federal rate for 
FY 2001. This 4 percent adjustment is not reflected in the rate tables 
(Tables 1, 2, 5, and 6 of this proposed rule). In accordance with the 
statute, it is applied after all adjustments (wage and case-mix). See 
the example in Section III; Table 9, of this proposed rule.
    The SNF market basket is used to adjust each per diem component of 
the Federal rates forward to reflect cost increases occurring between 
the midpoint of the Federal FY beginning October 1, 1999 and the 
midpoint of the Federal FY beginning October 1, 2000, and ending 
September 30, 2001, to which the payment rates apply. In accordance 
with section 1888(e)(4)(B) of the Act, the payment rates are updated 
between FY 2000 and FY 2001 by a factor equivalent to the annual market 
basket index percentage increase minus 1 percentage point. This factor 
is equal to 1.01833. Tables 1 and 2 below reflect the updated 
components of the unadjusted Federal rates.

                                                    Table 1.--Unadjusted Federal Rate Per Diem: Urban
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Nursing  case-      Medical       Therapy  case-   Therapy  non-
                           Rate component                                  mix           ancillary           mix            case mix      Non-case-  mix
--------------------------------------------------------------------------------------------------------------------------------------------------------
Per Diem Amount....................................................          $64.49           $49.45           $85.79           $11.32           $58.25
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Table 2.--Unadjusted Federal Rate Per Diem: Rural
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Nursing  case-      Medical       Therapy  case-   Therapy  non-
                           Rate component                                  mix           ancillary           mix            case mix      Non-case-  mix
--------------------------------------------------------------------------------------------------------------------------------------------------------
Per Diem Amount....................................................          $62.50           $46.58           $99.11           $12.10           $59.32
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Case-Mix Adjustment and Options

    As required by the BBA, HCFA must publish the SNF PPS case-mix 
classification methodology applicable for the next Federal FY before 
August 1 of each year. This proposed rule discusses options for 
refinements to the RUG-III system, describes ongoing research and 
analyses, shares the initial results that we propose be incorporated 
into the Medicare PPS system effective October 1, 2000, and solicits 
comments from all interested parties. During the next 60 days, comments 
will be reviewed and considered, additional analyses will be conducted, 
and final decisions will be made on the need for, and types of, RUG-III 
refinements to be implemented. A final rule will then be promulgated 
before August 1, 2000.
Research Goals
    We commissioned a study to review the RUG-III classification system 
with particular emphasis on the care needs of medically complex 
Medicare beneficiaries and the variation in non-therapy ancillary 
services within RUG-III categories. This project is a major priority 
for us, the provider industry, and others. The initial research 
identified potential refinements to the system that we propose to 
implement effective October 1, 2000.
    A key part of this research was the exploration of potential 
refinements to the Extensive Services category. Previous research 
showed that the Extensive category is associated with the highest per 
diem non-therapy ancillary costs of any of the RUG-III categories. The 
research also indicated that, while the Extensive Services category did 
capture a disproportionate share of high cost beneficiaries, there was 
considerable variance in costs within this category as well as within 
other categories. In the current project, additional studies were 
conducted to extend the analysis of non-therapy ancillary costs and 
within-group variance to other RUG-III categories.
    The researchers focused on the following analyses to identify 
options, and the results were used to develop the proposed RUG-III 
refinements discussed in this rule:
    1. Evaluate the ability of the current RUG-III system to predict 
variance in drug, respiratory or other non-therapy ancillary costs.
    2. Evaluate the ability of specific MDS items to predict variance 
in non-therapy ancillary costs, and identify the MDS items most closely 
associated with differences in non-therapy ancillary costs.
    3. Design/test potential refinements to the RUG-III methodology.
    A detailed description of the methodology used to conduct these 
analyses is included in the Technical Appendix A to this proposed rule.
Data Sources
    Since ensuring the equity and accuracy of the SNF PPS has been, and 
continues to be, a major HCFA priority, the studies were initiated 
shortly after the introduction of the new payment system. In fact, the 
research was conducted before actual PPS claims and acuity data became 
available. For this reason, the analyses described here were conducted 
using a large cross-linked research data base that included clinical 
assessment data collected from the Federally-mandated MDS, drug 
information, our claims data, and organizational data on nursing home 
providers. The data sets used in the analyses are described below:
Minimum Data Set (MDS)
    MDS data were collected from 6 states: Kansas, Maine, Mississippi, 
Ohio, South Dakota, and Texas. (As explained in Technical Appendix A, 
we were unable to utilize data from a seventh state, New York, due to 
that state's use of an all-inclusive payment rate.) These states were 
selected because the MDS data had been collected and used for rate-
setting purposes prior to the start of the Medicare SNF PPS (either 
through the HCFA Case-Mix Demonstration Project or for state Medicaid 
payment systems), and provided a greater number of MDS records over a 
longer period of time than available from any other source. In 
addition, previous demonstration

[[Page 19194]]

project reliability studies and state validation activities indicated a 
generally high level of data accuracy.
    MDS data used in this study were for calendar years 1995, 1996 and 
1997 (except for Texas, where data were only available for 1997), and 
included assessments for Medicare beneficiaries, Medicaid recipients 
and private pay patients. While some states required MDS assessments 
for all beneficiaries admitted to the SNF regardless of the length of 
stay, most of the assessments were prepared following the Federal 
guidelines in effect at the time; that is, assessments required by day 
14 of the SNF admission.
MDS Drug Data
    Facilities participating in the HCFA Case-Mix Demonstration project 
submitted medications data as part of their MDS assessments. In 
addition, several of the states, including Maine, South Dakota, and 
Ohio, required the medications data with every MDS, regardless of payor 
source. The medications reported on the MDSs were collected from seven 
states, the six states used for this study, plus New York (see 
Technical Appendix A for details on the use of New York data).
    Up to 18 medications administered during the assessment reference 
period can be reported on an MDS record. The MDS drug data were 
cleansed and verified through a combination of manual examination (by 
either a clinical pharmacist or physician) and computerized 
reclassification of National Drug Codes (NDC). The data were then 
ordered into therapeutic groups for easier analysis.
SNF Claims
    All SNF Medicare claims spanning the years 1995 through 1997 were 
downloaded from the HCFA Data Center and matched to MDS files. The 
files were constructed so that there are multiple observations per SNF 
stay if multiple MDS assessments were performed.
Staff Time Measurement (STM) Study Data
    This analysis incorporated HCFA STM Study data (combined 1995 and 
1997). The May 12, 1998 interim final rule described the STM Study, and 
the methodology used to incorporate the STM data into Medicare PPS 
rate-setting. These data were used to impute staff time costs for the 
observations used in this study.
On-Line Survey Certification and Reporting System (OSCAR) Data
    The OSCAR data provide facility-level information, such as the 
results from annual survey inspections and information regarding 
facility type. OSCAR data from 1991 through 1998 were linked serially 
into a longitudinal file. The analytic database constructed for this 
research has been merged to this longitudinal OSCAR file through the 
linking of facility identifiers, using the OSCAR information from the 
survey dates closest to the MDS assessment data.
Case Mix Research Findings
    While maintaining the general structure of RUG-III, we found that 
the two most viable ways to refine the system are by adding new 
categories and end splits to the system, and by developing a new index 
system to reflect the variation of non-therapy ancillary service costs. 
Adoption of these refinements will add additional groups to the case-
mix system, somewhat increasing its complexity. This proposed change 
also may introduce some initial uncertainty for providers, who would 
have to become familiar with the refined system and modify existing 
operational and support systems.
    In evaluating a particular change, we first identified the 
drawbacks of that change (for example, added complexity of the RUG-III 
model and time and effort required by providers, contractors, and 
beneficiaries to assimilate the change). Then, to evaluate the overall 
desirability of the potential change, we weighed these drawbacks 
against the benefits, such as the expected improvement in payment and 
clinical accuracy. In addition, we evaluated potential refinements in 
terms of possible incentives and disincentives related to access, 
quality and cost-effectiveness of SNF care. We incorporated this 
analysis into our evaluation of potential RUG-III refinements.
    After careful review and extensive analysis, we then identified 
several possible RUG-III refinements that will improve the accuracy of 
SNF PPS payments. One such refinement is the development of new 
categories for beneficiaries who qualify for both the RUG-III 
Rehabilitation and Extensive Services categories. As expected, our 
analyses indicated that ancillary costs were much higher for Medicare 
beneficiaries in the Extensive Services category than for those in 
other categories. There are also a significant number of beneficiaries 
who would classify into the Extensive Services category based on 
clinical conditions but who, because they are also receiving 
rehabilitation services, classify into one of the Rehabilitation 
categories instead (due to the hierarchical logic of the RUG-III 
classification system). These beneficiaries carry with them the same 
non-therapy ancillary costs associated with their complex clinical 
needs even though they are classified into a RUG-III Rehabilitation 
category.
    The high costs for beneficiaries in the Extensive Services category 
suggest that the payment rate for Extensive Services should be 
increased. However, increasing the payment rate without further 
adjustments could adversely affect provider incentives to provide 
therapy to beneficiaries requiring Extensive Services. Therefore, we 
expanded the scope of the proposed refinement to include a new category 
for beneficiaries who qualify for both Extensive Services and a RUG-III 
Rehabilitation category.
    Our research findings showed little or no correlation between the 
groups within the Extensive Services category (that is, SE1, SE2, SE3) 
and the level of rehabilitation services used. For this reason, the 
structure for the new hierarchy level proposed here would mirror that 
of the existing Rehabilitation categories. Thus, we would add to the 
current RUG-III model fourteen (14) new ``Rehabilitation and Extensive 
Services'' sub-categories that use the same Rehabilitation sub-category 
and ADL splits as the current system (See Table 4 for the proposed RUG-
III structure).
    The second component of the proposed refinement is the development 
of a separate ``non-therapy ancillary'' index based on clinical 
variables on the MDS. We tested MDS items to identify clinical 
conditions and services that are predictive of non-therapy ancillary 
costs. First, we analyzed each MDS variable independently, and 
identified all MDS items that had a significant positive relationship 
(at the 5 percent level) with per diem non-therapy ancillary costs. 
Next, we identified combinations of MDS items that were associated with 
significant cost differences. We then evaluated variables for clinical 
validity and potential incentive effects. For example, we rejected 
consideration of indwelling catheters as case-mix adjustors due to the 
potential negative incentive factors associated with their use in the 
index. See Table 3 for a list of MDS items that were found to be 
associated with significant differences in ancillary costs.
    Once we identified the critical predictive variables, we 
investigated a

[[Page 19195]]

number of index model approaches. We developed weighted and unweighted 
versions of a non-therapy ancillary index. Both versions improved the 
variance prediction of the case-mix system. The unweighted index model 
assigns a non-therapy ancillary level based on a count of the variables 
(selected MDS items) associated with non-therapy ancillary costs. Under 
the weighted index model, different weights are assigned to the 
selected MDS items based on the difference in costs associated with the 
item. In this study, the researchers assigned the weights based on 
quantitative analysis of the data. With both indices, thresholds were 
determined to form subgroups which vary logically in cost. However, 
these cost variations relate to the research data base, and need to be 
verified against the national MDS/Medicare claims data base.
    The grouping logic used for the refined RUG-III is very similar to 
that currently used. The same 108 MDS items that are used to classify 
beneficiaries into the 44 RUG-III groups will be used to classify 
beneficiaries into the refined RUG-III subcategories in either the 
unweighted or weighted index models. It is only at the last level of 
classification that additional MDS items are considered. The MDS items 
used for the last step of classification include some of the 108 items 
that are used for the first level of classification in addition to some 
others, either alone or in combinations.
    The last step to grouping using the unweighted index model (UWIM) 
that we are proposing is based on a count of clinical variables, up to 
a maximum of 11. There are 11 ``domains,'' some of which are comprised 
of multiple MDS clinical variables. The clinical conditions and 
services that define the domains are shown in Table 3. Within a domain, 
any one clinical variable, or combination of variables, satisfies the 
criteria for being included in the count for classification into one of 
the refined RUG-III groups. For example, the first domain is 
``Parenteral/IV feeding with greater than 76 percent total calories.'' 
In order for the domain to be counted for determining the final step in 
RUG-III classification in the UWIM, the MDS items K5a and K6a must be 
coded to reflect the receipt by the beneficiary of at least 76 percent 
of total nutrition received via parenteral or IV feeding in the 
previous 7 days.
    Other domains are comprised of many more MDS items than the 
parenteral/IV feeding domain. An example of this is the domain 
entitled, ``Oxygen and either pneumonia or respiratory infection with 
fever, or pneumonia or respiratory infection, chronic obstructive 
pulmonary disease, congestive heart failure, coronary artery disease 
with shortness of breath.'' This domain will only count once toward 
classification even though it is possible for a beneficiary to have 
values for all of these clinical conditions. As soon as the grouper 
software identifies that one combination of MDS items' values is 
present on the MDS that satisfies this domain, it will credit the case 
with a count of 1 in addition to whatever other domain criteria are 
satisfied by the MDS.
    The identified clinical variables are used for classification of 
every Medicare MDS in the Clinically Complex category and above, 
regardless of the other qualifying conditions and services reported on 
the MDS. This means that a beneficiary who has a count of 2 of the 
relevant clinical variables, will classify into the ``3'' level of the 
particular refined RUG-III subcategory for which he or she qualifies. 
As described above, the ``3'' level signifies a count of 1 or 2 of the 
clinical variables used for determining the non-therapy ancillary end 
split.
    For example, a beneficiary who has pneumonia, an ADL sum score of 
8, dehydration, a fever, and a surgical wound that requires twice daily 
dressing changes, will classify to the Special Care category. Within 
the Special Care category, the ADL score of 8 will classify this 
beneficiary into the ``SC'' subcategory. The count of the items that 
are used to make the final classification is 2, as the pneumonia and 
the wound care with dressing changes are the two clinical variables 
that will affect classification of this beneficiary to the SC3 group.

 Table 3.--MDS Items Associated With Differences in Ancillary Charges--Refined Variable List Following Clinical
                                                      Input
----------------------------------------------------------------------------------------------------------------
                                                    Percent of      Regression
                MDS items domains                     sample        coefficient   Standard error    t-Statistic
----------------------------------------------------------------------------------------------------------------
Parenteral/IV with >76 percent total calories...               1          153.97           14.63           10.53
Tracheostomy....................................               1          109.87           16.57            6.63
Suctioning......................................               2          106.76           10.23           10.43
IV Medication...................................              15           77.33            3.71           20.86
Oxygen and either pneumonia or resp. inf. with                44           26.42            2.60           10.17
 fever, or pneumonia or resp. inf., COPD, CHF,
 CAD with SOB...................................
Pneumonia.......................................              10           25.64            4.06            6.32
Tube feeding with >76 percent total calories....               6           23.21            4.33            5.36
Respiratory Infection...........................               7           18.81            4.87            3.87
Application of dressing with/with-out topical                  5           13.38            5.15            2.60
 medication and presence of ulcers or other skin
 lesions/ wounds................................
Skin wound/ulcer care...........................              25            7.01            2.77            2.53
Stage 4 Pressure Ulcer..........................               4            6.87            3.09           2.22
----------------------------------------------------------------------------------------------------------------
Notes: N = 8,087 (Based on analysis of test sample only--20 percent of observations)
Data Source: Medicare MDS and SNF Claims Data 1995-1997, excluding ME, OH, SD.

Using the selected MDS items, we calculated a non-therapy ancillary 
index score for each MDS and classified them to the appropriate non-
therapy ancillary level. We are including a more detailed description 
of the non-therapy ancillary index methodology in Technical Appendix A.
    An index model can differ with respect to the RUG-III categories to 
which the model is applied. Two options that we considered were to 
apply the index model only to the Extensive Services category 
(including beneficiaries in rehabilitation who also qualify for 
Extensive Services) or to apply the index option to a broader group of 
RUG-III categories. The research indicated very little difference in 
ancillary costs for beneficiaries in the

[[Page 19196]]

Impaired Cognition, Behavior and Physical Function categories. 
Differences in ancillary costs were identified within the 
Rehabilitation, Clinically Complex, Special Care, and Extensive 
Services groups. For this reason, we propose to apply the non-therapy 
ancillary index model to all residents in the Clinically Complex 
category or above (where over 90 percent of Medicare patients fall). In 
addition, we propose to apply a single non-therapy ancillary index 
factor to each of the lower levels of the RUG-III model (that is, 
Impaired Cognition, Behavior, and Physical Function).
    Index models can also be applied differently across RUG-III levels. 
The most straightforward method is to apply a fixed dollar amount for 
each level of the index. In this case, the add-on for a non-therapy 
ancillary index score of 3 would be the same regardless of the 
beneficiary's RUG-III group. Separate indices can also be calculated 
for each level of the hierarchy. In this case, the dollar amount of the 
non-therapy ancillary index level of 3 would be different for 
beneficiaries in different levels of the RUG-III hierarchy, for 
example, clinically complex, special care, rehabilitation, etc. 
Separate indices are more appropriate when there is significant inter-
group variance. Using the research data base, we found significant 
variation. In projecting rates for both the UWIM (Tables 5 and 6) and 
WIM 2 (Technical Appendix A, Tables 6.1 and 6.2) models, we calculated 
separate index values for each of the 8 proposed hierarchy levels. This 
approach will be analyzed and evaluated using the national PPS/MDS data 
base.
    Finally, index models can also differ with respect to the number of 
non-therapy ancillary index groups that are used. Six groups were 
developed for the weighted index model. Four groups were used for the 
unweighted model. The weighted index model performs slightly better 
than its unweighted counterpart. However, it adds a significant level 
of complexity both in terms of the number of additional RUG-III 
variations and the addition of a new type of MDS scoring methodology 
based on cost instead of clinical criteria. In addition, as stated 
above, the weighted index model break points are not representative of 
national ancillary costs.
    On the other hand, the unweighted index model relies on a count of 
MDS items to differentiate among index levels, an approach similar to 
that used currently in RUG-III for classification into the Extensive 
Services category. At this phase of our analysis, we have concluded 
that the added complexity of the weighted model offsets any benefits 
gained. Therefore, we are proposing the unweighted non-therapy 
ancillary index model that will be applied to the combined 
Rehabilitation/Extensive Services, Rehabilitation, Extensive Services, 
Special Care and Clinically Complex categories of the RUG-III 
hierarchy.
    Adopting a new Extensive Services with Rehabilitation category and 
adding a non-therapy ancillary index component will require 
modifications to the naming conventions used to identify each RUG-III 
group. Based on these recommendations, we have updated the RUG-III 
structure to incorporate the proposed refinements, as displayed in 
Table 4. These proposed RUG-III groups are based upon the existing 3 
digit RUG-III coding structure, but will designate the non-therapy 
ancillary level as well as the RUG-III category.
    The first letter of the RUG-III code defines the hierarchy level. 
First, a new hierarchy level is being added to recognize beneficiaries 
needing a combination of Extensive and Rehabilitation Services. The 
codes used to reflect the hierarchy level are also being expanded to 
identify separately each level of Rehabilitation (that is, Ultra High, 
Very High, High, Medium and Low) either in combination with Extensive 
Services or separately.

                         RUG Code--First letter
------------------------------------------------------------------------
                            Hierarchy                              Code
------------------------------------------------------------------------
Extensive with Rehabilitation:
  Ultra High....................................................       J
  Very High.....................................................       K
  High..........................................................       L
  Medium........................................................       M
  Low...........................................................       N
Rehabilitation:
  Ultra High....................................................       U
  Very High.....................................................       V
  High..........................................................       W
  Medium........................................................       X
  Low...........................................................       Y
Extensive Services..............................................       E
Special Services................................................       S
Clinically Complex..............................................       C
Impaired Cognition..............................................       I
Behavior........................................................       B
Reduced Physical Function.......................................       P
------------------------------------------------------------------------

    The second letter of the proposed RUG-III coding structure is an 
alpha character that indicates the final group assigned after the RUG-
III end-splits (that is, ADLs, depression, restorative nursing) have 
been calculated.
    The third digit of the proposed RUG-III coding structure will 
indicate the non-therapy ancillary index level. In the unweighted non-
therapy ancillary model, there are 4 levels determined by the number of 
MDS non-therapy ancillary qualifying items (See Table 4 for the 
complete list of qualifiers.)

------------------------------------------------------------------------
           Index level                     Number qualifiers met
------------------------------------------------------------------------
5................................  6 or more.
4................................  3-5.
3................................  1-2.
2................................  0.
1................................  Regular--for impaired cognition
                                    behavior and physical function
                                    categories.
------------------------------------------------------------------------

    For example, under the current RUG-III model, a beneficiary whose 
MDS reflects an ADL sum score of 11, a tracheostomy, suctioning, 
pneumonia, IV medications and receipt of 380 minutes per week of 
physical therapy, would group into the RHB rehabilitation group.
    In the refined RUG-III model with the unweighted non-therapy 
ancillary index, this beneficiary would group into the LB4 group with 
the first digit, L, indicating a combination of Extensive Services and 
High Rehabilitation, the second digit, B, indicating the ADL level of 
11, and the third digit, 4, indicating the non-therapy ancillary level 
for a beneficiary with 4 qualifiers. See Table 4 for a crosswalk from 
the current RUG-III groups to the new groups.
    In Example 2, we will show the proposed classification for a 
beneficiary who receives no rehabilitation services. This beneficiary 
is a quadriplegic, who has an ADL sum score of 17, a stage 4 pressure 
ulcer, treatment for the pressure ulcer, pneumonia, and daily 
respiratory therapy. This beneficiary currently classifies into the 
Special Care category, into the SSC group. In the refined 
classification system he or she will group into the SA4 group, showing 
that he or she is in the Special Care category, with an ADL sum score 
of 17-18, and 3-5 of the MDS non-therapy ancillary qualifiers.
    A naming convention has also been established for the weighted 
model. The first 2 digits are the same as for the unweighted model. The 
third digit, the non-therapy ancillary indicator, uses alpha characters 
A through F, with ``F'' as the lowest ancillary level.

[[Page 19197]]



                   Table 4.--RUG Refinement Crosswalk
------------------------------------------------------------------------
 Current  RUG-III    Description of     Non-therapy     Refined  RUG-III
       group            category      ancillary split        group
------------------------------------------------------------------------
                    Rehab: At least               6    JA5
                     720 minutes/
                     week in 1
                     disciplines,
                     one discipline
                     at least 5 days/
                     week.
                    Extensive: At
                     least one of
                     the following:
                     IV feeding in
                     last 7 days, IV
                     medications in
                     last 14 days,
                     suctioning in
                     last 14 days,
                     tracheostomy
                     care in last 14
                     days,
                     ventilator/
                     respirator in
                     last 14 days.
                    ADL Sum Score:
                     16-18.
                                                3-5    JA4
                                                1-2    JA3
                                                  0    JA2
                    Rehabilitation:               6    JB5
                     As above for
                     ultra high
                     rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 9-
                     15.
                                                3-5    JB4
                                                1-2    JB3
                                                  0    JB2
                    Rehabilitation:               6    JC5
                     As above for
                     ultra high
                     rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 7-
                     8.
                                                3-5    JC4
                                                1-2    JC3
                                                  0    JC2
                    Rehabilitation:               6    KA5
                     At least 500
                     minutes/week.
                     At least one
                     discipline 5
                     days/week.
                    Extensive: As
                     above.
                    ADL Sum Score:
                     16-18.
                                                3-5    KA4
                                                1-2    KA3
                                                  0    KA2
                    Rehabilitation:               6    KB5
                     As above for
                     Very High
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 9-
                     15.
                                                3-5    KB4
                                                1-2    KB3
                                                  0    KB2
                    Rehabilitation:               6    KC5
                     As above for
                     Very High
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 7-
                     8.
                                                3-5    KC4
                                                1-2    KC3
                                                  0    KC2
                    Rehabilitation:               6    LA5
                     High
                     Rehabilitation:
                     At least 325
                     minutes/week.
                     One discipline
                     at least 5
                     times/week.
                    Extensive: As
                     above..
                    ADL Sum Score:
                     13-18.
                                                3-5    LA4
                                                1-2    LA3
                                                  0    LA2
                    Rehabilitation:               6    LB5
                     As above for
                     High
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 8-
                     12.
                                                3-5    LB4
                                                1-2    LB3
                                                  0    LB2
                    Rehabilitation:               6    LC5
                     As above for
                     High
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 7
                                                3-5    LC4
                                                1-2    LC3
                                                  0    LC2
                    Rehabilitation:               6    MA5
                     Medium
                     Rehabilitation:
                     At least 150
                     minutes/week.
                     Must have
                     therapy on 5
                     days, any
                     discipline
                     combination.
                    Extensive: As
                     above.
                    ADL Sum Score:
                     15-18.
                                                3-5    MA4
                                                1-2    MA3
                                                  0    MA2
                    Rehabilitation:               6    MB5
                     As above for
                     Medium
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 8-
                     14.
                                                3-5    MB4
                                                1-2    MB3
                                                  0    MB2

[[Page 19198]]

 
                    Rehabilitation:               6    MC5
                     As above for
                     Medium
                     Rehabilitation.
                    Extensive: As
                     above.
                    ADL Sum Score: 7
                                                3-5    MC4
                                                1-2    MC3
                                                  0    MC2
                    Rehabilitation:               6    NA5
                     Low
                     Rehabilitation:
                     At least 45
                     minutes/week on
                     at least 3 days/
                     week. Nursing
                     Rehabilitation
                     therapy must be
                     provided in two
                     activities, for
                     15 minutes, 6
                     days/week.
                    Extensive: As
                     above.
                    ADL Sum Score:
                     14-18.
                                                3-5    NA4
                                                1-2    NA3
                                                  0    NA2
                    Rehabilitation:               6    NB5
                     As above for
                     Low
                     Rehabilitation.
                    Extensive: As
                     above..
                    ADL Sum Score: 7-
                     13.
                                                3-5    NB4
                                                1-2    NB3
                                                  0    NB2
ULTRA HIGH RUC....  Rehabilitation:               6    UA5
                     At least 720
                     minutes/week in
                     at least 2
                     therapy
                     disciplines. At
                     least one
                     discipline must
                     be provided at
                     least 5 days/
                     week.
                    ADL Sum Score:
                     16-18.
                                                3-5    UA4
                                                1-2    UA3
                                                  0    UA2
RUB...............  Rehabilitation:               6    UB5
                     As above for
                     Ultra High
                     Rehabilitation.
                    ADL Sum Score: 9-
                     15.
                                                3-5    UB4
                                                1-2    UB3
                                                  0    UB2
RUA...............  Rehabilitation:               6    UC5
                     As above for
                     Ultra High
                     Rehabilitation.
                    ADL Sum Score: 4-
                     8.
                                                3-5    UC4
                                                1-2    UC3
                                                  0    UC2
RVC...............  Rehabilitation:               6    VA5
                     Very High
                     Rehabilitation:
                     At least 500
                     minutes/week.
                     One discipline
                     at least 5 days/
                     week.
                    ADL Sum Score:
                     16-18.
                                                3-5    VA4
                                                1-2    VA3
                                                  0    VA2
  RVB               Rehabilitation:               6    VB5
                     As above for
                     Very High
                     Rehabilitation.
                    ADL Sum Score: 9-
                     15.
                                                3-5    VB4
                                                1-2    VB3
                                                  0    VB2
                    Rehabilitation:               6    VC5
                     As above for
                     Very High
                     Rehabilitation.
                    ADL Sum Score: 4-
                     8.
                                                3-5    VC4
                                                1-2    VC3
                                                  0    VC2
RHC...............  Rehabilitation:               6    WA5
                     High
                     Rehabilitation:
                     At least 325
                     minutes/week
                     and at least
                     one discipline
                     5 days/week.
                    ADL Sum Score:
                     13-18.
                                                3-5    WA4
                                                1-2    WA3
                                                  0    WA2
RHB...............  Rehabilitation:               6    WB5
                     As above for
                     High
                     Rehabilitation.
                    ADL Sum Score: 8-
                     12.
                                                3-5    WB4
                                                1-2    WB3
                                                  0    WB2
RHA...............  Rehabilitation:               6    WC5
                     As above for
                     High
                     Rehabilitation.
                    ADL Sum Score: 4-
                     7.
                                                3-5    WC4
                                                1-2    WC3
                                                  0    WC2

[[Page 19199]]

 
RMC...............  Rehabilitation:               6    XA5
                     At least 150               3-5    XA4
                     minutes/week               1-2    XA3
                     and at least 5               0    XA2
                     days/week in
                     one therapy
                     discipline.
RMB...............  Rehabilitation:               6    XB5
                     As above for
                     Medium
                     Rehabilitation.
                    ADL Sum Score: 8-
                     14.
                                                3-5    XB4
                                                1-2    XB3
                                                  0    XB2
RMA...............  Rehabilitation:               6    XC5
                     As above for
                     Medium
                     Rehabilitation.
                    ADL Sum Score: 4-
                     7.
                                                3-5    XC4
                                                1-2    XC3
                                                  0    XC2
RLB...............  Rehabilitation:               6    YA5
                     Low
                     Rehabilitation:
                     At least 45
                     minutes/week on
                     at least 3 days/
                     week. Nursing
                     rehabilitation
                     therapy must be
                     provided in two
                     activities, for
                     15 minutes, 6
                     days/week.
                    ADL Sum Score:
                     14-18.
                                                3-5    YA4
                                                1-2    YA3
                                                  0    YA2
RLA...............  Rehabilitation:               6    YB5
                     As above for
                     Low
                     Rehabilitation.
                    ADL Sum Score: 4-
                     13.
                                                3-5    YB4
                                                1-2    YB3
                                                  0    YB2
SE3...............  EXTENSIVE                     6    EA5
                     SERVICES--(if
                     ADL 7,
                     beneficiary
                     classifies to
                     Special Care).
                    IV feeding in
                     the past 7 days
                     (K5a).
                    IV medications
                     in the past 14
                     days (P1ac).
                    Suctioning in
                     the past 14
                     days (P1ai).
                    Tracheostomy
                     care in the
                     last 14 days
                     (P1aj).
                    Ventilator/
                     respirator in
                     the last 14
                     days (P1al).
                    ADL Sum Score: 7-
                     18.
                                                3-5    EA4
                    Qualification               1-2    EA3
                     for the EA, EB,
                     EC levels is
                     dependent on
                     ADL score and
                     additional
                     clinical
                     qualifiers
                     identified in
                     the Special
                     Care and
                     Clinically
                     Complex
                     criteria. No
                     change from the
                     current RUG-III
                     system.
                                                  0    EA2
SE2...............  Extensive                     6    EB5
                     Services: As
                     above.
                    ADL Sum Score: 7-
                     18.
                                                3-5    EB4
                                                1-2    EB3
                                                  0    EB2
SE1...............  Extensive                     6    EC5
                     Services: As
                     above.
                    ADL Sum Score: 7-
                     18.
                                                3-5    EC4
                                                1-2    EC3
                                                  0    EC2
SSC...............  SPECIAL CARE--                6    SA5
                     (if ADL <7
                     beneficiary
                     classifies to
                     Clinically
                     Complex).
                    Multiple
                     Sclerosis (I1w)
                     and an ADL
                     score of 10 or
                     higher.
                    Quadriplegia
                     (I1z) and an
                     ADL score of 10
                     or higher.
                    Cerebral Palsy
                     (I1s) and an
                     ADL score of 10
                     or higher.
                    Respiratory
                     therapy (P1bdA
                     must = 7 days).
                    Ulcers, pressure
                     or stasis; 2 or
                     more of any
                     stage
                     (M1a,b,c,d) and
                     treatment (M5a,
                     b,c,d,e,g,h).
                    Ulcers,
                     pressure; any
                     stage 3 or 4
                     (M2a) and
                     treatment
                     (M5a,b,c,d,e,g,
                     h).
                    Radiation
                     therapy (P1ah).
                    Surgical, Wounds
                     (M4g) and
                     treatment
                     (M5f,g,h).
                    Open Lesions
                     (M4c) and
                     treatment
                     (M5f,g,h).
                    Tube Fed (K5b)
                     and Aphasia
                     (I1r) and
                     feeding
                     accounts for at
                     least 51
                     percent of
                     daily calories
                     (K6a = 3 or 4)
                     OR at least 26
                     percent of
                     daily calories
                     and 501cc daily
                     intake (K6b =
                     2,3,4 or 5).
                    Fever (J1h) with
                     Dehydration
                     (J1c),
                     Pneumonia
                     (Ie2),Vomiting
                     (J1o) or Weight
                     loss (K 3a).
                    Fever (J1h) with
                     Tube Feeding
                     (K5b) and, as
                     above, (K6a = 3
                     or 4) &/or (K6b
                     = 2,3,4, or 5).
                    ADL Sum Score:              3-5    SA4
                     17-18.

[[Page 19200]]

 
                                                1-2    SA3
                                                  0    SA2
SSB...............  Special Care: As              6    SB5
                     above.
                    ADL Sum Score:
                     15-16.
                                                3-5    SB4
                                                1-2    SB3
                                                  0    SB2
SSA...............  Special Care: As              6    SC5
                     above.
                    ADL Sum Score: 7-
                     14.
                                                3-5    SC4
                                                1-2    SC3
                                                  0    SC2
CC2...............  CLINICALLY                    6    CA5
                     COMPLEX--
                    Burns (M4b).....
                    Coma (B1) and
                     Not awake (N1 =
                     d) and
                     completely ADL
                     dependent
                     (G1aa, G1ba,
                     G1ha, G1ia = 4
                     or 8).
                    Septicemia (I2g)
                    Pneumonia (I2e).
                    Foot/Wounds
                     (M6b,c) and
                     treatment (M6f).
                    Internal Bleed
                     (J1j).
                    Dialysis (P1ab).
                    Tube Fed (K5b)
                     and feeding
                     accounts for:
                     at least 51% of
                     daily calories
                     (K6a = 3 or 4)
                     OR 26 percent
                     of daily
                     calories and
                     501cc daily
                     intake (K6b =
                     2, 3, 4 or 5).
                    Dehydration
                     (J1c).
                    Oxygen therapy
                     (P1ag).
                    Transfusions
                     (P1ak).
                    Hemiplegia (I1v)
                     and an ADL
                     score or 10 or
                     higher.
                    Chemotherapy
                     (P1aa).
                    No. Of Days in
                     last 14 there
                     were Physician
                     Visits and
                     order changes:.
                    visits > = 1
                     days and order
                     changes > = 4
                     days; or visits
                     > = 2 days and
                     order changes
                     on > = 2 days.
                    ................
                    Diabetes
                     mellitus (I1a)
                     and injections
                     on 7 days (O3>
                     = 7).
                    ADL Sum Score:              3-5    CA4
                     17-18.
                    Positive for
                     Signs of
                     Depression.
CC1...............  Clinically                    6    CB5
                     Complex: As
                     above.
                    ADL Sum Score:
                     17-18.
                    No signs of                 3-5    CB4
                     depression.                1-2    CB3
                                                  0    CB2
CB2...............  Clinically                    6    CC5
                     Complex: As
                     above.
                    ADL Sum Score:              3-5    CC4
                     12-16.
                    Positive for
                     Signs for
                     Depression.
                                                1-2    CC3
                                                  0    CC2
CB1...............  Clinically                    6    CD5
                     Complex: As
                     above.
  ................  ADL Sum Score:              3-5    CD4
                     12-16.
                    No signs of                 1-2    CD3
                     depression.                  0    CD2
CA2...............  Clinically                    6    CE5
                     Complex: As
                     above.
                    ADL Sum Score: 4-           3-5    CE4
                     11.                        1-2    CE3
                    Positive for                  1    CE2
                     Signs of
                     Depression.
CA1...............  Clinically                    6    CF5
                     Complex: As
                     above.
                    ADL Sum Score: 4-           3-5    CF4
                     11.
                    No Signs of
                     Depression.
                                                1-2    CF3
                                                  0    CF2
IB2...............  Impaired          ...............  IA1
                     Cognition:
                     Score on MDS2.0
                     Cognitive
                     Performance
                     Scale >= 3
                    Receiving
                     Nursing
                     rehabilitation
                     therapy in two
                     activities, for
                     15 minutes, 6
                     days/week.
                    ADL Sum Score: 6-
                     10.
IB1...............  Impaired          ...............  IB1
                     Cognition:
                     Score on MDS2.0
                     Cognitive
                     Performance
                     Scale >= 3.
                    ADL Sum Score: 6-
                     1.
IA2...............  Impaired          ...............  IC1
                     Cognition:
                     Score on MDS2.0
                     Cognitive
                     Performance
                     Scale >= 3.
                    Receiving
                     Nursing
                     rehabilitation
                     therapy in two
                     activities, for
                     15 minutes, 6
                     days/week.
                    ADL Sum Score: 4-
                     5.

[[Page 19201]]

 
IA1...............  Impaired          ...............  ID1
                     Cognition:
                     Score on MDS2.0
                     Cognitive
                     Performance
                     Scale >= 3.
                    ADL Sum Score: 4-
                     5.
BB2...............  BEHAVIOR ONLY...  ...............  BA1
                    Coded on MDS 2.0
                     items: 4+ days
                     a week--
                     wandering,
                     physical or
                     verbal abuse,
                     inappropriate
                     behavior or
                     resists care;
                     or
                     hallucinations,
                     or delusions
                     checked.
                    Receiving
                     Nursing
                     rehabilitation
                     therapy in two
                     activities, for
                     15 minutes, 6
                     days/week.
                    ADL Sum Score: 6-
                     10.
BB1...............  Behavior: As                       BB1
                     above.
                    No nursing
                     rehabilitation
                     received.
                    ADL Sum Score: 6-
                     10.
BA2...............  Behavior: As                       BC1
                     above.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score: 4-
                     5.
BA1...............  Behavior: As                       BD1
                     above.
                    No nursing
                     rehabilitation
                     received.
                    ADL Sum Score: 4-
                     5.
PE2...............  Physical                           PA1
                     Function
                     Impaired.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score:16-
                     18.
PE1...............  Physical                           PB1
                     Function
                     Impaired.
                    ADL Sum Score:
                     16-18.
PD2...............  Physical                           PC1
                     Function
                     Impaired.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score:11-
                     15.
PD1...............  Physical                           PD1
                     Function
                     Impaired.
                    ADL Sum Score:
                     11-15.
PC2...............  Physical                           PE1
                     Function
                     Impaired.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score: 9-
                     10.
PC1...............  Physical                           PF1
                     Function
                     Impaired.
                    ADL Sum Score: 9-
                     10.
PB2...............  Physical                           PG1
                     Function
                     Impaired.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score: 6-
                     8.
PB1...............  Physical                           PH1
                     Function
                     Impaired.
                    ADL Sum Score: 6-
                     8.
PA2...............  Physical                           PI1
                     Function
                     Impaired.
                    Nursing
                     Rehabilitation
                     received, at
                     level described
                     above.
                    ADL Sum Score: 4-
                     5.
PA1...............  Physical                           PJ1
                     Function
                     Impaired.
                    ADL Sum Score: 4-
                     5.
BC1...............    ..............        (\(1)\)    BC1
------------------------------------------------------------------------
\1\Default Code

Additional Research Plans
    As noted above, we performed the RUG-III refinement analyses on a 
research data base rather than on PPS Medicare claims and MDS data. The 
research data base was appropriate and extremely useful in testing 
hypotheses, and identifying areas where refinements could be 
introduced. However, research data always have limitations, and HCFA 
and contractor staff have identified several areas of concern. 
Fortunately, since actual PPS claims and MDS data are now available, we 
are already conducting additional analyses of the unweighted and 
weighted models to address these concerns and validate the research 
findings.
    For this proposed rule, we have developed Tables 5 and 6 to 
illustrate the application of the proposed refinement to the RUG-III 
classification system on the FY 2001 Federal per diem rates. In 
addition, for comparison purposes, we have developed rate tables for 
the WIM2 model that are shown in Technical Appendix A (Tables 6.1 and 
6.2). However, in reviewing these tables, it is important to recognize 
the following limitations:
    The nursing index is a critical factor in accurately calibrating 
the system to link payment to acuity levels. The nursing indices shown 
in Tables 5 through 6 assume that the distribution of the actual 
Medicare population is the same as the distribution of the research 
data base. We are now reworking these calculations using national PPS 
data to ensure accurate calibration of the system.
    Using the actual PPS data base also adjusts for a second data 
limitation: the extent to which MDS data reflects short stay patients. 
The research data base utilized MDS assessments from 1995 through 1997, 
a period when MDSs were often not completed for beneficiaries who were 
in a SNF for less than 14 days. By contrast, the PPS data base includes 
short-stay beneficiaries, and we will take any special needs of this 
population into account by using actual PPS data to validate the 
initial findings.
    In addition, the methodology used to adjust non-therapy ancillary 
charges to cost used the older, non-therapy ancillary charges and 
facility cost-to-charge ratios. In developing the PPS data base, we 
will use PPS claims data and the latest available cost-to-charge 
ratios.
    Using the smaller research data base, it was not always possible to 
obtain a

[[Page 19202]]

large number of observations in some of the RUG-III groups to fully 
determine ancillary costs with the necessary level of precision. For 
that small number of RUG-III groups, the researchers imputed ancillary 
costs, and applied these imputed costs to the non-therapy ancillary 
index used in the rate-setting projections. Using the national PPS data 
base will allow better differentiation between the non-therapy 
ancillary index levels for the new, combined Rehabilitation and 
Extensive Services categories, particularly in index levels 2 and 3 of 
the unweighted model (and B and C of the weighted model.) (See Tables 5 
and 6 for the UWIM model and Technical Appendix A Tables 6.1 and 6.2 
for the WIM2 model.)
    Finally, we will continue the process of identifying possible 
negative incentives associated with MDS items used in the non-therapy 
ancillary index. We will carefully evaluate each item before 
incorporating it into the final index. Then, we will develop methods to 
monitor coding practices and to identify changes in coding patterns for 
use in medical review, quality assurance and program integrity 
activities. We will issue clarifications, through Program Memoranda and 
other appropriate means, of MDS requirements needed to maintain the 
integrity of the RUG-III system.
    Using the national PPS data base, we will recalculate the 
distribution of the beneficiary population across RUG-III categories, 
including the proposed combined Rehabilitation and Extensive Services 
category. Then, we will perform the necessary analyses and sensitivity 
tests to compare the results with those derived from the research data 
base. We will reevaluate program options (for example, unweighted vs. 
weighted non-therapy ancillary index, etc.) based on the additional 
analyses, and modify the proposed refinements as needed. We expect 
these final analyses to be available in late Spring 2000, and we plan 
to incorporate them in the final rule to be issued before August 1, 
2000.
PPS Rate Tables
    We are confident that the additional analyses based on national 
data will confirm the need for refinements in the RUG-III model by 
adding the new combined Extensive and Rehabilitation Service groups and 
by creating a new non-therapy ancillary index. However, it is very 
likely the values of some of the model components (for example, average 
ancillary cost by RUG-III group, frequency distribution by RUG-III 
group, relative weights, etc.) will be further refined through use of 
the national data base. For this reason, it is important to understand 
that the values contained in these tables will likely change in the 
final rule.
    While we are confident that these research findings are based on 
sound methodology, it is certainly possible that additional testing 
will identify new issues or support variations of the models to those 
presented here. We remain open to suggestions during the comment period 
and will carefully evaluate the validation analyses before proceeding 
to final rulemaking. To illustrate the impact of these proposed changes 
based on the best data currently available, we have developed rate 
Tables 5 and 6 using the unweighted model. (For an additional 
discussion of the weighted model, including a schedule of rates, see 
Technical Appendix A.) These projections should not be viewed as final 
nursing indices, non-therapy ancillary indices, or payment rates.
    Further, as noted above, we based the non-therapy ancillary indices 
on the mean adjusted derived cost (that is, charges adjusted by 
facility ancillary cost-to-charge ratios) of non-therapy ancillary 
services. Mean costs were calculated separately for each of the eight 
proposed levels of the RUG-III hierarchy. For the research data base, 
we used the cost-to-charge ratio applicable to the service date of the 
claim. For the follow up analyses using actual PPS claims data, we are 
using the most recent available cost-to-charge ratio. We expect that 
using the newer cost-to-charges ratios will enhance the accuracy of the 
calculations. However, due to the lag time between SNF PPS claims 
submission and cost report processing, it is impossible to match the 
claims service dates perfectly with the cost report period used for the 
cost-to-charge ratios. For the SNF PPS data base, we are proposing to 
use approximately 9 months of claims data starting from January 1, 
1999, the date almost all providers became subject to PPS. The cost 
reports for calendar year 1999 are not due until April 2000.
    Finally, the research findings in this proposed rule include the 
use of ``imputed'' data in situations where the cell size (for example, 
number of records meeting the criteria for a specific RUG-III group, 
etc.) was too small for accurate measurement. When using the national 
data base, we expect that the relevant data cells will be adequately 
populated and that all analyses used in developing the final rule will 
be based on actual rather than imputed data.
    These tables reflect two adjustments in particular. First, our 
nursing and therapy staff time indices (combined 1995 and 1997 staff 
time data) currently used to establish PPS rates have been adjusted to 
reflect the new combined Extensive Services with Rehabilitation 
categories. Second, we have adjusted the nursing case mix component of 
the rate to remove the non-therapy ancillary component that is part of 
the current nursing index used in PPS rate-setting. We will need to 
adjust one or both of these components based on the additional 
analyses.
    We integrated these proposed refinements into the rate-setting 
methodology, and we list the estimated per diem Federal rates for 178 
separate RUG-III classification groups in Tables 5 and 6. We list the 
case-mix adjusted payment rates separately for urban and rural SNFs 
(178 each), with the corresponding case-mix index values. These tables 
list the rates in total and by component. The application of the wage 
index, described later in this section, is the final adjustment applied 
to the projected Federal rates in these tables.
    In accordance with section 101 of the BBRA, we will make a four 
percent upward adjustment to the adjusted per diem Federal rate for FY 
2001. This estimated adjustment is shown in Table 9.
    Finally, these projected rates do not reflect the BBRA requirement 
(section 103) to reduce the Part A SNF payment rates to account for 
those services that are newly excluded from consolidated billing and, 
thus, will be separately billable to Part B by the supplier. As 
mentioned in section II.A.2. above, because of the complexity of the 
process and the amount of time needed to implement this requirement, we 
are unable at present to adjust the proposed rates to reflect this. 
However, we will make these adjustments prospectively in the final rule 
establishing payment rates for FY 2001, using the methodology described 
below.
    In order to compute the level of this adjustment, we propose to 
determine the per diem amount of allowed charges associated with the 
specific HCPCS codes identified in the statute (and later in this rule) 
using the same 1995 data on Part B services used in establishing the 
Federal rates. These data are described in detail in section II.A.2.b 
of the May 12, 1998 interim final rule (63 FR 26251) and final rule (64 
FR 41644) associated with the implementation of the SNF PPS. The per 
diem amount will be subtracted from the non-therapy ancillary component 
of the Federal rates shown in Tables 5 and 6 of this rule. We expect 
this adjustment to be minimal.

[[Page 19203]]

Summary of Proposed RUG-III Refinements
    Based on the research described here, we are proposing the addition 
of new RUG-III groups to recognize the needs of Medicare beneficiaries 
with both heavy medical and rehabilitation needs and the development of 
an unweighted index model that would account more precisely for the 
variation in non-therapy ancillary services. Since the research shows 
substantial ancillary cost variation in the Rehabilitation and 
Extensive Services, Rehabilitation, Extensive Services, Special Care, 
and Clinically Complex categories, we have proposed four ancillary 
index levels to capture variation in ancillary costs accurately. Since 
beneficiaries in the Impaired Cognition, Behavior, and Physical 
Function categories exhibited a much smaller ancillary cost variation, 
we calculated a single ancillary add-on amount. The ancillary add-on 
amounts were calculated separately for each of the eight proposed RUG-
III categories.
    The refinements will achieve important improvements in the PPS 
model, and allow for more accurate payment rates. In addition, after 
further analysis and review of public comments, we may adjust these 
proposed refinements further to reflect actual PPS experience.
Collection of Medication Data
    In the interim final rule published in the Federal Register on May 
12, 1998, we stated that we would require facilities to complete and 
include MDS Section U with their Medicare MDS submissions beginning 
October 1, 1999. Subsequently, in the final rule published in the 
Federal Register on July 30, 1999, we announced a delay of that 
requirement and stated our intention to require completion of Section U 
beginning October 1, 2000. However, we are currently unable to 
implement the collection of medication data on the MDS beginning 
October 1, 2000. Accordingly, we will not require completion and 
submission of Section U of the MDS beginning October 1, 2000, as we had 
planned. We are currently examining issues related to the 
implementation of this requirement and we plan to address this matter 
when we implement the SNF PPS payment update for FY 2001.

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BILLING CODE 4120-03-C

[[Page 19222]]

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we provide for 
adjustments to the Federal rates to account for differences in area 
wage levels using an ``appropriate'' wage index as determined by the 
Secretary. In addition, it is our intent to evaluate a wage index based 
specifically on SNF data once it becomes available. The SNF wage data 
are currently being collected and evaluated to determine if we can 
utilize them in the future. If a wage index based on SNF data is 
developed, we will publish it for comment. However, in the interim, 
many commenters urged us to incorporate the latest wage data available. 
We continue to believe that, until a wage index based on SNF wage data 
is collected and analyzed, the hospital wage index's wage data provide 
the best available measure of comparable wages that should be paid by 
SNFs. We believe, since hospitals and SNFs compete in the same labor 
market area, that the use of this index's wage data results in an 
appropriate adjustment to the labor portion of SNF costs based on an 
appropriate wage index, as required under section 1888(e) of the Act.
    For rates addressed in this proposed rule, we are using wage index 
values that are based on hospital wage data from cost reporting periods 
beginning in FY 1996, the same wage data as used to compute the FY 2000 
wage index values for the inpatient hospital PPS. We will incorporate 
updated wage data in the final rule for the FY 2001 SNF PPS update.
    The computation of the wage index is similar to past years in that 
we incorporate the latest data and methodology used to construct the 
hospital wage index (see the discussion in the May 12, 1998 interim 
final rule (63 FR 26274)). The wage index adjustment is applied to the 
labor-related portion of the Federal rate, which is 77.663 percent of 
the total rate. The schedule of Federal rates below shows the Federal 
rates by labor-related and non-labor-related components.
    As discussed above and in the interim final rule, until an 
appropriate wage index based specifically on SNF data is available, we 
will use the latest available hospital wage index data in making annual 
updates to the payment rates. 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 
that are greater or less than would otherwise be made in the absence of 
the wage adjustment. In this third PPS year (Federal rates effective 
October 1, 2000), we are updating the wage index applicable to SNF 
payments using the most recent hospital wage data and applying an 
adjustment to fulfill the budget neutrality requirement. This 
requirement will be met by multiplying each of the per diem rate 
components by the ratio of the volume weighted mean wage adjustment 
factor (using the wage index from the previous year) to the volume 
weighted mean wage adjustment factor, using the wage index for the FY 
beginning October 1, 2000. The same volume weights are used in both the 
numerator and denominator and will be derived from 1997 Medicare 
Provider Analysis and Review File (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. 
The budget neutrality factor for FY 2001 is multiplied by each of the 
Federal rate components. This factor will be established when the 
updated wage data for the FY 2001 hospital wage index is available and 
set forth in the final rule establishing the FY 2001 SNF PPS rates.

            Table 7.--Case-Mix Adjusted Federal Rates for Urban SNFs by Labor and Non-Labor Component
                                                  [In dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                     Non-labor    Total  federal
                        RUG III category                          Labor  related      related           rate
----------------------------------------------------------------------------------------------------------------
JA5.............................................................          544.64          156.64          701.28
JA4.............................................................          391.79          112.68          504.47
JA3.............................................................          331.88           95.45          427.33
JA2.............................................................          331.88           95.45          427.33
 
JB5.............................................................          528.61          152.03          680.64
JB4.............................................................          375.76          108.07          483.83
JB3.............................................................          315.85           90.84          406.69
JB2.............................................................          315.85           90.84          406.69
 
JC5.............................................................          520.09          149.59          669.68
JC4.............................................................          367.25          105.62          472.87
JC3.............................................................          307.34           88.39          395.73
JC2.............................................................          307.34           88.39          395.73
 
KA5.............................................................          481.65          138.53          620.18
KA4.............................................................          328.80           94.57          423.37
KA3.............................................................          268.89           77.34          346.23
KA2.............................................................          268.89           77.34          346.23
 
KB5.............................................................          475.14          136.66          611.80
KB4.............................................................          322.29           92.70          414.99
KB3.............................................................          262.38           75.47          337.85
KB2.............................................................          262.38           75.47          337.85
 
KC5.............................................................          463.12          133.20          596.32
KC4.............................................................          310.27           89.24          399.51
KC3.............................................................          250.36           72.01          322.37
KC2.............................................................          250.36           72.01          322.37
 
LA5.............................................................          448.33          128.95          577.28
LA4.............................................................          295.48           84.99          380.47
LA3.............................................................          235.58           67.75          303.33
LA2.............................................................          235.58           67.75          303.33
 
LB5.............................................................          443.33          127.79          571.12

[[Page 19223]]

 
LB4.............................................................          291.48           83.83          375.31
LB3.............................................................          231.57           66.60          298.17
LB2.............................................................          231.57           66.60          298.17
 
LC5.............................................................          433.31          124.62          557.93
LC4.............................................................          280.46           80.66          361.12
LC3.............................................................          220.55           63.43          283.98
LC2.............................................................          220.55           63.43          283.98
 
MA5.............................................................          443.52          127.56          571.08
MA4.............................................................          290.67           83.60          374.27
MA3.............................................................          230.76           66.37          297.13
MA2.............................................................          230.76           66.37          297.13
 
MB5.............................................................          434.00          124.83          558.83
MB4.............................................................          281.16           80.86          362.02
MB3.............................................................          221.25           63.63          284.88
MB2.............................................................          221.25           63.63          284.88
 
MC5.............................................................          432.00          124.25          556.25
MC4.............................................................          279.15           80.29          359.44
MC3.............................................................          219.24           63.06          282.30
MC2.............................................................          219.24           63.06          282.30
 
NA5.............................................................          413.85          119.03          532.88
NA4.............................................................          261.00           75.07          336.07
NA3.............................................................          201.09           57.84          258.93
NA2.............................................................          201.09           57.84          258.93
 
NB5.............................................................          400.83          115.29          516.12
NB4.............................................................          247.99           71.32          319.31
NB3.............................................................          188.08           54.09          242.17
NB2.............................................................          188.08           54.09          242.17
 
UA5.............................................................          322.57           92.78          415.35
UA4.............................................................          323.34           93.00          416.34
UA3.............................................................          288.01           82.84          370.85
UA2.............................................................          273.03           78.53          351.56
 
UB5.............................................................          309.05           88.89          397.94
UB4.............................................................          309.82           89.11          398.93
UB3.............................................................          274.49           78.95          353.44
UB2.............................................................          259.51           74.64          334.15
 
UC5.............................................................          301.54           86.73          388.27
UC4.............................................................          302.31           86.95          389.26
UC3.............................................................          266.98           76.79          343.77
UC2.............................................................          252.00           72.48          324.48
 
VA5.............................................................          264.10           75.96          340.06
VA4.............................................................          264.87           76.18          341.05
VA3.............................................................          229.54           66.02          295.56
VA2.............................................................          214.56           61.71          276.27
 
VB5.............................................................          257.09           73.94          331.03
VB4.............................................................          257.86           74.16          332.02
VB3.............................................................          222.53           64.00          286.53
VB2.............................................................          207.55           59.69          267.24
VC5.............................................................          245.07           70.48          315.55
VC4.............................................................          245.83           70.71          316.54
VC3.............................................................          210.51           60.54          271.05
VC2.............................................................          195.52           56.24          251.76
 
WA5.............................................................          232.28           66.81          299.09
WA4.............................................................          233.05           67.03          300.08
WA3.............................................................          197.72           56.87          254.59
WA2.............................................................          182.74           52.56          235.30
 
WB5.............................................................          227.27           65.37          292.64
WB4.............................................................          228.04           65.59          293.63
WB3.............................................................          192.71           55.43          248.14
WB2.............................................................          177.73           51.12          228.85
 
WC5.............................................................          219.27           63.06          282.33
WC4.............................................................          220.03           63.29          283.32
WC3.............................................................          184.71           53.12          237.83
WC2.............................................................          169.72           48.82          218.54
 
XA5.............................................................          217.95           62.69          280.64

[[Page 19224]]

 
XA4.............................................................          218.72           62.91          281.63
XA3.............................................................          183.39           52.75          236.14
XA2.............................................................          168.41           48.44          216.85
 
XB5.............................................................          214.45           61.68          276.13
XB4.............................................................          215.22           61.90          277.12
XB3.............................................................          179.89           51.74          231.63
XB2.............................................................          164.91           47.43          212.34
 
XC5.............................................................          212.45           61.10          273.55
XC4.............................................................          213.22           61.32          274.54
XC3.............................................................          177.89           51.16          229.05
XC2.............................................................          162.91           46.85          209.76
 
YA5.............................................................          194.80           56.03          250.83
YA4.............................................................          195.57           56.25          251.82
YA3.............................................................          160.24           46.09          206.33
YA2.............................................................          145.26           41.78          187.04
 
YB5.............................................................          180.78           51.99          232.77
YB4.............................................................          181.55           52.21          233.76
YB3.............................................................          146.22           42.05          188.27
YB2.............................................................          131.23           37.75          168.98
 
EA5.............................................................          336.39           96.75          433.14
EA4.............................................................          264.57           76.10          340.67
EA3.............................................................          207.73           59.75          267.48
EA2.............................................................          186.23           53.56          239.79
 
EB5.............................................................          319.36           91.85          411.21
EB4.............................................................          247.54           71.20          318.74
EB3.............................................................          190.70           54.85          245.55
EB2.............................................................          169.20           48.66          217.86
 
EC5.............................................................          308.34           88.68          397.02
EC4.............................................................          236.52           68.03          304.55
EC3.............................................................          179.68           51.68          231.36
EC2.............................................................          158.18           45.49          203.67
 
SA5.............................................................          156.71           45.07          201.78
SA4.............................................................          174.76           50.26          225.02
SA3.............................................................          148.65           42.75          191.40
SA2.............................................................          134.82           38.77          173.59
 
SB5.............................................................          152.70           43.92          196.62
SB4.............................................................          170.75           49.11          219.86
SB3.............................................................          144.64           41.60          186.24
SB2.............................................................          130.81           37.62          168.43
 
SC5.............................................................          150.70           43.34          194.04
SC4.............................................................          168.75           48.53          217.28
SC3.............................................................          142.64           41.02          183.66
SC2.............................................................          128.80           37.05          165.85
 
CA5.............................................................          207.29           59.62          266.91
CA4.............................................................          207.29           59.62          266.91
CA3.............................................................          162.35           46.70          209.05
CA2.............................................................          135.09           38.85          173.94
 
CB5.............................................................          200.78           57.75          258.53
CB4.............................................................          200.78           57.75          258.53
CB3.............................................................          155.85           44.82          200.67
CB2.............................................................          128.58           36.98          165.56
 
CC5.............................................................          196.77           56.60          253.37
CC4.............................................................          196.77           56.60          253.37
CC3.............................................................          151.84           43.67          195.51
CC2.............................................................          124.57           35.83          160.40
 
CD5.............................................................          193.26           55.59          248.85
CD4.............................................................          193.26           55.59          248.85
CD3.............................................................          148.33           42.66          190.99
CD2.............................................................          121.06           34.82          155.88
 
CE5.............................................................          192.77           55.44          248.21
CE4.............................................................          192.77           55.44          248.21
CE3.............................................................          147.83           42.52          190.35
CE2.............................................................          120.56           34.68          155.24
 
CF5.............................................................          188.76           54.29          243.05

[[Page 19225]]

 
CF4.............................................................          188.76           54.29          243.05
CF3.............................................................          143.82           41.37          185.19
CF2.............................................................          116.56           33.52          150.08
 
IA1.............................................................          109.33           31.44          140.77
 
IB1.............................................................          108.32           31.16          139.48
 
IC1.............................................................          103.32           29.71          133.03
 
ID1.............................................................          101.31           29.14          130.45
 
BA1.............................................................          114.97           33.07          148.04
 
BB1.............................................................          113.47           32.64          146.11
 
BC1.............................................................          108.96           31.34          140.30
 
BD1.............................................................          104.96           30.19          135.15
 
PA1.............................................................          120.25           34.58          154.83
 
PB1.............................................................          117.74           33.86          151.60
 
PC1.............................................................          116.74           33.57          150.31
 
PD1.............................................................          114.23           32.86          147.09
 
PE1.............................................................          113.73           32.71          146.44
 
PF1.............................................................          107.22           30.84          138.06
 
PG1.............................................................          106.72           30.70          137.42
 
PH1.............................................................          106.22           30.55          136.77
 
PI1.............................................................          104.72           30.12          134.84
 
PJ1.............................................................          104.72           30.12          134.84
----------------------------------------------------------------------------------------------------------------


            Table 8.--Case-Mix Adjusted Federal Rates for Rural SNFs by Labor and Non-Labor Component
                                                  [In dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                     Non-labor    Total  federal
                        RUG III category                          Labor  related      related           rate
----------------------------------------------------------------------------------------------------------------
JA5.............................................................         $550.79         $158.41         $709.20
JA4.............................................................          406.81          117.01          523.82
JA3.............................................................          350.38          100.77          451.15
JA2.............................................................          350.38          100.77          451.15
 
JB5.............................................................          535.25          153.95          689.20
JB4.............................................................          391.28          112.54          503.82
JB3.............................................................          334.84           96.31          431.15
JB2.............................................................          334.84           96.31          431.15
 
JC5.............................................................          527.00          151.57          678.57
JC4.............................................................          383.03          110.16          493.19
JC3.............................................................          326.59           93.93          420.52
JC2.............................................................          326.59           93.93          420.52
 
KA5.............................................................          479.34          137.86          617.20
KA4.............................................................          335.36           96.46          431.82
KA3.............................................................          278.93           80.22          359.15
KA2.............................................................          278.93           80.22          359.15
 
KB5.............................................................          473.02          136.05          609.07
KB4.............................................................          329.05           94.64          423.69
KB3.............................................................          272.61           78.41          351.02
KB2.............................................................          272.61           78.41          351.02
 
KC5.............................................................          461.37          132.70          594.07
KC4.............................................................          317.40           91.29          408.69
KC3.............................................................          260.96           75.06          336.02
KC2.............................................................          260.96           75.06          336.02
 
LA5.............................................................          441.21          126.90          568.11
LA4.............................................................          297.24           85.49          382.73
LA3.............................................................          240.80           69.26          310.06
 
LA2.............................................................          240.80           69.26          310.06
 
LB5.............................................................          437.33          125.78          563.11
LB4.............................................................          293.36           84.37          377.73
LB3.............................................................          236.92           68.14          305.06
LB2.............................................................          236.92           68.14          305.06
 

[[Page 19226]]

 
LC5.............................................................          426.65          122.71          549.36
LC4.............................................................          282.68           81.30          363.98
LC3.............................................................          226.24           65.07          291.31
LC2.............................................................          226.24           65.07          291.31
 
MA5.............................................................          434.43          124.95          559.38
MA4.............................................................          290.46           83.54          374.00
MA3.............................................................          234.02           67.31          301.33
MA2.............................................................          234.02           67.31          301.33
 
MB5.............................................................          425.21          122.30          547.51
MB4.............................................................          281.24           80.89          362.13
MB3.............................................................          224.80           64.66          289.46
MB2.............................................................          224.80           64.66          289.46
 
MC5.............................................................          423.27          121.74          545.01
MC4.............................................................          279.30           80.33          359.63
MC3.............................................................          222.86           64.10          286.96
MC2.............................................................          222.86           64.10          286.96
 
NA5.............................................................          401.47          115.47          516.94
NA4.............................................................          257.50           74.06          331.56
NA3.............................................................          201.06           57.83          258.89
NA2.............................................................          201.06           57.83          258.89
 
NB5.............................................................          388.85          111.84          500.69
NB4.............................................................          244.88           70.43          315.31
NB3.............................................................          188.44           54.20          242.64
NB2.............................................................          188.44           54.20          242.64
 
UA5.............................................................          340.94           98.06          439.00
UA4.............................................................          341.66           98.27          439.93
UA3.............................................................          308.38           88.70          397.08
UA2.............................................................          294.27           84.64          378.91
 
UB5.............................................................          327.83           94.29          422.12
UB4.............................................................          328.55           94.50          423.05
UB3.............................................................          295.27           84.93          380.20
UB2.............................................................          281.16           80.87          362.03
 
UC5.............................................................          320.55           92.20          412.75
UC4.............................................................          321.28           92.40          413.68
UC3.............................................................          288.00           82.83          370.83
UC2.............................................................          273.89           78.77          352.66
 
VA5.............................................................          273.86           78.76          352.62
VA4.............................................................          274.58           78.97          353.55
VA3.............................................................          241.30           69.40          310.70
VA2.............................................................          227.19           65.34          292.53
 
VB5.............................................................          267.06           76.81          343.87
VB4.............................................................          267.78           77.02          344.80
VB3.............................................................          234.50           67.45          301.95
VB2.............................................................          220.39           63.39          283.78
 
VC5.............................................................          255.41           73.46          328.87
VC4.............................................................          256.13           73.67          329.80
VC3.............................................................          222.85           64.10          286.95
VC2.............................................................          208.74           60.04          268.78
 
WA5.............................................................          237.19           68.22          305.41
WA4.............................................................          237.91           68.43          306.34
WA3.............................................................          204.63           58.86          263.49
WA2.............................................................          190.52           54.80          245.32
 
WB5.............................................................          232.34           66.82          299.16
WB4.............................................................          233.06           67.03          300.09
WB3.............................................................          199.78           57.46          257.24
WB2.............................................................          185.67           53.40          239.07
 
WC5.............................................................          224.57           64.59          289.16
WC4.............................................................          225.29           64.80          290.09
WC3.............................................................          192.01           55.23          247.24
WC2.............................................................          177.90           51.17          229.07
 
XX5.............................................................          221.19           63.62          284.81
XA4.............................................................          221.91           63.83          285.74
XA3.............................................................          188.64           54.25          242.89
XA2.............................................................          174.52           50.20          224.72
 

[[Page 19227]]

 
XB5.............................................................          217.79           62.64          280.43
XB4.............................................................          218.51           62.85          281.36
XB3.............................................................          185.23           53.28          238.51
XB2.............................................................          171.12           49.22          220.34
 
XC5.............................................................          215.85           62.08          277.93
XC4.............................................................          216.57           62.29          278.86
XC3.............................................................          183.29           52.72          236.01
XC2.............................................................          169.18           48.66          217.84
 
YA5.............................................................          194.54           55.95          250.49
YA4.............................................................          195.26           56.16          251.42
YA3.............................................................          161.98           46.59          208.57
YA2.............................................................          147.87           42.53          190.40
YB5.............................................................          180.95           52.04          232.99
YB4.............................................................          181.67           52.25          233.92
YB3.............................................................          148.39           42.68          191.07
YB2.............................................................          134.28           38.62          172.90
 
EA5.............................................................          323.82           93.14          416.96
EA4.............................................................          256.18           73.68          329.86
EA3.............................................................          202.64           58.28          260.92
EA2.............................................................          182.38           52.45          234.83
 
EB5.............................................................          307.32           88.39          395.71
EB4.............................................................          239.68           68.93          308.61
EB3.............................................................          186.13           53.54          239.67
EB2.............................................................          165.87           47.71          213.58
 
EC5.............................................................          296.64           85.32          381.96
EC4.............................................................          229.00           65.86          294.86
EC3.............................................................          175.46           50.46          225.92
EC2.............................................................          155.19           44.64          199.83
 
SA5.............................................................          153.73           44.22          197.95
SA4.............................................................          170.73           49.11          219.84
SA3.............................................................          146.13           42.03          188.16
SA2.............................................................          133.11           38.29          171.40
 
SB5.............................................................          149.85           43.10          192.95
SB4.............................................................          166.85           47.99          214.84
SB3.............................................................          142.25           40.91          183.16
SB2.............................................................          129.23           37.17          166.40
 
SC5.............................................................          147.91           42.54          190.45
SC4.............................................................          164.91           47.43          212.34
SC3.............................................................          140.31           40.35          180.66
SC2.............................................................          127.29           36.61          163.90
 
CA5.............................................................          201.36           57.91          259.27
CA4.............................................................          201.36           57.91          259.27
CA3.............................................................          159.03           45.74          204.77
CA2.............................................................          133.35           38.35          171.70
 
CB5.............................................................          195.05           56.10          251.15
CB4.............................................................          195.05           56.10          251.15
CB3.............................................................          152.72           43.93          196.65
CB2.............................................................          127.04           36.54          163.58
 
CC5.............................................................          191.17           54.98          246.15
CC4.............................................................          191.17           54.98          246.15
CC3.............................................................          148.84           42.81          191.65
CC2.............................................................          123.16           35.42          158.58
 
CD5.............................................................          187.77           54.00          241.77
CD4.............................................................          187.77           54.00          241.77
CD3.............................................................          145.44           41.83          187.27
CD2.............................................................          119.76           34.44          154.20
 
CE5.............................................................          187.28           53.87          241.15
CE4.............................................................          187.28           53.87          241.15
CE3.............................................................          144.96           41.69          186.65
CE2.............................................................          119.27           34.31          153.58
 
CF5.............................................................          183.40           52.75          236.15
CF4.............................................................          183.40           52.75          236.15
CF3.............................................................          141.07           40.58          181.65
CF2.............................................................          115.39           33.19          148.58
 
IA1.............................................................          108.50           31.20          139.70
 

[[Page 19228]]

 
IB1.............................................................          107.52           30.93          138.45
 
IC1.............................................................          102.67           29.53          132.20
 
ID1.............................................................          100.73           28.97          129.70
 
BA1.............................................................          113.80           32.73          146.53
 
BB1.............................................................          112.35           32.31          144.66
 
BC1.............................................................          107.97           31.06          139.03
 
BD1.............................................................          104.09           29.94          134.03
 
PA1.............................................................          118.89           34.20          153.09
 
PB1.............................................................          116.46           33.50          149.96
 
PC1.............................................................          115.49           33.22          148.71
 
PD1.............................................................          113.07           32.52          145.59
 
PE1.............................................................          112.58           32.38          144.96
 
PF1.............................................................          106.27           30.57          136.84
 
PG1.............................................................          105.78           30.43          136.21
 
PH1.............................................................          105.30           30.29          135.59
 
PI1.............................................................          103.84           29.87          133.71
 
PJ1.............................................................          103.84           29.87          133.71
----------------------------------------------------------------------------------------------------------------

    For any RUG-III group, to compute a wage-adjusted Federal payment 
rate, the labor-related portion of the payment rate is multiplied by 
the SNF's appropriate wage index factor. The wage index factor has not 
been updated since the publication of the July 30, 1999 update notice 
(64 FR 41684). The product of that calculation is added to the 
corresponding non-labor-related component. The resulting amount is the 
Federal rate applicable to a beneficiary in that RUG-III group for that 
SNF.

D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act, the proposed 
payment rates listed here have been updated by the SNF market basket 
minus 1 percentage point, which equals 1.01833 percent. For each 
succeeding FY, we will publish the rates in the Federal Register before 
August 1 of the year preceding the affected Federal FY.
    For the current FY (FY 2001), and for FY 2002, section 
1888(e)(4)(E)(ii) of the Act requires the rates to be increased by a 
factor equal to the SNF market index change minus 1 percentage point. 
For subsequent FYs, this section requires the rates to be increased by 
the applicable SNF market basket index increase.

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

    As discussed in II.B above, we are proposing a number of 
refinements in the RUGs classifications in this notice. Further, 
regulations at Sec. 413.345 provide that the information included in 
each update of the Federal payment rates in the Federal Register will 
include the designation of those specific RUGs under the classification 
system that represent the required SNF level of care, as provided in 
Sec. 409.30. Accordingly, we hereby propose to designate the following 
RUG-III classifications for this purpose: all groups within the 
Rehabilitation and Extensive category; all groups within the Ultra High 
Rehabilitation category; all groups within the Very High Rehabilitation 
category; all groups within the Medium Rehabilitation category; all 
groups within the Low Rehabilitation category; all groups within the 
Extensive Services category; and, all groups within the Clinically 
Complex category.

III. Three-Year Transition Period

    Under sections 1888(e)(1) and (2) of the Act, during a facility's 
first three cost reporting periods that begin on or after July 1, 1998 
(that is, the transition period), the facility's PPS rate will be equal 
to the sum of a percentage of an adjusted facility-specific per diem 
rate and a percentage of the adjusted Federal per diem rate, as 
discussed in Section I.D.2. above. After the transition period, the PPS 
rate will equal the adjusted Federal per diem rate. The transition 
period payment method will not apply to SNFs that first received 
Medicare payments (interim or otherwise) on or after October 1, 1995 
under present or previous ownership, or to those facilities choosing to 
bypass the transition in accordance with section 102 of the BBRA; these 
facilities will be paid based on 100 percent of the Federal rate.
    The facility-specific per diem rate is the sum of the facility's 
total allowable Part A Medicare costs and an estimate of the amounts 
that would be payable under Part B for covered SNF services for cost 
reporting periods beginning in FY 1995 (base year). The base year cost 
report used to compute the facility-specific per diem rate in the 
transition period may be settled (either tentative or final) or as-
submitted for Medicare payment purposes. Under section 1888(e)(3) of 
the Act, any adjustments to the base year cost report made as a result 
of settlement or other action by the fiscal intermediary, including 
cost limit exceptions and exemptions, or results of an appeal, will 
result in a revision to the facility-specific per diem rate. The 
instructions for calculating the facility-specific per diem rate are 
described in detail in the May 12, 1998 interim final rule. In order to 
implement section 104 of the BBRA, for providers that received payment 
under the RUG-III demonstration during a cost reporting period that 
began in calendar year 1997, we will determine their facility-specific 
per diem rate using the methodology described below.
    It is possible that some providers participated in the 
demonstration but did not have a cost reporting period that began in 
calendar year 1997. For those providers, we will determine their

[[Page 19229]]

facility-specific per diem rate by using the calculations outlined in 
the May 12, 1998 Federal Register interim final rule (63 FR 26251, 
section III. (A)(1)(a), (b), or (c)). As with the facility-specific per 
diem applicable to other providers, the allowable costs will be subject 
to change based on the settlement of the cost report used to determine 
the total payment under the demonstration. In addition, we derive a 
special market basket inflation factor to adjust the 1997 costs to the 
midpoint of the rate setting period (October 1, 2000 to September 30, 
2001.)
    Step 1--Determine the aggregate payment during the cost reporting 
period that began in calendar year 1997--RUG-III payment plus routine 
capital costs plus ancillary costs (other than occupational therapy, 
physical therapy, and speech pathology).
    Step 2--Divide the amount in Step 1, by the applicable total 
inpatient days for the cost reporting period.
    Step 3--Adjust the amount in Step 2, by 1.094828 (inflation 
factor).
    Step 4--Add the amount determined in step 3, to the appropriate 
Part B add-on amount determined according to Program Memorandum 
transmittal no. A-99-53 (December 1999).
    The amount in Step 4 is the facility-specific rate that is 
applicable for the facility's first cost reporting period beginning on 
or after October 1, 2000.
    Computation of the Skilled Nursing Facility Prospective Payment 
System Rate During the Transition:
    For the first three cost reporting periods beginning on or after 
July 1, 1998 (the transition period), an SNF's payment under the PPS is 
the sum of a percentage of the facility-specific per diem rate and a 
percentage of the adjusted Federal per diem rate. Under section 
1888(e)(2)(C) of the Act, for the first cost reporting period in the 
transition period, the SNF payment will be the sum of 75 percent of the 
facility-specific per diem rate and 25 percent of the Federal per diem 
rate. For the second cost reporting period, the SNF payment will be the 
sum of 50 percent of the facility-specific per diem rate and 50 percent 
of the Federal per diem rate. For the third cost reporting period, the 
SNF payment will be the sum of 25 percent of the facility-specific per 
diem rate and 75 percent of the Federal per diem rate. For all 
subsequent cost reporting periods beginning after the transition 
period, the SNF payment will be equal to 100 percent of the Federal per 
diem rate. An example is given below computing the SNF PPS rate and SNF 
payment.
    Example of computation of adjusted PPS rates and SNF payment:
    Using the XYZ SNF described in Table 9, the following shows the 
adjustments made to the facility-specific per diem rate and the Federal 
per diem rate to compute the provider's actual per diem PPS payment in 
the transition period. XYZ's 12-month cost reporting period begins 
October 1, 2000. (This is the provider's second cost reporting period 
under the transition.)

                         Step 1
Compute:
Facility-specific per diem rate.........................         $570.00
Market Basket Adjustment (Table 10.C)...................      x  1.13320
                                                         ---------------
Adjusted facility-specific rate.........................         $645.92
 

Step 2

    Compute Federal per diem rate:

                                                                         Table 9
                                    [SNF XYZ from above is located in State College, PA with a wage index of 0.9138.]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Labor                    Adjusted     Nonlabor     Adjusted    4 percent     Medicare
                    RUG group                       portion*    Wage index     labor       portion*       rate      adjustment      days       Payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
VA5.............................................      $264.10       0.9138      $241.33       $75.96      $317.29      $329.98           50      $16,499
WA5.............................................       232.28       0.9138       212.26        66.81       279.07       290.23           50       14,512
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................                                                                                        100      31,011
--------------------------------------------------------------------------------------------------------------------------------------------------------
* From Table 7.


                         Step 3
Apply transition period percentages:
Facility-specific per diem rate $645.92  x  100 days =..         $64,592
Times transition percentage (50 percent)................             .50
                                                         ---------------
Actual facility-specific PPS payment....................          32,296
                                                         ===============
Federal PPS payment.....................................          31,011
Times transition percentage (50 percent)................             .50
                                                         ---------------
Actual Federal PPS payment..............................          15,506
 
                         Step 4
 
Compute total PPS payment:
XYZ's total PPS payment ($32,296 + $15,506).............          47,802
 

IV. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires the Secretary to 
establish an SNF market basket index (input price index) that reflects 
changes over time in the prices of an appropriate mix of goods and 
services included in the SNF PPS. This rule incorporates the latest 
estimates of the SNF market basket index at the time of this proposed 
rule. The final rule will incorporate updated

[[Page 19230]]

projections based on the latest available projections as of that point 
in time. Accordingly, as described below, we have developed a SNF 
market basket index that encompasses the most commonly used cost 
categories for SNF routine services, ancillary services, and capital-
related expenses. In the May 12, 1998 Federal Register, we included a 
complete discussion on rebasing the SNF market basket to FY 1992, and 
revising the index to include capital and ancillary costs. There are 21 
separate cost categories and respective price proxies. These cost 
categories were illustrated in Tables 4.A, 4.B, and Appendix A, found 
in the May 12, 1998 Federal Register.
    Each year we calculate a revised labor-related share based on the 
relative importance of labor-related cost categories in the input price 
index. Table 10.A below summarizes the updated labor-related share for 
FY 2001.

                 Table 10.A--FY 2001 Labor-Related Share
------------------------------------------------------------------------
                                                    FY 2000     FY 2001
                  Cost category                    relative    relative
                                                  importance  importance
------------------------------------------------------------------------
Wages and Salaries..............................      56.647      56.744
Employee Benefits...............................      12.321      12.405
Nonmedical Professional Fees....................       1.959       1.953
Labor-intensive Services........................       3.738       3.733
Capital-related.................................       2.880       2.828
                                                 -----------------------
    Total.......................................      77.545      77.663
------------------------------------------------------------------------

    The forecasted rates of growth used to compute the projected SNF 
market basket percentages, described in the next section, are shown in 
Table 10.B.

     Table 10.B--Skilled Nursing Facility Total Cost Market Basket,
                      Forecasted Change, 1997-2002
------------------------------------------------------------------------
                                                                Skilled
                                                                nursing
                                                                facility
               Fiscal years beginning October 1                  total
                                                                  cost
                                                                 market
                                                                 basket
------------------------------------------------------------------------
October 1996, FY 1997........................................        2.4
October 1997, FY 1998........................................        2.8
October 1998, FY 1999........................................        2.8
October 1999, FY 2000........................................        3.1
October 2000, FY 2001........................................        2.8
October 2001, FY 2002........................................        2.9
Forecasted Average: 2000-2002................................       2.9
------------------------------------------------------------------------
Source: Standard & Poor's DRI HCC, 4th QTR, 1999;@USSIM/TREND25YR1199
  @CISSIM/TRENDLONG1199.

Released by HCFA, OACT, National Health Statistics Group
    Use of the Skilled Nursing Facility Market Basket Percentage:
    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index, 
described in the previous section, from the midpoint of the prior FY 
(or period) to the midpoint of the current FY (or other period) 
involved. The facility-specific portion and Federal portion of the SNF 
PPS rates addressed in this proposed rule are based on cost reporting 
periods beginning in the base year, Federal FY 1995. For the Federal 
rates, the percentage increases in the SNF market basket index will be 
used to compute the update factors occurring between the midpoint of FY 
2000 and the midpoint of FY 2001. We used the Standard & Poor's DRI CC, 
4th quarter 1999 historical and forecasted percentage increases of the 
revised and rebased SNF market basket index for routine, ancillary, and 
capital-related expenses, described in the previous section, to compute 
the update factors. Finally, the update factors, as described below, 
will be used to adjust the base year costs for computing the facility-
specific portion and Federal portion of the SNF PPS rates.

A. Facility-Specific Rate Update Factor

    Under section 1888(e)(3)(D)(i) of the Act, for the facility-
specific portion of the SNF PPS rate, we will update a facility's base 
year costs up to the corresponding cost reporting period beginning 
October 1, 2000, and ending September 30, 2001, by the SNF market 
basket percentage. We took the following steps to develop the 12-month 
cost reporting period facility-specific rate update factors shown in 
Table 10.C.
    For the facility rate, we developed factors to inflate data from 
cost reporting periods beginning October 1, 1994, through September 30, 
1995, to the corresponding cost reporting period beginning in FY 2001. 
According to section 1888(e)(3)(D) of the Act, the years through FY 
1999 were inflated at a rate of market basket minus 1 percentage point, 
while FY 2000 and FY 2001 are to be inflated at the full market basket 
rate of increase.
    1. We first determined the total growth from the midpoint of each 
12-month cost reporting period that began during the period from 
October 1, 1994, through September 30, 1995, to the midpoint of the 
corresponding period beginning in FY 2001.
    2. From this total growth, we determined the average annual growth 
rate for each time span.
    3. We subtracted 1 percentage point from each average annual growth 
rate through FY 1999.
    4. These reduced average annual growth rates were converted to 
cumulative growth rates, using market basket minus one for the first 
four years, and with full market basket for the final two years. (For 
example, if the time span were for 9 years, we would inflate at the 
market basket minus 1 percentage point annual rate for 7 years and at 
annual market basket rate for 2 additional years).

  Table 10.C--Update Factors 1 For Facility-Specific Portion of the SNF
  PPS Rates--Adjust to 12-Month Cost Reporting Periods Beginning on or
  After October 1, 2000 and Before October 1, 2001 From Cost Reporting
                Periods Beginning in FY 1995 (Base Year)
------------------------------------------------------------------------
                                   Adjust from 12-month
   If 12-month cost reporting     cost reporting period    Using update
period in initial period begins     in base year that        factor of
                                          begins
------------------------------------------------------------------------
October 1, 2000................  October 1, 1994........         1.13320
November 1, 2000...............  November 1, 1994.......         1.13302
December 1, 2000...............  December 1, 1994.......         1.13276
January 1, 2001................  January 1, 1995........         1.13260
February 1, 2001...............  February 1, 1995.......         1.13273
March 1, 2001..................  March 1, 1995..........         1.13315
April 1, 2001..................  April 1, 1995..........         1.13363
May 1, 2001....................  May 1, 1995............         1.13391
June 1, 2001...................  June 1, 1995...........         1.13401
July 1, 2001...................  July 1,1995............         1.13411

[[Page 19231]]

 
August 1, 2001.................  August 1, 1995.........         1.13443
September 1, 2001..............  September 1, 1995......        1.13497
------------------------------------------------------------------------
1 Source: Standard & Poor's DRI, 1st Qtr 2000; @USSIM/
  TREND25YR0299@CISSIM/CONTROL991

B. Federal Rate Update Factor

    To update each facility's costs up to the common period, we:
    1. Determined the total growth from the average market basket level 
for the period of October 1, 1999 through September 30, 2000 to the 
average market basket level for the period of October 1, 2000 through 
September 30, 2001.
    2. Calculated the rate of growth between the midpoints of the two 
periods.
    3. Calculated the annual average rate of growth for number 2, 
above.
    4. Subtracted 1 percentage point from this annual average rate of 
growth.
    5. Using the annual average minus 1 percentage point rate of 
growth, determined the cumulative growth between the midpoints of the 
two periods specified above.
    This revised update factor was used to compute the Federal portion 
of the SNF PPS rate shown in Tables 1 and 2.

V. Consolidated Billing

    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 
beneficiaries receive. As with hospital bundling, the law contains a 
list of services (primarily those of physicians and certain other types 
of medical practitioners) that are excluded from SNF consolidated 
billing and, thus, can be separately billed to Part B directly by the 
outside entity that furnishes them to the Medicare beneficiary (see 
section 1888(e)(2)(A)(ii) of the Act).
    Section 103(a)(2) of the BBRA added section 1888(e)(2)(A)(iii) to 
the Act to provide for the exclusion of certain additional types of 
services from SNF consolidated billing, effective with services 
furnished on or after April 1, 2000. The original statutory exclusions 
enacted by the BBA consisted of a number of broad service categories, 
and encompassed all of the individual services that fall within those 
categories. By contrast, the additional exclusions enacted in the BBRA 
apply only to certain specified, individual services within a number of 
broader service categories that otherwise remain subject to 
consolidated billing. Within the affected service categories--that is, 
chemotherapy items and their administration, radioisotope services, and 
customized prosthetic devices--the exclusion applies only to those 
individual services that are specifically identified by HCPCS code in 
the legislation itself, while all other services within those broader 
categories remain subject to consolidated billing. See Table 11, Post-
BBA Consolidated Billing Exclusions. We have issued Program Memorandum 
(PM) no. AB-00-18 (March 2000), which lists the HCPCS codes of those 
particular services identified by the BBRA as excluded from 
consolidated billing.

                               Table 11.--Post-BBA Consolidated Billing Exclusions
----------------------------------------------------------------------------------------------------------------
                                                                         Effective
                Exclusion                      Exclusion authority          date               Comments
----------------------------------------------------------------------------------------------------------------
Chemotherapy & Administration............  Section 103 of BBRA;            4/1/2000  Only applies to those HCPCS
                                            section 1888(e)(2)(A)                     codes specified in
                                            (iii) (II) and (III) of                   legislation; Excluded
                                            the Act.                                  regardless of whether they
                                                                                      are furnished in a
                                                                                      hospital or nonhospital
                                                                                      setting.
Radioisotope Services....................  Section 103 of BBRA;            4/1/2000  Only applies to those HCPCS
                                            section 1888(e)(2)(A)                     codes specified in
                                            (iii) (IV) of the Act.                    legislation; Excluded
                                                                                      regardless of whether they
                                                                                      are furnished in a
                                                                                      hospital or nonhospital
                                                                                      setting.
Customized prosthetic devices............  Section 103 of BBRA;            4/1/2000  Only applies to those HCPCS
                                            section 1888(e)(2)(A)                     codes specified in
                                            (iii) (V) of the Act.                     legislation; Excluded
                                                                                      regardless of whether they
                                                                                      are furnished in a
                                                                                      hospital or nonhospital
                                                                                      setting.
Ambulance Services furnished in            Section 103 of BBRA;            4/1/2000  Subject to the medical
 conjunction with Part B Dialysis           section 1888(e)(2)(A)                     necessity requirements
 services.                                  (iii) (I) of the Act.                     that apply to ambulance
                                                                                      services generally.
Outpatient hospital services that HCFA     Sec.  411.15(p)(2)(x) and       7/1/1998  Excluded from consolidated
 has identified (see Program Memorandum A-  (p)(3)(iii), as                           billing only when
 98-;37, 11/1998) as being beyond the       promulgated in the SNF PPS                furnished in the
 general scope of SNF care plans, along     Interim Final Rule (5/12/                 outpatient hospital
 with associated ambulance services:        1998).                                    setting.
     Cardiac catheterization;
     CT scans;
     Magnetic resonance imaging
     (MRIs);

[[Page 19232]]

 
     Ambulatory surgery involving
     the use of an operating room;
     Emergency services;
     Radiation therapy;
     Angiography;
     Venous and lymphatic
     procedures
----------------------------------------------------------------------------------------------------------------

    The BBRA Conference report (H.R. Conf. Rep. No. 106-479 at 854) 
characterizes the individual services that this legislation targets for 
exclusion as ``* * * high-cost, low probability events that could have 
devastating financial impacts because their costs far exceed the 
payment [SNFs] receive under the prospective payment system * * *.'' 
According to the conferees, section 103(a) ``is an attempt to exclude 
from the PPS certain services and costly items that are provided 
infrequently in SNFs * * *.'' Some chemotherapy drugs, which are 
relatively inexpensive and are administered routinely in SNFs, were 
excluded from this provision [and thus continue to be subject to 
consolidated billing requirements]. Id.
    Further, we note that the exceptionally costly and intensive 
outpatient hospital services, such as magnetic resonance imaging (MRIs) 
and cardiac catheterization, that we identified previously under the 
regulations at Sec. 411.15(p)(3)(iii) (see the preamble discussion in 
the May 12, 1998 interim final rule at 63 FR 26298-99, and in the July 
30, 1999 final rule at 64 FR 41675-76) are excluded from consolidated 
billing only when furnished in the outpatient hospital setting. By 
contrast, as indicated in Table 11, the services identified in section 
103 of the BBRA are excluded regardless of whether they are furnished 
in a hospital or nonhospital setting.
    In addition, section 103(a)(2) of the BBRA excludes from 
consolidated billing those ambulance services that are furnished to an 
SNF beneficiary in conjunction with dialysis services that are covered 
under Part B. We note that Part B dialysis services themselves are 
already excluded from consolidated billing (see regulations at 42 CFR 
411.15(p)(2)(vii)), as are those ambulance services that are furnished 
to a beneficiary who is not considered an SNF ``resident'' for 
consolidated billing purposes (see Sec. 411.15(p)(2)(x))--for example, 
a beneficiary who receives one of the excluded outpatient hospital 
services under Sec. 411.15(p)(3)(iii). The BBRA Conference Committee 
report further indicates that the newly excluded ambulance services 
(that is, those needed to transport a SNF resident who receives Part B 
dialysis services offsite at a certified dialysis facility) still 
remain subject to the overall medical necessity requirement that 
applies to ambulance services generally; that is, that ambulance 
coverage is available only in those situations where the use of other 
means of transportation is medically contraindicated. (H.R. Conf. Rep. 
No. 106-479 at 854.)
    Further, we note that the statutory exclusion of those ambulance 
services that are furnished to SNF residents in conjunction with Part B 
dialysis services does not extend to ambulance services furnished to 
SNF residents in conjunction with any of the other types of services 
that this section of the BBRA identifies as excluded. For example, when 
a SNF resident is temporarily transported offsite via ambulance to 
receive a type of chemotherapy that is excluded by the BBRA, the 
ambulance services themselves remain subject to the SNF consolidated 
billing provision, and are not separately billable to Part B.
    Section 103 of the BBRA also gives the Secretary the authority to 
designate additional, individual services for exclusion within each of 
the specified service categories. The BBRA Conference report notes that 
``* * * [n]ew, extremely costly items may come into use or codes may 
change over time'', H.R. Conf. Rep. No. 106-479 at 854 and the 
discretionary authority provided in the BBRA affords the Secretary the 
flexibility to revise the exclusion list as warranted by changing 
conditions that may occur in the future. For example, we note that the 
BBRA's conference agreement requests the GAO to conduct a review, by 
July 1, 2000, of the appropriateness of the codes that this legislation 
has designated for exclusion from consolidated billing. We will 
carefully consider the GAO's findings to determine whether further 
refinements in the exclusion list are warranted.
    Also, we note that the BBRA made a number of technical corrections 
in the provisions of the BBA. One of these corrections, section 
321(g)(2) of the BBRA, has revised the statute at section 
1833(h)(5)(A)(iii) of the Act to make it clear that clinical diagnostic 
tests furnished to a SNF resident are subject to the consolidated 
billing requirement.
    Finally, while we have implemented consolidated billing in 
connection with services furnished to SNF residents during Medicare-
covered stays, we have not yet implemented so-called ``Part B'' 
consolidated billing, in connection with services furnished to SNF 
residents who are in noncovered stays. As we explained in the July 30, 
1999 final rule, the overriding need to accomplish systems renovations 
in time to achieve Year 2000 (Y2K) compliance forced us to delay 
certain other projects that involved significant systems modifications 
of their own, including the implementation of this aspect of 
consolidated billing. Now that the Y2K-related systems changes have 
been completed, we have been able to resume work on these other 
projects. In this context, we have been reexamining some of the 
operational implications of consolidated billing that are specific to 
implementing the ``Part B'' aspect of this provision.
    For example, under regulations at Sec. 411.15(p)(3)(iv), if a 
beneficiary leaves the SNF and then returns within 24 hours of 
departure, his or her status as an SNF ``resident'' (for consolidated 
billing purposes) continues during the absence, regardless of whether 
the SNF has effected a formal discharge. This would make the SNF 
responsible for billing Medicare for any services that a beneficiary 
receives during a temporary absence of up to 24 hours, other than those 
that are specifically excluded (see the preamble discussion in the SNF 
PPS interim final rule (63 FR 26298 through 26299, May 12, 1998)). 
Since consolidated billing is currently in effect only for those SNF 
stays that are covered by Part A and paid by the PPS, this essentially 
means that such a beneficiary remains a SNF ``resident'' after leaving 
the SNF only if he or she then returns to the SNF by midnight, thus 
making the day of departure a covered Part A day. However, once

[[Page 19233]]

consolidated billing is fully implemented, this will effectively 
convert the policy regarding services furnished during a beneficiary's 
temporary absence from the current ``midnight rule'' to the full ``24 
hour rule'' described in the regulations.
    As explained in the SNF PPS interim final rule, we initially 
established a 24-hour window in the regulations in order to prevent a 
SNF from being able to unbundle a particular service merely by sending 
a beneficiary offsite briefly to receive the service as an outpatient 
of a hospital or clinic. However, we note that SNFs basically have a 
financial incentive to unbundle such services only in connection with a 
resident whose stay is covered under Part A, since unbundling the 
service would mean that it could be paid separately under Part B, 
rather than out of the global per diem amount that Part A pays the SNF 
for the covered stay itself. By contrast, a resident who is in a 
noncovered stay does not qualify for comprehensive coverage of the 
entire institutional package of care under Part A, but only for Part B 
coverage of the individual medical and other health services specified 
in section 1861(s) of the Act. This means that when a SNF resident is 
in a noncovered stay, Part B would pay individually for each covered 
medical or other health service furnished to that resident, regardless 
of whether the SNF or an outside supplier submits the bill.
    Thus, as the financial incentives for unbundling are associated 
with covered stays, we believe that it may be appropriate to have a 
standard with regard to SNF ``resident'' status that, in actual 
practice, is not more stringent for noncovered stays. We could revise 
the regulations at Sec. 411.15(p)(3)(iv) to provide for continuing a 
beneficiary's ``resident'' status during a temporary absence only if he 
or she returns by midnight of the day of departure. This would, in 
effect, utilize the same standard that currently applies to covered 
stays for noncovered stays as well, and we invite comments on the 
appropriateness of such a revision.
    As a point of clarification, we note that the phrase ``midnight of 
the day of departure'' refers to the midnight that immediately follows 
the actual moment of departure, rather than to the midnight that 
immediately precedes it (see, for example, the discussion of a ``leave 
of absence'' in section 3103.3 of the Medicare Intermediary Manual, 
Part 3 (HCFA Pub. 13-3), which indicates that the day a patient returns 
to the hospital from a leave of absence ``* * * is counted as an 
inpatient day if he is present at midnight of that day'' (emphasis 
added)). Thus, under this policy, a patient ``day'' begins at 12:01 
A.M., and midnight of a particular day occurs at the very end of that 
day rather than at the very beginning. For example, under the 
``midnight rule,'' if a beneficiary begins a leave of absence from the 
SNF at 10:00 A.M. on July 1 but subsequently returns to the SNF by 
12:00 A.M. that night, the beneficiary would continue to be considered 
a ``resident'' of the SNF, for consolidated billing purposes, during 
his or her absence. By contrast, if the beneficiary does not return to 
the SNF until 1:00 A.M. on the morning of July 2, his or her 
``resident'' status, for consolidated billing purposes, would end as of 
10:00 A.M. on July 1, and would not resume until the actual point of 
readmission to the SNF (that is, as of 1:00 A.M. on July 2).

VI. Provisions of the Proposed Rule

    The provisions of this proposed rule are as follows:
     In Sec. 411.15, paragraph (p)(2)(vii) would be revised to 
exclude from consolidated billing those ambulance services that are 
furnished to an SNF resident in conjunction with dialysis services that 
are covered under Part B.
     In Sec. 411.15, paragraph (p)(2) would also be revised to 
list the additional services that the BBRA has excluded from 
consolidated billing.
     In Sec. 411.15, paragraph (p)(3)(iv), the phrase ``within 
24 consecutive hours'' would be revised to read ``by midnight of the 
day of departure''.
     In Sec. 489.20, paragraph (s) would be revised to list the 
additional services that BBRA has excluded from consolidated billing, 
and a conforming change would be made in Sec. 489.21(h).
     In Sec. 489.20, paragraph (s)(7) would be revised to 
exclude from consolidated billing those ambulance services that are 
furnished to an SNF resident in conjunction with dialysis services that 
are covered under Part B.
     Section 489.20(s)(11) and Sec. 411.15(p)(2)(xi), would be 
revised to reflect editorial revisions in the paragraphs concerning the 
transportation costs of electrocardiogram equipment.

VII. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et.seq.).

VIII. Response to Comments

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

IX. Regulatory Impact Analysis

    We have examined the impacts of this rule as required by Executive 
Order (EO) 12866, the Unfunded Mandates Reform Act (UMRA) (Pub. L. 104-
4), the Regulatory Flexibility Act (RFA) (Pub. L. 96-354), and the 
Federalism Executive Order (EO) 13132.
    Executive Order 12866 directs agencies to assess 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). This notice is a major rule as defined 
in Title 5, United States Code, section 804(2), because we estimate its 
impact will be to increase the payments to SNFs by approximately $900 
million in FY 2001. The update set forth in this notice applies to 
payments in FY 2001. Accordingly, the analysis that follows describes 
the impact of this one year only. In accordance with the requirements 
of the Act, we will publish a notice for each subsequent FY that will 
provide for an update to the payment rates and include an associated 
impact analysis.
    The UMRA also requires (in section 202) that agencies prepare an 
assessment of anticipated costs and benefits before developing any rule 
that may result in an annual expenditure by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any given year. This rule will have no consequential 
effect on State, local, or tribal governments. We believe the private 
sector cost of this rule falls below these thresholds as well.
    Executive Order 13132 (effective November 2, 1999), establishes 
certain requirements that an agency must meet when it promulgates 
regulations that impose substantial direct compliance costs on State 
and local governments,

[[Page 19234]]

preempts State law, or otherwise have Federalism implications. As 
stated above, this rule will have no consequential effect on State and 
local governments.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. 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 virtue of their nonprofit status or by having revenues of $5 
million or less annually. For purposes of the RFA, all States and 
tribal governments are not considered to be small entities, nor are 
intermediaries or carriers. Individuals and States are not included in 
the definition of a small entity. The policies contained in this rule 
would update the SNF PPS rates by increasing the payment rates 
published in the July 30, 1999 notice, but will not have a significant 
effect upon small entities.
    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. We are not preparing a 
rural impact statement since we have determined, and the Secretary 
certifies, that this notice will not have a significant economic impact 
on the operations of a substantial number of small rural hospitals.

A. Background

    This notice sets forth proposed updates of the SNF PPS rates 
contained in the update notice, published on July 30, 1999. Table 13 
below, presents the projected effects of the policy changes in the SNF 
PPS update notice, as well as statutory changes effective for FY 2001, 
on various SNF categories. We estimate the effects of each policy 
change by estimating payments while holding all other payment variables 
constant. We use the best data available, but we do not attempt to 
predict behavioral responses to our policy changes, and we do not make 
adjustments for future changes in such variables as days or case-mix.
    This analysis incorporates the latest estimates of growth in 
service use and payments under the Medicare SNF benefit based on 
Medicare claims from 1998. Some of the data used for this analysis are 
the same data used to develop the impact analysis associated with the 
SNF PPS update notice promulgated on July 30, 1999 (64 FR 41684). These 
data were used to estimate the effects of changing only one payment 
variable at a time. We have also utilized MDS 2.0 data from the States 
used for the RUG-III refinement research (described in section 2.B 
earlier) to illustrate the effect of case mix refinements on the 
classification of the patient population in the study States. In 
addition, we are unable at this time to demonstrate the distributional 
impact of these case mix refinements on facility payments but 
anticipate doing so in the final rule planned for later this year.
    We have used the best avaliable data on SNF case mix in calculating 
the FY 2001 impact for this proposed rule; however, we note that the 
data currently available on Medicare SNF claims and MDS 2.0 do not 
reflect the refined case mix classification system and case-mix indices 
proposed in this rule. While we still have only a partial database of 
SNF PPS claims and MDS 2.0 data at the present time due to the phased-
in manner in which SNFs came into the PPS, we are confident that 
sufficient national data reflecting the distribution of payments and 
service days under the new RUG-III classification model can be 
assembled before promulgation of the final rule associated with this 
update. While the refinement to the case-mix classification system 
results in no greater or lesser aggregate payments to SNFs under the 
Medicare SNF PPS, we believe it is important to estimate the potential 
distributional impact of incorporating the refined RUG-III case-mix 
groups and indices. Consequently, for the final rule implementing the 
FY 2001 SNF PPS rates, we anticipate using such a national data base of 
SNF PPS claims and MDS 2.0 data to estimate more accurately the impact 
of this update, including the distributional effect of the case-mix 
refinements on payments for different facility types and locations. 
However, based on the data currently available, we believe that the 
method we have used to develop the impact analysis for this proposed 
rule offers the most accurate estimate of the FY 2001 update to the SNF 
PPS.
    For this proposed rule, we have attempted to convey a sense of the 
effect of the case-mix refinements on the classification of residents 
in SNFs. Below, we have prepared Table 12 which displays the 
distribution of patients in the six-state sample used to develop the 
case-mix refinements, as shown for both the existing RUG-III groups and 
for the refined model proposed in this rule. This table details a 
comparison of the distribution of an identical group of Medicare 
patients across both the existing and proposed RUG-III classification 
models. In addition, Table 6, in Technical Appendix A accompanying this 
rule, illustrates a comparison of the distribution of this same group 
of patients across the existing RUG-III system and the alternate 
ancillary index refinement approach (WIM2) discussed earlier in this 
proposed rule.

 Table 12.--Distributional Shifts of Beneficiaries Between Existing RUG-III-Model and the Refined Model Proposed
                                                  in This Rule
----------------------------------------------------------------------------------------------------------------
                                                                                                   Refined RUG-
               RUG III category                 Existing RUG-       Refined RUG III category        III  (UWIM)
                                                     III
----------------------------------------------------------------------------------------------------------------
RUC+SE.......................................  ..............  JA5                                            14
RUC+SE.......................................  ..............  JA4                                            91
RUC+SE.......................................  ..............  JA3                                            78
RUC+SE.......................................  ..............  JA2                                             0
 
RUB+SE.......................................  ..............  JB5                                             9
RUB+SE.......................................  ..............  JB4                                            82
RUB+SE.......................................  ..............  JB3                                           190
RUB+SE.......................................  ..............  JB2                                             0
 
RUA+SE.......................................  ..............  JC5                                             0
RUA+SE.......................................  ..............  JC4                                             4
RUA+SE.......................................  ..............  JC3                                            23
RUA+SE.......................................  ..............  JC2                                             0
 

[[Page 19235]]

 
RVC+SE.......................................  ..............  KA5                                             5
RVC+SE.......................................  ..............  KA4                                            80
RVC+SE.......................................  ..............  KA3                                            75
RVC+SE.......................................  ..............  KA2                                             0
 
RVB+SE.......................................  ..............  KB5                                             2
RVB+SE.......................................  ..............  KB4                                            77
RVB+SE.......................................  ..............  KB3                                           169
RVB+SE.......................................  ..............  KB2                                             0
 
RVA+SE.......................................  ..............  KC5                                             0
RVA+SE.......................................  ..............  KC4                                            13
RVA+SE.......................................  ..............  KC3                                            18
RVA+SE.......................................  ..............  KC2                                             0
 
RHC+SE.......................................  ..............  LA5                                            12
RHC+SE.......................................  ..............  LA4                                            89
RHC+SE.......................................  ..............  LA3                                           143
RHC+SE.......................................  ..............  LA2                                             0
 
RHB+SE.......................................  ..............  LB5                                             1
RHB+SE.......................................  ..............  LB4                                            37
RHB+SE.......................................  ..............  LB3                                            91
RHB+SE.......................................  ..............  LB2                                             0
 
RHA+SE.......................................  ..............  LC5                                             0
RHA+SE.......................................  ..............  LC4                                             0
RHA+SE.......................................  ..............  LC3                                             1
RHA+SE.......................................  ..............  LC2                                             0
 
RMC+SE.......................................  ..............  MA5                                            40
RMC+SE.......................................  ..............  MA4                                           333
RMC+SE.......................................  ..............  MA3                                           376
RMC+SE.......................................  ..............  MA2                                             0
 
RMB+SE.......................................  ..............  MB5                                             5
RMB+SE.......................................  ..............  MB4                                           183
RMB+SE.......................................  ..............  MB3                                           563
RMB+SE.......................................  ..............  MB2                                             2
 
RMA+SE.......................................  ..............  MC5                                             0
RMA+SE.......................................  ..............  MC4                                             1
RMA+SE.......................................  ..............  MC3                                            15
RMA+SE.......................................  ..............  MC2                                             0
 
RLB+SE.......................................  ..............  NA5                                             0
RLB+SE.......................................  ..............  NA4                                            12
RLB+SE.......................................  ..............  NA3                                            28
RLB+SE.......................................  ..............  NA2                                             0
 
RLA+SE.......................................  ..............  NB5                                             0
RLA+SE.......................................  ..............  NB4                                             4
RLA+SE.......................................  ..............  NB3                                            31
RLA+SE.......................................  ..............  NB2                                             0
 
RUC..........................................             971  UA5                                             1
RUC..........................................  ..............  UA4                                            63
RUC..........................................  ..............  UA3                                           424
RUC..........................................  ..............  UA2                                           300
 
RUB..........................................            3072  UB5                                             1
RUB..........................................  ..............  UB4                                           106
RUB..........................................  ..............  UB3                                          1100
RUB..........................................  ..............  UB2                                          1584
 
RUA..........................................            1222  UC5                                             0
RUA..........................................  ..............  UC4                                            30
RUA..........................................  ..............  UC3                                           349
RUA..........................................  ..............  UC2                                           816
 
RVC..........................................             853  VA5                                             1
RVC..........................................  ..............  VA4                                            53
RVC..........................................  ..............  VA3                                           350
RVC..........................................  ..............  VA2                                           289
 
RVB..........................................            2812  VB5                                             0
RVB..........................................  ..............  VB4                                            81
RVB..........................................  ..............  VB3                                          1091
RVB..........................................  ..............  VB2                                          1392
 
RVA..........................................            1383  VC5                                             0

[[Page 19236]]

 
RVA..........................................  ..............  VC4                                            41
RVA..........................................  ..............  VC3                                           471
RVA..........................................  ..............  VC2                                           840
 
RHC..........................................            1808  WA5                                             0
RHC..........................................  ..............  WA4                                            75
RHC..........................................  ..............  WA3                                           721
RHC..........................................  ..............  WA2                                           768
 
RHB..........................................            1795  WB5                                             0
RHB..........................................  ..............  WB4                                            38
RHB..........................................  ..............  WB3                                           601
RHB..........................................  ..............  WB2                                          1027
 
RHA..........................................             900  WC5                                             0
RHA..........................................  ..............  WC4                                            23
RHA..........................................  ..............  WC3                                           309
RHA..........................................  ..............  WC2                                           567
 
RMC..........................................            3834  XX5                                             0
RMC..........................................  ..............  XA4                                           205
RMC..........................................  ..............  XA3                                          1601
RMC..........................................  ..............  XA2                                          1279
 
RMB..........................................            7142  XB5                                             0
RMB..........................................  ..............  XB4                                           160
RMB..........................................  ..............  XB3                                          2487
RMB..........................................  ..............  XB2                                          3742
 
RMA..........................................            2426  XC5                                             0
RMA..........................................  ..............  XC4                                            68
RMA..........................................  ..............  XC3                                           801
RMA..........................................  ..............  XC2                                          1541
 
RLB..........................................             404  YA5                                             0
RLB..........................................  ..............  YA4                                            18
RLB..........................................  ..............  YA3                                           182
RLB..........................................  ..............  YA2                                           164
 
RLA..........................................             703  YB5                                             0
RLA..........................................  ..............  YB4                                            19
RLA..........................................  ..............  YB3                                           249
RLA..........................................  ..............  YB2                                           400
 
SE3..........................................            2059  EA5                                           106
SE3..........................................  ..............  EA4                                          1021
SE3..........................................  ..............  EA3                                           932
SE3..........................................  ..............  EA2                                             0
 
SE2..........................................            2944  EB5                                            65
SE2..........................................  ..............  EB4                                           913
SE2..........................................  ..............  EB3                                          1934
SE2..........................................  ..............  EB2                                            32
 
SE1..........................................             272  EC5                                             0
SE1..........................................  ..............  EC4                                            33
SE1..........................................  ..............  EC3                                           227
SE1..........................................  ..............  EC2                                            12
 
SSC..........................................            3129  SA5                                             2
SSC..........................................  ..............  SA4                                           391
SSC..........................................  ..............  SA3                                          1907
SSC..........................................  ..............  SA2                                           829
 
SSB..........................................            3598  SB5                                             0
SSB..........................................  ..............  SB4                                           370
SSB..........................................  ..............  SB3                                          2168
SSB..........................................  ..............  SB2                                          1060
 
SSA..........................................            6251  SC5                                             0
SSA..........................................  ..............  SC4                                           424
SSA..........................................  ..............  SC3                                          3688
SSA..........................................  ..............  SC2                                          2139
 
CC2..........................................              58  CA5                                             0
CC2..........................................  ..............  CA4                                             1
CC2..........................................  ..............  CA3                                            28
CC2..........................................  ..............  CA2                                            29
 
CC1..........................................             309  CB5                                             0
CC1..........................................  ..............  CB4                                            18

[[Page 19237]]

 
CC1..........................................  ..............  CB3                                           171
CC1..........................................  ..............  CB2                                           120
 
CB2..........................................             262  CC5                                             0
CB2..........................................  ..............  CC4                                             9
CB2..........................................  ..............  CC3                                           104
CB2..........................................  ..............  CC2                                           149
 
CB1..........................................            1423  CD5                                             0
CB1..........................................  ..............  CD4                                            36
CB1..........................................  ..............  CD3                                           619
CB1..........................................  ..............  CD2                                           768
 
CA2..........................................             802  CE5                                             0
CA2..........................................  ..............  CE4                                            18
CA2..........................................  ..............  CE3                                           319
CA2..........................................  ..............  CE2                                           465
 
CA1..........................................            4977  CF5                                             0
CA1..........................................  ..............  CF4                                           107
CA1..........................................  ..............  CF3                                          2075
CA1..........................................  ..............  CF2                                          2795
 
IB2..........................................              60  IA1                                            60
 
IB1..........................................             565  IB1                                           565
 
IA2..........................................              12  IC1                                            12
 
IA1..........................................             379  ID1                                           379
 
BB2..........................................               1  BA1                                             1
 
BB1..........................................              52  BB1                                            52
 
BA2..........................................               2  BC1                                             2
 
BA1..........................................              71  BD1                                            71
 
PE2..........................................              41  PA1                                            41
 
PE1..........................................             401  PB1                                           401
 
PD2..........................................             119  PC1                                           119
 
PD1..........................................            1184  PD1                                          1184
 
PC2..........................................              33  PE1                                            33
 
PC1..........................................             342  PF1                                           342
 
PB2..........................................              39  PG1                                            39
 
PB1..........................................             602  PH1                                           602
 
PA2..........................................              40  PI1                                            40
 
PA1..........................................            1185  PJ1                                          1185
----------------------------------------------------------------------------------------------------------------

    We note that certain events may combine to limit the scope or 
accuracy of our impact analysis, because such an analysis is future-
oriented and, thus, very susceptible to forecasting errors due to other 
changes in the forecasted impact time period. Some examples of such 
possible events are newly legislated general Medicare program funding 
changes by the Congress, or changes specifically related to SNFs. In 
addition, changes to the Medicare program may continue to be made as a 
result of the BBA. Although these changes may not be specific to SNF 
PPS, due to the nature of the Medicare program the changes may 
interact, and the complexity of the interaction of these changes could 
make it very difficult to predict accurately the full scope of the 
impact upon SNFs.

B. Impact of This Proposed Rule

    As stated previously in this preamble, the aggregate increase in 
payments associated with this update is estimated to be $900 million. 
There are three areas of change that produce this increase for 
facilities--
    1. The effect of the Federal transition, that results in many 
facilities being paid 75 percent at the Federal rate and 25 percent at 
the facility-specific rate instead of the current 50 percent Federal 
rate and 50 percent facility-specific rate. There is also the 
additional effect of the BBRA option to bypass the transition and be 
paid according to 100 percent of the Federal rate;
    2. The implementation of various other provisions in the BBRA; and,
    3. The total change in payments from FY 2000 levels to FY 2001 
levels. This includes all of the previously noted changes in addition 
to the effect of the update to the rates.
    As seen in table 13 below, some of these areas result in increased 
aggregate payments and others tend to lower them. The breakdown of the 
various categories of data in the table are as follows:
    In column one, the first row of the table includes the effects on 
all facilities. The next six rows show the effects on facilities split 
by hospital-based versus freestanding and urban versus rural. The rest 
of the table shows the effects on urban versus rural status by census 
region.
    The second column in the table shows the number of facilities in 
the impact database. The third column shows the effect of the 
transition to the Federal rates. It includes the impact of the normal 
progression of facilities in the transition to new cost reporting 
periods

[[Page 19238]]

and, therefore, blended payment amounts (that is, facility-specific 
versus Federal rates) as well as those facilities that, as a result of 
the BBRA, elect to bypass the transition and go immediately to the full 
Federal rate). This change has an overall effect of raising payments by 
.3 percent, with most of the increase coming from freestanding 
facilities. There are several regions that have decreased payments due 
to this provision, but the majority (and most populous) of the regions 
evidence higher payments, with the largest increase being in the New 
England and mid-Atlantic regions for both urban and rural facilities.
    We estimate that approximately 51 percent of SNFs currently under 
the transition will elect to be paid based on 100 percent of the 
Federal rate. Of these facilities, we estimate 22 percent are hospital-
based and 78 percent are freestanding.
    The fourth column shows the projected effect of the 4 percent add-
on to the adjusted Federal rate mandated by the BBRA. As expected, this 
provision results in an increase in payments for all facilities. 
However, as seen in the table, the varying effect of the SNF PPS 
transition results in a distributional impact of this provision. In 
addition, since this increase only applies to the Federal portion of 
the payment rate, the effect on total expenditures is less than 4 
percent.
    The fifth column of the table shows the effect of the update to the 
Federal and facility-specific payment rates. It reflects an update to 
the Federal rates of 1.833 percent, which is equivalent to the market 
basket increase minus 1 percentage point, as required by law. In 
addition, it reflects an update to the facility-specific rates of 2.833 
percent, which is equivalent to the full market basket increase for 
this period. For this analysis, it is assumed that payments will 
increase by 2.0 percent in total if there are no behavioral changes by 
the facilities. As can be seen from this table, the effects of the 
update itself do not vary significantly by specific types of providers 
or by location.
    The sixth column of the table shows the effect of all of the 
changes on the FY 2001 payments. This includes all of the previous 
changes, including the update to this year's payment rates by the 
market basket. Therefore, it is assumed that payments will increase by 
5.8 percent in total, assuming facilities do not change their care 
delivery and billing practices in response. As can be seen from this 
table, the combined effects of all of the changes vary much more widely 
by specific types of providers and by location. For example, 
freestanding facilities enjoy more significant payment increases due to 
the policy changes, while the effects of the transition tend to 
diminish the increase for hospital-based providers.

                          Table 13.--Projected Impact of FY 2001 Update to the SNF PPS
----------------------------------------------------------------------------------------------------------------
                                                               Transition   Add on to
                                                  Number of    to federal    federal       Update      Total FY
                                                  facilities     rates        rates        change    2001 change
                                                               (percent)    (percent)    (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
Total..........................................         9037          0.3          3.4          2.0          5.8
Urban..........................................         6300          0.0          3.4          2.0          5.5
Rural..........................................         2737          1.4          3.5          1.9          6.9
Hospital based urban...........................          683         -6.1          2.9          2.1         -1.3
Freestanding urban.............................         5617          1.2          3.5          2.0          6.8
Hospital based rural...........................          533         -3.2          3.2          2.0          1.9
Freestanding rural.............................         2204          2.5          3.6          1.9          5.8
Urban by region:
    New England................................          630          6.1          3.8          1.9         12.2
    Middle Atlantic............................          877          5.1          3.7          1.9         11.1
    South Atlantic.............................          959         -2.0          3.2          2.0          3.2
    East North Central.........................         1232          1.5          3.5          1.9          7.0
    East South Central.........................          212         -1.3          3.3          2.0          4.0
    West North Central.........................          469          0.3          3.4          2.0          5.8
    West South Central.........................          519         -6.8          2.9          2.1         -2.1
    Mountain...................................          303         -4.6          3.0          2.1          0.3
    Pacific....................................         1070         -2.5          3.2          2.0          2.6
Rural by region:
    New England................................           88          6.0          3.9          1.9         12.2
    Middle Atlantic............................          144          4.0          3.7          1.9          9.9
    South Atlantic.............................          373          0.6          3.5          2.0          6.2
    East North Central.........................          561          2.6          3.6          1.9          8.3
    East South Central.........................          255         -0.4          3.4          2.0          5.0
    West North Central.........................          581          3.9          3.6          1.9          9.7
    West South Central.........................          354         -3.2          3.2          2.0          1.9
    Mountain...................................          204          0.2          3.4          2.0          5.7
    Pacific....................................          151          1.7          3.6          1.9         7.4
----------------------------------------------------------------------------------------------------------------
Notes:
1. The effects of the various changes are not additive.
2. The percent differences illustrated in this table are measured against the policies and payment rates in
  effect for FY 2000 as described in the SNF PPS Notice published on July 30, 1999 (64 FR 42684).
3. This table reflects Federal payment rates based on the case-mix methodology and wage index used for FY 2000.
  As explained in the text, the FY 2001 wage index and national case-mix data based on the refined RUG-III model
  are not currently available, but will be for the final rule.

    In the final rule implementing the SNF PPS update for FY 2001, we 
will revise the estimates listed in Table 13 to reflect the final FY 
2001 payment rates as well as the latest available data on estimates of 
program growth in services and expenditures. Table 13 will also 
incorporate two additional columns showing the projected distributional 
effect of the refined case-mix classification system based on actual 
MDS 2.0 data and updated wage index

[[Page 19239]]

across the various facility types and locations, as discussed earlier. 
We will also indicate the impact of the reduction in the Federal rates 
to account for the new services excluded from consolidated billing 
under section 103 of the BBRA.
    As discussed earlier in this rule, Section 101 of the BBRA provides 
for a 20 percent positive adjustment to the adjusted Federal rates 
associated with 15 RUG-III groups for the period of April 1, 2000 
through October 1, 2000. In addition, it provides for a four percent 
positive adjustment to the Federal rates associated with all RUG-III 
categories for FY 2001 and FY 2002, regardless of whether refinements 
to the case-mix adjustment are implemented. However, were we not to 
implement case-mix refinements such as those proposed in this rule for 
FY 2001, the Federal rates for this period would be based on the 
existing RUG-III model currently in use and maintain the 20 percent 
adjustments to the 15 specified RUG-III groups. As indicated in Table 
13, the effect of this proposed rule will be an increase in 
expenditures of 900 million dollars (or +5.8 percent) over the payment 
rates and policies as described in the SNF PPS Notice published on July 
30, 1999 (64 FR 41684). However, were we not to implement case-mix 
refinements, the effect of this BBRA provision would be a larger 
increase in expenditures equaling 1.9 billion dollars (or +12.5 
percent). At the present time, we are unable to illustrate the 
distributional impact of maintaining this 20 percent add-on, but will 
attempt to develop the data to allow us to do so for the final rule 
associated with the FY 2001 update. It is important to note that such a 
result would also have negative consequences for the beneficiary. 
Section 101 of the BBRA provides the 20 percent add-on for certain RUG-
III rehabilitation groups, resulting in higher payments for such groups 
even though they are associated with a lower intensity of service than 
other rehabilitation groups. This results in a perverse incentive where 
some facilities may choose to provide less rehabilitation services to 
beneficiaries in order to receive the higher payments. Because this 
provision of the law takes effect on April 1, 2000, it may already be 
resulting in a reduction of needed services. Adoption of the 
refinements proposed in this rule would eliminate this perverse 
incentive.
    As noted previously, we are proposing the addition of new RUG-III 
categories to recognize the needs of Medicare beneficiaries with both 
heavy medical and rehabilitation needs and to account more precisely 
for the variation in non-therapy ancillary services. The refinements 
will achieve important improvements in the PPS and allow for more 
accurate payment rates, thus meeting our responsibility to provide for 
equitable payments to providers while ensuring access to quality SNF 
care for Medicare beneficiaries. In evaluating the different options, 
it is important to analyze the overall impact of implementing a refined 
case-mix system. Adoption of any of these refinements will increase the 
complexity of the PPS and may introduce some initial uncertainty for 
providers, who would have to become familiar with the refined system 
and modify existing operational and support systems. As discussed in 
section II.B of this proposed rule, we propose adoption of the UWIM 
model because we believe it best represents an appropriate balance 
between improvements in the accuracy of our payments and the complexity 
and uncertainty which results from changes of this nature.
    Finally, in accordance with the provisions of Executive Order 
12866, this notice was reviewed by the Office of Management and Budget.

X. Federalism

    We have reviewed this final rule under the threshold criteria of 
Executive Order 13132, Federalism, and we have determined that it does 
not significantly affect the rights, roles, and responsibilities of 
States.

List of Subjects

42 CFR Part 411

    Kidney diseases, Medicare, 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 would 
be amended as follows:

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

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

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

Subpart A--General Exclusions and Exclusion of Particular Services

    2. Section 411.15 is amended by:
    A. Republishing the introductory text.
    B. Revising paragraphs (p)(2)(vii) and (p)(2)(xi).
    C. Adding new paragraphs (p)(2)(xii), (p)(2)(xiii), (p)(2)(xiv), 
and (p)(2)(xv).
    D. Revising paragraph (p)(3)(iv).


Sec. 411.15  Particular services excluded from coverage.

    The following services are excluded from coverage.
* * * * *
    (p) Services furnished to SNF residents. * * *
    (2) Exceptions. The following services are not excluded from 
coverage:
* * * * *
    (vii) Dialysis services and supplies, as defined in section 
1861(s)(2)(F) of the Act, and those ambulance services that are 
furnished in conjunction with them.
* * * * *
    (xi) The transportation costs of electrocardiogram equipment (HCPCS 
code R0076), but only with respect to those electrocardiogram test 
services furnished during 1998.
    (xii) Those chemotherapy items identified, as of July 1, 1999, by 
HCPCS codes J9000-J9020; J9040-J9151; J9170-J9185; J9200-J9201; J9206-
J9208; J9211; J9230-J9245; and J9265-J9600.
    (xiii) Those chemotherapy administration services identified, as of 
July 1, 1999, by HCPCS codes 36260-36262; 36489; 36530-36535; 36640; 
36823; and 96405-96542.
    (xiv) Those radioisotope services identified, as of July 1, 1999, 
by HCPCS codes 79030-79440.
    (xv) Those customized prosthetic devices (including artificial 
limbs and their components) identified, as of July 1, 1999, by HCPCS 
codes L5050-L5340; L5500-L5611; L5613-L5986; L5988; L6050-L6370; L6400-
6880; L6920-L7274; and L7362-L7366, which are delivered for a 
resident's use during a stay in the SNF and intended to be used by the 
resident after discharge from the SNF.
    (3) SNF resident defined. * * *
    (iv) The beneficiary is formally discharged (or otherwise departs) 
from the SNF, unless the beneficiary is readmitted (or returns) to that 
or another SNF by midnight of the day of departure.
* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

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

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

[[Page 19240]]

Subpart B--Essentials of Provider Agreements

    2. Section 489.20 is amended by:
    A. Republishing the introductory text and paragraph (s) 
introductory text.
    B. Revising paragraphs (s)(7) and (s)(11).
    C. Adding new paragraphs (s)(12), (s)(13), (s)(14), and (s)(15).


Sec. 489.20  Basic commitments.

    The provider agrees to the following:
* * * * *
    (s) In the case of an SNF, either to furnish directly or make 
arrangements (as defined in Sec. 409.3 of this chapter) for all 
Medicare-covered services furnished to a resident (as defined in 
Sec. 411.15(p)(3) of this chapter) of the SNF, except the following:
* * * * *
    (7) Dialysis services and supplies, as defined in section 
1861(s)(2)(F) of the Act, and those ambulance services that are 
furnished in conjunction with them.
* * * * *
    (11) The transportation costs of electrocardiogram equipment (HCPCS 
code R0076), but only with respect to those electrocardiogram test 
services furnished during 1998.
    (12) Those chemotherapy items identified, as of July 1, 1999, by 
HCPCS codes J9000-J9020; J9040-J9151; J9170-J9185; J9200-J9201; J9206-
J9208; J9211; J9230-J9245; and J9265-J9600.
    (13) Those chemotherapy administration services identified, as of 
July 1, 1999, by HCPCS codes 36260-36262; 36489; 36530-36535; 36640; 
36823; and 96405-96542.
    (14) Those radioisotope services identified, as of July 1, 1999, by 
HCPCS codes 79030-79440.
    (15) Those customized prosthetic devices (including artificial 
limbs and their components) identified, as of July 1, 1999, by HCPCS 
codes L5050-L5340; L5500-L5611; L5613-L5986; L5988; L6050-L6370; L6400-
6880; L6920-L7274; and L7362-L7366, which are delivered for a 
resident's use during a stay in the SNF and intended to be used by the 
resident after discharge from the SNF.

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

    Dated: March 20, 2000.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
    Approved: March 27, 2000.
Donna E. Shalala,
Secretary.

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

Technical Appendix A--Technical Features of the RUG-III Refinements 
Analyses

    The purpose of the research discussed in this proposed rule is 
to develop potential refinements to the PPS that would better ensure 
accurate and equitable payment. An analytic (or research) data base 
consisting of linked MDS assessments and Medicare claims data was 
developed, and used to perform the analyses described in this 
proposed rule.

A. Creation of Analytic Sample

    In creating the analytic sample used to develop and test 
potential refinements, we were guided by the desire to have a large, 
representative sample and the need to exclude assessments likely to 
contain reporting errors. Our original sample included 733,300 MDS 
assessments from seven States, representing the years 1995 through 
1997. We then reduced this sample through implementation of the 
following exclusion criteria:
    1. Exclude all assessments from New York. All assessments from 
New York were excluded from analyses that used Medicare claims data 
because many facilities in the State billed SNF stays using an all-
inclusive rate. Because these facilities did not use the revenue 
codes that we used to measure prescription drug, respiratory therapy 
or other non-therapy ancillary charges, measured ancillary charges 
for most New York beneficiaries were zero in some or all of the 
revenue codes analyzed for this study. The exclusion of New York 
results in the removal of 525,215 of the 733,300 total MDS 
assessments from our analytic sample.
    2. Exclude all assessments for which a cost-to-charge ratio 
could not be calculated. Medicare cost report data were used to 
calculate the facility-specific ratio of Total Part A allowed cost 
to total Part A charges for each facility in each year. Facilities 
missing Medicare cost reports for at least two years between 1995 
and 1997 were excluded because we were not able to calculate cost-
to-charge ratios for the facility. This resulted in the exclusion of 
93,314 additional assessments.
    3. Exclude all facilities for which the correlation between a 
measure of drug costs calculated from Section U and one calculated 
from Medicare claims data was less than zero. We used drug charge 
data derived from Medicare claims in the refinement analyses, but 
used the Section U data to identify facilities with unreliable drug 
cost data. For facilities that have a negative correlation between 
the two drug cost measures, there is a concern about inaccurate 
reporting on either claims or MDS assessments at the facility level, 
and these facilities were excluded. This step resulted in the 
exclusion of 10,915 MDS assessments.
    4. Exclude all beneficiaries with per diem ancillary charges 
greater than $1,000. Two hundred fifty-three (253) observations with 
per diem total ancillary charges greater than $1,000 were excluded 
from the refinement analyses. Summary measures of statistical 
performance such as R-squared are typically sensitive to outliers, 
and these extreme values were judged unlikely to be accurate. In 
addition, such values have disproportionate leverage in the design 
of potential refinements. The exclusion of extreme outliers in 
refinement analyses does not mean that their costs cannot be 
considered when determining payment rates.
    The resulting analytic sample included 103,603 assessments, 
which were assigned randomly to either the test or validation 
samples. We assigned approximately 60 percent of this sample--61,929 
assessments--to the test sample which was used to develop and test 
potential refinements. The remaining 41,674 assessments comprised 
the validation sample.

B. Characteristics of the Sample

    Table 1 shows the sociodemographic characteristics of the sample 
stratified by an aggregate of the RUG-III categories. The majority 
of beneficiaries were female (65 percent), with little variation in 
the proportion across the RUG-III categories. Beneficiaries 
classified in the Behavior category were less likely to be male (37 
percent) and those in the Physical Function categories were the 
least likely to be male (30 percent). The majority of beneficiaries 
were white, of non-Hispanic origin (84 percent). Approximately nine 
percent of beneficiaries were black and 2 percent were Hispanic. 
Overall, nearly one quarter of the beneficiaries were severely 
cognitively impaired. Among beneficiaries classified in a 
Rehabilitation category, 35 percent were moderately impaired and 14 
percent were severely cognitively impaired. The distribution of 
cognitive impairment among those classified as Reduced Physical 
Function was similar to that of the Rehabilitation category. 
Beneficiaries classified as Extensive Services or Special Care also 
had a similar distribution of cognitive impairment level. 
Approximately one third of each were moderately impaired. Thirty-
nine percent of beneficiaries were classified as dependent in 
activities of daily living and only 7 percent with no limitations. 
Beneficiaries in the Behavior category were most likely to have only 
minimal limitations in physical functioning (28 percent). 
Beneficiaries classified in the Clinically Complex (14 percent), 
Cognitively Impaired (13 percent), or Physical Function (14 percent) 
categories were also more likely to have minimal limitations 
relative to the other RUG-III categories. Beneficiaries in the 
Extensive Services (58 percent) and Special Care (56 percent) 
categories were most likely to be classified as dependent in 
activities of daily living.
    The active clinical diagnoses documented for beneficiaries in 
the sample are shown

[[Page 19241]]

stratified by RUG-III group on Table 1.1. Cardiovascular diseases 
were common in beneficiaries. Overall, 20 percent of beneficiaries 
had coronary artery disease. Cardiac arrhythmia was present in 14 
percent of beneficiaries. Overall, nearly one quarter of 
beneficiaries had congestive heart failure and 9 percent had 
peripheral vascular diseases. On average, 43 percent of 
beneficiaries had documented hypertension. While the distribution of 
beneficiaries with coronary artery disease appeared similar across 
RUG-III groups, congestive heart failure and arrhythmia were more 
common in the Extensive Services, Special Care, and Clinically 
Complex categories. For most of the cardiovascular conditions, 
beneficiaries in the Impaired Cognition category were less likely to 
have these diseases relative to other RUG-III categories. A similar, 
but attenuated pattern was noted for beneficiaries in the Behavior 
category.
    Neurological diseases were also common. Overall, 9 percent of 
beneficiaries had Alzheimer's disease documented. Twenty-eight 
percent had other dementia documented. Nearly one quarter of 
beneficiaries had an active clinical diagnosis of stroke and 6 
percent had Parkinson's disease. While the proportion of 
beneficiaries with Parkinson's disease did not vary by RUG-III 
group, the proportion with other neurological conditions varied 
substantially by RUG-III group. Beneficiaries in the Impaired 
Cognition group were more likely to have Alzheimer's disease (22 
percent) and other dementia (54 percent) documented and less likely 
to have had a stroke (15 percent) compared to other RUG-III groups. 
Similar to the Impaired Cognition group, beneficiaries in the 
Behavior category were more likely to have other dementia (41 
percent) and less likely to have had a stroke (12 percent) compared 
to other RUG-III groups, but this category had a similar proportion 
of beneficiaries with Alzheimer's disease. The distribution of 
neurological conditions among beneficiaries classified as Extensive 
Services, Special Care, and Clinically Complex was similar. A third 
of beneficiaries classified as Extensive Services and Special Care 
had non-Alzheimer's dementia and one quarter had suffered a stroke.
    Only 5 percent of beneficiaries had anxiety and 16 percent had 
depression documented as a diagnosis on the MDS. Across RUG-III 
groups, the proportion of beneficiaries with anxiety and depression 
was similar. However, the prevalence of anxiety (8 percent) and 
depression (22 percent) was higher in the Behavior category. Twelve 
percent of beneficiaries had cataracts and 7 percent had glaucoma. 
These conditions did not vary substantially by RUG-III group. 
Overall, septicemia was rare (1 percent), and only 8 percent of 
beneficiaries had pneumonia, while 17 percent had urinary tract 
infections. Beneficiaries in the Extensive Services category were 
more likely to have septicemia (2 percent), pneumonia (17 percent), 
and urinary tract infections (24 percent) compared to other RUG-III 
categories. Other diagnoses and conditions were common. Twenty-one 
percent of beneficiaries had allergies, 19 percent had anemia, 22 
percent had arthritis, 22 percent had diabetes, and 12 percent had 
cancer. Beneficiaries in the Rehabilitation, Extensive Services, 
Special Care, and Clinically Complex categories were more likely to 
have these conditions relative to the Impaired Cognition and 
Behavioral Problem categories. The prevalence of hypothyroidism (10 
percent) did not vary by RUG-III group.
    Pooling across all States and the three years, there is little 
variation by RUG-III group in total daily drug cost as measured by 
Section U. Median costs within the Rehabilitation groups range from 
approximately $6.50 (Low Rehabilitation) to approximately $9.00 
(Ultra-high Rehabilitation) whereas the lowest costs of medications 
were experienced by the Impaired Cognition category (approximately 
$3.00). The groups with the higher interquartile range 
(approximately $13) were the Extensive Services categories and some 
of the Rehabilitation groups (for example, RVC was approximately 
$12). The Impaired Cognition category also demonstrated the least 
variation in costs of medications, with an interquartile range of 
approximately $5.
    To better understand which classes of drugs may be driving 
costs, we classified the drugs according to fourteen major 
therapeutic classes. The most expensive therapeutic drug classes are 
anti-infective agents (Median: $6.53) and biologics (Median: $9.73). 
The least expensive therapeutic drug classes are analgesics (Median: 
$0.10) and nutritional products (Median: $0.18). The proportion of 
beneficiaries within each of the major RUG-III categories are shown 
in Table 1.2. Variations in medication use across RUG-III groups 
were apparent for many medication classes and corresponded to 
observed variations in the active clinical diagnoses shown by RUG-
III group in Table 1.1. Beneficiaries were least likely to be on 
biologics (1 percent) and anti-neoplastics (2 percent), regardless 
of RUG-III class. The majority of beneficiaries were on at least one 
cardiovascular medication, with substantial variation across RUG-III 
groups. Beneficiaries in the Rehabilitation category (67 percent) 
and in the Clinically Complex category (64 percent) were the most 
likely to be receiving at least one cardiovascular medication. 
Beneficiaries in the Impaired Cognition (47 percent) and Behavior 
(53 percent) categories were the least likely to be receiving 
cardiovascular medications.
    Similar trends were observed across RUG-III groups for both 
gastrointestinal agents and endocrine/metabolic agents. More than 
half of beneficiaries had taken at least one gastrointestinal agent 
with beneficiaries in the Rehabilitation categories (67 percent) the 
most likely to use gastrointestinal products and beneficiaries in 
the Impaired Cognition or Behavioral Problem categories the least 
likely to receive these drugs (approximately 50 percent). With 
endocrine and metabolic agents, over one third of beneficiaries in 
the Rehabilitation, Extensive Services, Special Care, and Clinically 
Complex categories received these drugs, relative to approximately 
25 percent of other RUG-III groups. Beneficiaries in the 
Rehabilitation, Extensive Services, Special Services, and Clinically 
Complex categories were most likely to be on anti-infective agents, 
with over 25 percent of beneficiaries in each on these medications. 
Among these RUG-III groups, beneficiaries in the the Extensive 
Services categories were the most likely to be taking anti-infective 
agents (39 percent). Less than 15 percent of beneficiaries in other 
RUG-III groups received these drugs.
    Overall, 47 percent received at least one analgesic. Impaired 
Cognition (32 percent) and Behavior beneficiaries (39 percent) were 
less likely to receive analgesics than those in the Rehabilitation 
category (60 percent). Similar trends were apparent with 
hematological agents (approximately 20 percent Impaired Cognition 
vs. approximately 35 percent in the Rehabilitation groups), and 
topical agents (approximately 20 percent vs. approximately 37 
percent in the Special Care groups). Conversely, beneficiaries in 
the Impaired Cognition (approximately 46 percent) and Behavior (over 
50 percent) categories were more likely to receive CNS drugs 
relative to the other RUG-III groups (approximately 33 percent).
    The highest proportion of total costs due to anti-infective use 
is found in the Extensive Services and Clinically Complex groups, 
with approximately 50 percent of drug costs attributable to the 
anti-infective agents. Use of biologics was relatively infrequent 
(approximately 1.2 percent) and the proportion of drug costs due to 
these agents was highly variable among the users, regardless of RUG-
III group. Among people receiving anti-neoplastic medications 
(approxmiately 2.2 percent of beneficiaries), these agents accounted 
for one quarter of their total daily drug cost (Median: 27 percent; 
25th percentile: 13 percent; 75th percentile: 49 percent). 
Regardless of RUG-III group, this measure is highly variable. While 
nearly one third of all beneficiaries received an endocrine 
medication, these agents only accounted for 8 percent of the total 
daily drug costs among users. Cardiovascular medications accounted 
for 18 percent of the total daily drug cost, which varies slightly 
across RUG-III group (+/- approximately 4 percent). There appears to 
be slightly less variation in this measure among the Extensive 
Services, Special Care, and Clinically Complex groups as compared to 
other RUG-III categories. Among the 19 percent of beneficiaries 
using respiratory medications, 12 percent of their drug costs were 
due to these agents. Higher median proportions and greater 
variability occurred at the end splits within the aggregate RUG-III 
categories. A similar pattern is observed among users of 
gastrointestinal agents. These medications accounted for only 13 
percent (median) of the total daily costs. This measure is highly 
variable, regardless of RUG-III group. Only 5 percent of 
beneficiaries had used a genitourinary medication, accounting for 
only 13 percent of total drug costs (median value). This measure 
varied slightly across RUG-III groups.

[[Page 19242]]



                                  Table 1.--Sociodemographic Characteristics of Residents of SNF Stays by RUG-III Group
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Physical
                                                   All      Rehabilitation   Extensive     Special     Clinically    Impaired    Behaviors     function
                                                                              services       care       complex     cognition       only       reduced
--------------------------------------------------------------------------------------------------------------------------------------------------------
Male.........................................           35             37            36           34           36           35           37           30
Race/Ethnicity:
    White....................................           84             90            83           83           82           80           84           83
    Hispanic.................................            2              1             2            2            2            3            3            2
    Black....................................            9              6             9            9            9           11            8            9
    Asian/Pacific Islander...................          0.5            0.2           0.7          0.5          0.6          0.7          0.7          0.6
    American Indian..........................            1            0.7             2            2            2            1            1            1
    Missing=.................................            3             .9             3            4            4            3            3            3
Cognitive Impairment:@
    Mild (CPS: 0-1)..........................           41             51            33           35           47            0           50           53
    Moderate (CPS: 2-4)......................           35             35            31           34           35           67           50           32
    Severe (CPS: 5-6)........................           23             14            34           31           17           33            0           14
Physical Functioning:
    Minimal limitations......................            7              6             0            3           14           13           28           14
    Moderate limitations.....................           44             53            37           36           51           58           49           47
    Dependent................................           39             18            58           56           31           20            7           26
    Missing=.................................            9             23             6            4            4            9           16          12
--------------------------------------------------------------------------------------------------------------------------------------------------------
@ CPS = Cognitive Performance Scale.
=Missing data percentages shown when greater than 3% missing data occurred.
Totals may not equal 100% due to rounding.


                                         Table 1.1--Active Clinical Diagnoses for Beneficiaries by RUG-III Group
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Physical
                                                   All      Rehabilitation   Extensive     Special     Clinically    Impaired    Behaviors     function
                                                                              services       care       complex     cognition       only       reduced
--------------------------------------------------------------------------------------------------------------------------------------------------------
Heart/Circulation:
    Coronary artery disease..................           20             14            22           22           22           21           19           21
     Cardiac arrhythmia......................           14             15            16           15           14           11            8           12
    Congestive heart failure.................           24             22            27           25           27           16           20           21
    Hypertension.............................           43             44            42           42           44           37           40           42
    Peripheral vascular diseases.............            9              8            10           12            9            6            7            7
    Other cardiovascular diseases............           20             20            21           21           21           16           16           17
Neurological:
    Alzheimer's disease......................            9              5             9            9            8           22           11            8
    Other dementia...........................           28             18            30           30           27           54           41           28
    Cerebrovascular disease..................           23             26            24           25           25           15           12           16
    Parkinson's disease......................            6              5             6            6            5            6            5            6
Psychiatric:
    Anxiety..................................            5              6             5            5            6            5            8            5
    Depression...............................           16             17            15           17           18           15           22           15
Sensory:
    Cataract.................................           12              6            14           14           14           14           13           13
    Glaucoma.................................            7              5             7            7            7            6            8            7
Infections:
    Septicemia...............................            1              1             2            1            1            0            0            0
    Pneumonia................................            8              8            17            8           10            0            0            0
    Urinary tract infection..................           17             16            24           19           13           10            9           12
Other:
    Allergies................................           21             23            22           22           21           14           19           17
    Anemia...................................           19             16            23           22           19           15           14           17
    Arthritis................................           22             22            23           22           21           17           19           24
    Cancer...................................           12             11            14           13           13            7            8            9
    Emphysema/COPD...........................           15             14            17           15           19           10           14           10
    Diabetes mellitus........................           22             22            22           23           24           15           19           18
    Hypothyroidism...........................           10             10            10           10           10            9            9            9
    Osteoporosis.............................            8              9             8            8            8            6            6            9
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 19243]]


                                           Table 1.2--Drug Utilization by Therapeutic Class and RUG-111 Group
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Physical
                                                   All      Rehabilitation   Extensive     Special     Clinically    Impaired    Behaviors     function
                                                                              services       care       complex     cognition       only       reduced
--------------------------------------------------------------------------------------------------------------------------------------------------------
Anti-infectives..............................           26             29            39           28           23           12           12           16
Biologics....................................            1            0.3             1            2            1            1            1            1
Anti-neoplastics.............................            2              2             2            2            3            1            2            1
Endocrine....................................           31             36            30           30           33           22           26           26
Cardiovascular...............................           61             67            59           59           64           51           55           58
Respiratory..................................           19             23            21           18           23            9           17           13
Gastrointestinal.............................           61             67            60           62           62           47           53           58
Genitourinary................................            5              6             5            5            5            4            3            5
CNS..........................................           36             43            32           33           38           46           55           34
Analgesics...................................           47             60            43           45           44           32           39           44
Neuromuscular................................           13             13            13           13           12           14           18           12
Hematological................................           30             35            30           31           29           20           19           26
Topical......................................           30             26            34           37           28           20           20           23
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Test and Validation Samples

    The recursive strategies employed by stepwise regression, AID, 
and other fitting techniques may produce over-optimistic measures of 
variance explanation. For that reason, assessment of the explanatory 
power of alternative models required use of data that were not used 
in forming the models themselves. We selected at random 60 percent 
of the sample for use as a test sample and the remaining 40 percent 
for use as a validation sample. Refinements to RUG-III were 
developed based solely on analysis of the test sample and evaluated 
solely on their performance with the validation sample. Since 
aberrations in the test sample that may have influenced the design 
of refinements were absent in the validation sample, any unsupported 
features of the proposed models should be exposed by this approach.

D. Creation of Measure of Non-therapy Ancillary Charges From SNF 
Claims

    Medicare Part A SNF claims were used to measure the perdiem 
ancillary charges. For ancillary charges developed using Medicare 
claims data, it was not possible to identify items with a date of 
service that corresponds to the period covered by the MDS assessment 
(used to establish the RUG-III classification). Per diem charges 
were calculated using Medicare claims with a covered date within a 
specified range of a date covered by MDS assessment. Operationally, 
per diem charges are derived by the sum of the charges of the 
ancillary therapies divided by the number of days covered by claims.
    We then estimated the costs of non-therapy ancillaries, using 
revenue codes as extracted from the claims data. First, we 
identified target revenue codes and categorized charges into these 
conceptually meaningful categories. The categories and their related 
revenue codes included the following: prescription drugs/pharmacy 
(250-259), drugs requiring ID (630-639), IV therapy (260-269), 
medical and surgical supplies (270-270; 620-622), respiratory 
services (410-419), laboratory (300-309), oxygen (600-604), and 
dialysis (820-829, 830-839, 880-889).

1. Cost-to-Charge Multiplier

    It is important to note that the actual ancillary costs for 
beneficiaries in the sample are not observed. The covered charges 
reported in claims are routinely discounted by the intermediary 
responsible for processing on the basis of audited reasonable cost. 
Inclusion of ancillary charges without further adjustment in our 
measure of per diem ancillary charges would overstate the true level 
of reimbursable costs, since these charges are routinely discounted 
before payment under the present system.
    Using the appropriate annual SNF cost report (that is, the cost 
report for the service period covered by the claim), conversion 
factors were computed for each SNF included in the research data 
base. To be as consistent as possible, we calculated one average 
discount factor (the ratio of total Part A allowed cost to total 
Part A charges) for each facility in each year. This discount factor 
was applied to the facility's ancillary charges before analysis to 
approximate the costs of ancillary services.

E. Analysis and Findings--RUG-III Refinements

    As shown by previous research and confirmed in this study, the 
RUG-III Extensive Services groups are associated with the highest 
per diem non-therapy ancillary charges of any of the RUG-III 
classifications, including the rehabilitation categories. For the 
purposes of this project, ancillary costs were divided into three 
categories: medications (by far the most critical predictor of 
overall ancillary costs), respiratory therapy, and other 
ancillaries. This research also showed significantly higher non-
therapy ancillary costs and intra-group variance related to the 
variety of ancillary supplies and services needed to treat the 
various acute and severe health conditions characterizing 
beneficiaries who classify into the Extensive Services category. 
Figures 1 through 3 compare the mean, per diem costs of ancillary 
services for beneficiaries in the Extensive Services category with 
those of beneficiaries in other RUG-III categories.
    Another key to more accurate accounting of the cost(s) 
associated with treating Extensive Services beneficiaries is 
disentangling some of the overlap between the Extensive Services and 
Rehabilitation categories. Under the current PPS system, the payment 
rate (under an index maximization approach) is the same for 
beneficiaries who qualify for both Extensive Services and one of the 
top three rehabilitation categories (Ultra High, Very High and High 
Rehabilitation) as for those beneficiaries who qualify only for one 
of the top three rehabilitation categories. Using this research data 
base, we found a significant number of beneficiaries qualifying for 
both Extensive Services and Rehabilitation.

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1. Costs for Beneficiaries Who Qualify for Both Extensive Services and 
Rehabilitation

    As shown in Figures 4 through 7, across all three ancillary 
categories, costs were significantly higher for beneficiaries who 
qualified for both Extensive Services and Rehabilitation compared to 
those who qualify only for a Rehabilitation category. Therefore, we 
considered whether those qualifying for both categories should be 
separately identified.
     Across all five Rehabilitation categories, mean 
prescription drug costs were approximately double for beneficiaries 
who qualified for both Extensive Services and Rehabilitation, 
compared to those who qualified only for Rehabilitation. (See Figure 
4 for comparison of drug charges across all five Rehabilitation 
categories based on whether the beneficiary also qualified for 
Extensive Services.)
     A similar pattern was observed for respiratory therapy. 
Across all five rehabilitation categories, respiratory therapy costs 
were more than twice as high for beneficiaries who also qualified 
for Extensive Services as for those who qualified only for 
Rehabilitation (Figure 5).
     Other non-therapy ancillary costs were considerably 
higher for beneficiaries who qualified for both Rehabilitation and 
Extensive Services than for those who qualified for Rehabilitation 
but not Extensive Services (Figure 6).
     Total average ancillary charges for beneficiaries who 
qualified for both Rehabilitation and Extensive Services were also 
significantly higher than for those qualifying only for 
rehabilitation (Figure 7).
    Based on these results, it makes sense, for statistical, 
incentive-related, and clinical reasons, to consider potential 
refinements which reflect the higher costs of beneficiaries in the 
Rehabilitation categories who also qualify for Extensive Services.

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BILLING CODE 4120-03-C
    These cost differences suggested that a potential refinement 
could be based on interactions between existing RUG-III categories. 
Such a change could be implemented in either of two ways:
     A new terminal split within the current RUG-III 
Rehabilitation groups based on whether the beneficiary also 
qualified for Extensive Services. These changes would be reflected 
in changes in the Case Mix Index (CMI) for nursing in calculating 
payments for the Rehabilitation categories.
     A new RUG-III category for beneficiaries who qualify 
for both Extensive Services and Rehabilitation. The new category 
(which could be called ``Rehabilitation and Extensive Services'') 
would be at the top of the hierarchical case-mix system.

2. Non-Therapy Ancillary Index Models

    In addition, variations in non-therapy ancillary costs could be 
addressed through several types of index model-based refinements. 
There are a number of ways that index model-based refinements can be 
implemented:
     The models can be based on an unweighted count of the 
number of index model variables present or on a weighted index that 
assigns a relative cost factor to each of the index model variables.
     The index models can differ with respect to the RUG-III 
categories to which the model is applied.
     The index models can differ with respect to the number 
of index groups that are used.
     The index models can also vary based on the thresholds 
used to define groups. For the weighted index model, beneficiaries 
were classified based on their predicted costs.
     The index model can be applied separately to each major 
category; that is, each level of the RUG-III hierarchy.
    In our analysis of ancillary costs, the results did not indicate 
strong interaction effects. There were two implications of this 
finding. First, the variables effects were principally additive and 
models which develop indexes are indicated. Second, the appropriate 
approach was to use regression analysis to form indexes, rather than 
PC-Group to identify tree models. (It should be noted that PC-Group 
still has some unique capabilities, employed later, to help identify 
optimal thresholds for an index.)
    One way an index model could be used is in an ``add-on'' system 
for predicting non-therapy ancillary charges. RUG-III could be used 
for predicting staff time costs and the non-therapy ancillary index 
would be ``added-on'' to determine the total payment rate for 
beneficiaries with given characteristics. The motivation for this 
approach is that RUG-III has been well tested and validated for 
predicting staff time costs, but was not designed to capture 
variance in non-therapy ancillary charges. Although such a system 
can be described as consisting of two components, it could easily be 
implemented as an integrated system, as though the non-therapy 
ancillary component defined a new set of end-splits to RUG-III.
    The index model approach allowed for a large number of items to 
be considered simultaneously in determining payment rates, including 
additional measures of severity that are not reflected in RUG-III. 
We designed both weighted and unweighted versions of a non-therapy 
ancillary index for each level of the RUG-III hierarchy, and showed 
that both versions resulted in large improvements in the proportion 
of the variance predicted by the case-mix system and some 
improvement in the system's ability to identify high-cost 
beneficiaries. The weighted version allowed items that predict much 
higher costs (such as receipt of IV medications) to have more impact 
on predicted costs than less-influential items such as shortness of 
breath. For this study, the weights were assigned by the researchers 
based on a combination of expert opinion and a comparison of cost 
data for the various MDS items. The weighted index model exhibited 
enhanced explanatory power, but at the cost of additional complexity 
and subjectivity.

F. Model Performance

    We tested a number of potential refinements, but selected only 
the most powerful alternative from each type for presentation here. 
The most promising types of potential refinements are summarized in 
Table 2, and discussed below.
    1. RUG-III CMI Adjustment: This potential refinement improved 
the ability of the case-mix system to capture variance in ancillary 
and total costs. Changes to the CMI alone (that is, changes to the 
payment rates associated with different groups but no changes to the 
case-mix system) will reduce the proportion of beneficiaries for 
whom costs are greater than payment, but will not affect the 
proportion of variance in costs captured by the case-mix system. The 
current RUG-III methodology accounted for about 6 percent of the 
variance in ancillary charges and 11 percent of the variance in 
total costs (See Table 2).

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                                  Table 2.--Statistical Performance of Potential RUG-III Refinements-Model Description
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            R-squared validation sample (test                      Specificity and sensitivity analyses
                                                                         sample)                                            validation sample
                                                          ------------------------------------                  ----------------------------------------
      Model description             Number of groups           Ancillary                        Min/Max             Specificity         Sensitivity
                                                               (percent)         (percent)                           (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
RUG-III--(CMI changes only)..  44........................  5.9               11.0              111/239           91.7               26.1%
                                                           (6.5)             (11.2)
RUG III (version 2001) RUG-    58........................  7.8               13.7              116/355           91.5               27.8
 III with new category                                     (8.3)             (13.7)
 ``Extensive Services and
 Rehabilitation''.
WIM 1--Weighted index model    58 plus a six-group         11.2              16.8              114/458           91.5               31.7%
 applied to Extensive           ancillary add-on system.   (12.5)            (17.6)
 Services (includes new
 category ``Extensive
 Services and
 Rehabilitation'').
WIM 2--Weighted index model    58 plus a six-group         13.4              19.0              111/456           92.3               32.2%
 applied to Extensive           ancillary add-on system.   (14.2)            (19.4)
 Services beneficiaries
 (includes new category
 ``Extensive Services and
 Rehabilitation'') and to
 Rehabilitation, Special
 Care, and Clinically Complex.
UWIM--Unweighted index model   58 plus a four-group        10.9              17.1              104/447           92.0               30.8%
 applied to Extensive           ancillary add-on system.   (12.6)            (18.0)
 Services (includes new
 category ``Extensive
 Services and
 Rehabilitation'') and to
 Rehabilitation, Special
 Care, and Clinically Complex.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
: Predicted total costs for the lowest and highest reimbursed groups in the refined case mix system.
: Note that all index model-based refinements also include the ``Extensive Services and Rehabilitation'' category.
: Specificity is measured as the proportion of beneficiaries who are not in the top 10 percent of predicted ancillary charges and also not in the top 10
  percent in terms of actual ancillary charges.
: Sensitivity is measured as the proportion of beneficiaries in the top 10 percent in terms of both predicted and actual ancillary charges.
Data sources: Medicare claims, Minimum Data Set 1995-1997.

    2. RUG-III (proposed, version 2001): Adding the new Extensive 
Services and Rehabilitation categories resulted in small 
improvements in statistical performance. The validation sample R-
squared increased to 7.8 percent for ancillary charges, an increase 
of about 2 percent relative to RUG-III, and to 13.7 percent for 
total costs. However, the improvements associated solely with a 
change in the RUG-III (proposed, version 2001) methodology were 
substantially less than those produced by the other potential 
refinements that incorporated a combination of RUG-III and index 
model-based refinements.
    In conducting this analysis, new CMIs had to be constructed. For 
this research, the CMIs were developed from the same 1995 through 
1997 staff time measurement studies that were used to construct the 
indices used under the current RUG-III methodology. (See Table 3)
    3. Weighted Index Model (WIM1): Under WIM1, Extensive Services 
beneficiaries (including those in the new Extensive Services and 
Rehabilitation categories) would receive an ancillary ``add-on'' 
based on the beneficiary's predicted, per diem ancillary costs for 
the index model qualifiers. The ancillary index has 6 groups with 
break points at costs at the 50th percentile or below, from the 51st 
through 75th percentile, from the 76th through 90th percentile, from 
the 91st through 95th percentile, from the 96th through 98th 
percentile, and the 99th percentile. The break points were 
calculated separately for each level of the RUG-III hierarchy.
    Application of WIM1 resulted in some improvement relative to 
RUG-III (proposed, version 2001). For the validation sample, the 
model accounted for 11 percent of the variance in ancillary charges 
and 17 percent of the variance in total costs. Nearly 32 percent of 
beneficiaries in the top 10 percent of ancillary charges were also 
in the top 10 percent in terms of predicted costs, compared to 27.8 
percent for RUG-III (proposed, version 2001).
    4. Weighted Index Model 2 (WIM2): Model WIM2 extends the use of 
the non-therapy ancillary index to 40 RUG-III (proposed, version 
2001) groups (14 Rehabilitation/Extensive Services, 3 Extensive 
Services, 14 Rehabilitation, 3 Special Care and 6 Clinically Complex 
groups), and accounted for 19 percent of the variance in total costs 
and 13 percent of the variance in ancillary charges. This was more 
than twice the R-squared of the existing RUG-III or the proposed 
RUG-III (version 2001) alone. The range of payments was similar to 
that of WIM1. Using WIM2, 32 percent of beneficiaries in the top 10 
percent in terms of actual ancillary charges were also in the top 10 
percent in terms of predicted ancillary charges.
    Table 4 shows the distribution of Medicare beneficiaries in the 
6 non-therapy ancillary index levels by RUG-III (proposed version 
2001) category. The cut-off points used to define these groups are 
the same as for WIM1.
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    In the Regulatory Impact Analysis, we showed the distributional 
impact of these case mix refinements using the UWIM model proposed 
in this rule. Table 6 shows the distributional shifts of 
beneficiaries between the existing RUG-III model and the WIM2 
Option. In addition, Tables 6.1 and 6.2 show the projected rates 
using the WIM2 model. (See Table 12 in the Proposed rule for the 
UWIM model.)
    5. Unweighted Index Model (UWIM): This model is the unweighted 
counterpart to WIM2. While this model performed better than the 
current RUG-III and proposed RUG-III (version 2001) models, it was 
slightly outperformed by WIM2. However, we regard the unweighted 
model as preferable to WIM2, for two reasons. First, it is 
relatively simple, and employs a more familiar methodology similar 
to that used in classifying beneficiaries into the Extensive 
Services groups. Second, in developing the weighted models, the 
researchers had to rely more heavily on imputed data to develop the 
number of index levels, and the cut-off points. Therefore, even 
though the WIM models appear to have slightly more predictive power, 
they are based upon more subjective criteria. However, the WIM 
models are subject to additional testing using the full PPS data 
base, and, based on the results, this model may be reconsidered.
    UWIM accounted for 11 percent of the variance in ancillary 
charges and 17 percent of the variance in total costs. The 
sensitivity and specificity of the model were slightly less than for 
WIM2. Using UWIM, beneficiaries are split into four groups based on 
the number of index model variables present.

------------------------------------------------------------------------
                                                               Ancillary
                    Number of qualifiers                         level
------------------------------------------------------------------------
0...........................................................          2
1-2.........................................................          3
3-5.........................................................          4
6 or more...................................................          5
------------------------------------------------------------------------

    Table 5 shows the distribution of Medicare beneficiaries in the 4 
non-therapy ancillary index levels by RUG-III (proposed, version 2001) 
category.

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BILLING CODE 4120-03-c
    The models described here focus on those upper RUG-III categories 
that are reflective of the skilled care needs of Medicare 
beneficiaries. However, since there are a small number of beneficiaries 
in the research data base who may be classified into one of the lower 
RUG-III levels, we also applied the WIM and UWIM models to the Impaired 
Cognition, Behavior, and Physical Function categories. Almost all the 
beneficiaries in these three levels of the RUG-III hierarchy

[[Page 19290]]

grouped into the two lowest non-therapy ancillary index levels. In 
fact, in the UWIM model, 90 percent of the Impaired Cognition, 87.8 
percent of the Behavior and 85 percent of the Physical Function 
observations fell into the lowest level of the non-therapy ancillary 
index. In these analyses, we did find a relationship between costs and 
the index value for these beneficiaries. However, including these 
groups in the model resulted in minimal additional improvement in 
statistical performance (See Table 7).
    While these groups have not been included in the refinements 
proposed in this rule, we will include these RUG-III categories in 
additional analyses using the full PPS data base. Based on the results, 
we will review the applicability of the non-therapy ancillary index to 
the Impaired Cognition, Behavior, and Physical Function categories.

  Table 7.--Statistical Performance of Potential RUG-III refinements--
                            Model Description
------------------------------------------------------------------------
                                                  R-squared validation
                                                  sample (test sample)
                                  Number of    -------------------------
      Model description             groups       Ancillary
                                                  charges    Total costs
                                                 (percent)    (percent)
------------------------------------------------------------------------
UWIM--Unweighted index model   58 plus a four-         10.9         17.1
 applied to Extensive           group                 -12.6        -18.0
 Services residents (includes   ancillary add-
 new category ``Extensive       on system.
 Services and
 Rehabilitation'') jkand to
 Rehabilitation, Special
 Care, and Clinically Complex
 residents.
UWIM-ALL-Unweighted index      58 plus a four-         10.9         17.1
 model applied to all           group                 -12.7       -18.2
 residents (including new       ancillary add-
 ``Extensive Services and       on system.
 Rehabilitation'' category).
------------------------------------------------------------------------
Data sources: Medicare claims, Minimum Data Set 1995-1997.

G. RUG-III Medications Data

    Although the bulk of the development and analysis of potential RUG-
III refinements to date have been based on Medicare claims data, the 
Section U drug cost data holds unique promise as a source of detailed 
information on the drug use of particular beneficiaries. In the coming 
months, once the characteristics of these new data are more fully 
understood, we plan to use Section U drug cost data to analyze the 
behavior of high-cost individuals as well as the potential effects of 
case mix refinements.
1. Creation of MDS-Based Drug Cost Measures
    The following types of pricing are available in the Medispan Master 
Drug Data Base: Average wholesale price (AWP), Direct Price, Wholesaler 
Acquisition Cost, HCFA Federal Financial Participation (FFP) limit 
price, Average AWP, and the generic equivalent average price. While we 
translated the medications listed on the MDS with NDC codes to 
therapeutic classes and sub-classes, we needed to cross-link the two 
data systems to identify the cost of the medications. We used the 
average wholesale price (AWP) for medication costs for several reasons. 
The AWP is a national figure and not subject to regional influence 
resulting from purchasing contracts and other local market factors. 
This helps to account for the cost of dispensing. Using AWP is 
conservative when the price of a medication is relatively low or high, 
and AWP is not subject to institutional cost-shifting. Additionally, 
AWP, compared to other pricing options, was found to yield the lowest 
amount of missing cost data.
    In evaluating the drug regimens of beneficiaries in our sample, we 
realized that because of the way some drugs are packaged, the AWP price 
may reflect a price for multiple doses. Examples include injectables, 
inhalants, elixirs, and other drugs that indicated a multi-day supply 
in the drug description. We generated a printout of all potential 
problems of this sort. A clinical pharmacist reviewed the potential 
appropriateness of multiple use and long-acting dosage forms and unique 
treatment regimens for bundling. The Physician Desk Reference, the Red 
Book and other sources were used in addition to the documented AWP to 
determine a likely constant by which to divide the cost for each 
potential problem. In many instances, not enough information was 
available to make an appropriate estimate. In these cases, the drug 
cost remained as indicated by the AWP.
    While we were able to successfully map NDC codes to drug names 
(nested within therapeutic classes and sub-classes), successfully 
matching to a drug cost required more information. Specifically, 
assigning an AWP to a drug requires both the strength of the drug 
administered and complete information regarding the frequency with 
which the medication was administered. Unfortunately, many of the NDC 
codes included in the MDS data did not include information regarding 
strength.\1\ For example, we may know that a beneficiary received 
aspirin, but we do not know if it was 80 mg, 325 mg, or some other 
strength. As a result, we have substantial missing cost data. Because 
of the extent of missing data, we opted to impute the drug costs as 
opposed to excluding cases for which we did not have complete drug cost 
information. Analyses of the extent of missing data revealed that 
missing data did not vary by RUG group, State, year, or type of 
medication.
---------------------------------------------------------------------------

    \1\ The MDS instruction manual references NDC codes which do not 
contain drug strength information.
---------------------------------------------------------------------------

    Nonetheless, by imputing missing drug costs, we have introduced 
random variations in the data that were not generated by the underlying 
process that we are attempting to model. Consequently, variables that 
explain variance in non-missing data will have no explanatory power for 
imputed data. The coefficients on these variables will, therefore, be 
biased toward zero. This bias will be small if the proportion of total 
variance attributable to imputation is small. However, variables 
explicitly or implicitly used in the imputation process may have 
explanatory power with regard to the imputed values. For example, if 
the RUG group is implicitly used as part of the imputation process, it 
theoretically could explain more of the variance in the dependent 
variable simply because RUG was used as part of the imputation 
algorithm. The coefficients of the variables used to impute cost data 
may be amplified relative to other coefficients in the explanatory 
models. Depending on the correlation between the RUG groups and other 
variables, these coefficients will also be biased in unpredictable 
ways. This problem could be small if the between-group variance is 
small (overall variance can be broken down into between-group and 
within-group components). Given the potential for introducing bias in 
our models, we opted to create two imputation algorithms.
2. RUG-Based Imputation Method
    We assigned drug costs based on NDC codes recorded on Section U of 
the MDS evaluation forms using the following algorithm. First, if the 
NDC code was listed among the approximately 150,000 codes tracked by 
Medispan, we used the pricing information collected by Medispan. If the 
NDC code was not listed, but the exact name of the generic drug was 
listed, we calculated pricing as follows. In those instances where the 
RUG code (as calculated for our recording purposes and provided on the 
``raw'' data files) was observed among beneficiaries using the drug, if 
only one cost was associated with the drug, it was used. If multiple 
costs were associated, the most likely cost was chosen based on the 
distribution of observed costs among beneficiaries. If the RUG code was 
not observed, we applied the process to a pooled distribution over all 
of the medication codes observed among all of the MDS records for all 
of the beneficiaries. If we could not match the exact generic name, we 
sought a match for the leading words in the generic name, and if 
matched, we applied the same approach (that is, selecting the most 
likely drug cost based on the RUG distribution). In cases where no 
reasonable match could be found, no price was assigned to the 
medication. This algorithm was iterative over the observed distribution 
among beneficiaries.

[[Page 19291]]

3. State and Year-Based Imputation Method
    Because of our concerns regarding bias, we implemented a similar, 
but alternative algorithm to estimate the drug costs based on data 
contained in Section U of the MDS. We thought that missing data might 
vary systematically by State owing to differing data collection 
procedures (and software) among States. Further, we considered that 
coding of drugs might have improved over time. If both assumptions were 
true, the pattern of missing data would vary systematically through 
time and place. It follows that an imputation method based on time and 
place would be reasonable. If the NDC code was not listed among the 
150,000 Medispan codes, but the exact name of the generic drug was 
listed, we calculated pricing as follows. If only one cost was 
associated with the drug within a given State and year, it was used. If 
multiple costs were associated, we chose the most likely cost based on 
the distribution of observed costs among beneficiaries. If we could not 
match the exact generic name, we sought a match for the leading words 
in the generic name, and if matched, we applied the same approach (that 
is, selecting the most likely drug cost using the State and year). In 
cases where no reasonable match could be found, no price was assigned 
to the medication. As with the RUG-based imputation measure, this 
algorithm was iterative over the observed distribution among 
beneficiaries.
    During the course of initial analyses, we noted discrepancies 
between costs as measured by MDS Section U and costs as measured by SNF 
claims. The discrepancies between the Section U-based drug cost measure 
and the drug cost measure estimated from SNF claims may be due to 
several factors. The pharmacy cost detail codes used from the SNF claim 
include treatments that would not necessarily be included on the 
Section U according to the MDS instructions. For example, radiation 
treatment supplies and other procedure-related drug supplies are 
clearly not included on Section U. Furthermore, while applying the cost 
to charge ratio for pharmacy charges might appear to estimate 
``costs'', this adjustment may only capture the administrative step-
down from the facility cost report since, in all but the largest 
facilities, consultant pharmacy firms supply all drugs to 
beneficiaries. The charge to the facility includes both its ``cost'' 
(from the pharmaceutical firm or supplier) as well as the value-added 
labor of the facility's consultant pharmacists who perform its drug 
utilization review, along with any mark-up that the consultant pharmacy 
contractor applies. These charges for services provided represent 
``costs'' to the facility, and so applying the facility cost to charge 
ratio only discounts its administrative step-down. Finally, in most 
States and areas, the typical practice in nursing homes is for a new 
admission to have a 30-day blister pack ordered for each specified drug 
the resident was taking upon admission to the nursing home. Since most 
residents came from the hospital where drugs are dispensed daily, they 
generally arrive at the nursing home with less than a one-day supply of 
medications. As a result, the transition and ordering of medications 
must be very quick. In turn, the ``charge'' for the drug will, in many 
instances, include drugs that may have already been changed by the 14th 
day of the stay, when the MDS Section U would be completed. The net 
result of this practice of delivering and billing for a full 30-day 
supply is a higher observed cost than would be produced by estimating 
per diem drug cost based on an enumeration of the drugs received.
    Thus, we believe that Section U-based drug cost measures may 
eventually provide further insight into drug utilization patterns in 
the SNF population as these potential sources of data inconsistency 
yield to further analysis. However, in view of the delay in 
implementing the collection of medication data on the MDS, and given 
the current need to address and resolve these issues before proceeding, 
the analysis of potential RUG-III refinements described in this report 
was based on SNF claims data.

[FR Doc. 00-8481 Filed 4-7-00; 8:45 am]
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