[Federal Register Volume 68, Number 149 (Monday, August 4, 2003)]
[Rules and Regulations]
[Pages 46036-46072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19677]



[[Page 46035]]

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

Part IV





Department of Health and Human Services





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



Centers for Medicare & Medicaid Services



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



41 CFR Parts 409, 411, et al.



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

  Federal Register / Vol. 68, No. 149 / Monday, August 4, 2003 / Rules 
and Regulations  

[[Page 46036]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 411, 413, 440, 483, 488, and 489

[CMS-1469-F]
RIN 0938-AL90


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

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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

SUMMARY: This final rule updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2004. Annual updates to the PPS rates are required 
by section 1888(e) of the Social Security Act (the Act), as amended by 
the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), and the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA), relating to Medicare payments and 
consolidated billing for SNFs.

DATES: Effective Date: This regulation becomes effective on October 1, 
2003.

FOR FURTHER INFORMATION CONTACT: John Davis, (410) 786-0008 (for 
information related to the Wage Index, and for information related to 
swing-bed providers).
    Ellen Gay, (410) 786-4528 (for information related to the case-mix 
classification methodology, and for information related to swing-bed 
providers).
    Sheila Lambowitz, (410) 786-7605 (for information related to the 
SNF Market Basket Index and forecast error).
    Bill Ullman, (410) 786-5667 (for information related to level of 
care determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, PO Box 371954, Pittsburgh, PA 15250-7954. 
The cost for each copy is $10. 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. As an alternative, you can also 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 SNF Services Under Part A of 
the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 (the BBA) for 
Updating the SNF PPS
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (the BBRA)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (the BIPA)
    E. General Overview of the SNF PPS
    1. Payment Provisions--Federal Rates
    2. Payment Provisions--Initial Transition Period
    F. Use of the SNF Market Basket Index
II. Provisions of the Proposed Rule and the Supplemental Proposed 
Rule
III. Analysis of and Response to Public Comments
    A. Update of Federal Payment Rates Under the SNF PPS
    1. Costs and Services Covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    B. Case-Mix Adjustment
    C. Wage Index Adjustment to Federal Rates
    1. Selecting the Most Appropriate Wage Index
    2. Determining the Labor-Related Portion of the SNF PPS
    3. Calculating the Budget Neutrality Factor
    D. Publication of Updates to the Federal Rates
    E. Relationship of RUG-III Classification System to Existing SNF 
Level-of-Care Criteria
    F. Expiration of Initial Three-Year Transition Period
    G. Example of Computation of Adjusted PPS Rates and SNF Payment
    H. SNF Market Basket Index
    1. Background
    2. Use of the SNF Market Basket Percentage
    3. Market Basket Forecast Error Adjustment
    4. Federal Rate Update Factor
    I. Consolidated Billing
    J. Application of the SNF PPS to SNF Services Furnished by 
Swing-Bed Hospitals
    K. Distinct Part Definition
    L. Quality of Care Efforts under the SNF PPS
IV. Provisions of the Final Rule
V. Waiver of Proposed Rulemaking
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered
    D. Conclusion

Regulation Text

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

AHE Average Hourly Earnings
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 
1999 (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (Pub. L. 106-554)
CAH Critical Access Hospital
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
ECEC Employer Cost for Employee Compensation
ECI Employment Cost Index
FI Fiscal Intermediary
FR Federal Register
FY Fiscal Year
GAO General Accounting Office
HCPCS Healthcare Common Procedure Coding System
IFC Interim Final Rule with Comment Period
MDS Minimum Data Set
MedPAC Medicare Payment Advisory Commission
MEDPAR Medicare Provider Analysis and Review File
MSA Metropolitan Statistical Area
NF Nursing Facility
PPI Producer Price Indices
PPS Prospective Payment System
QIO Quality Improvement Organization
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act (Pub. L. 96-354)
RIA Regulatory Impact Analysis
RUG Resource Utilization Groups
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
UMRA Unfunded Mandates Reform Act (Pub. L. 104-4)

I. Background

    On May 16, 2003, we published a proposed rule (hereinafter referred 
to as the ``proposed rule'') in the Federal Register (68 FR 26758), 
setting forth the proposed updates to the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for FY 2004. Annual updates to the PPS rates are required by

[[Page 46037]]

section 1888(e) of the Social Security Act (the Act), as amended by the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
(Pub. L. 106-113) (the BBRA) and the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) (the 
BIPA), relating to Medicare payments and consolidated billing for SNFs. 
In the proposed rule, we invited public comments on a number of 
proposed revisions and technical corrections to the associated 
regulations. Following the publication of that proposed rule, we then 
published a supplemental proposed rule (hereinafter referred to as the 
``supplemental proposed rule'') on June 10, 2003 (68 FR 34768), in 
which we invited public comments on possibly revising the annual update 
methodology by establishing an adjustment to account for forecast 
error. In addition, we also invited comments on ways to ensure that 
additional payments that could result from such an adjustment would be 
used to promote quality of care in the SNF setting (including direct 
care services to residents).

A. Current System for Payment of SNF Services Under Part A of the 
Medicare Program

    Section 4432 of the Balanced Budget Act of 1997 (Pub. L. 105-33) 
(the BBA) amended section 1888 of the Act to provide for the 
implementation of a per diem PPS for SNFs, covering all costs (routine, 
ancillary, and capital-related) 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. We are updating 
the per diem payment rates for SNFs for FY 2004. Major elements of the 
SNF PPS include:
    [sbull] Rates. Per diem Federal rates were established for urban 
and rural areas using allowable costs from FY 1995 cost reports. These 
rates also included an estimate of the cost of services that, before 
July 1, 1998, were paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay. The rates were 
adjusted annually using a SNF market basket index. Rates were case-mix 
adjusted using a classification system (Resource Utilization Groups, 
version III (RUG-III)) based on beneficiary assessments (using the 
Minimum Data Set (MDS) 2.0). The rates were also adjusted by the 
hospital wage index to account for geographic variation in wages. (In 
section III.C of this final rule, we discuss the wage index adjustment 
in detail.) A correction notice was published on December 27, 2002 (67 
FR 79123) that announced corrections to several of the wage factors. 
Additionally, as noted in the July 31, 2002 update notice (67 FR 
49798), section 101 of the BBRA and certain sections of the BIPA also 
affect the payment rate.
    [sbull] Transition. The SNF PPS included an initial 3-year, phased 
transition that blended a facility-specific payment rate with the 
Federal case-mix adjusted rate. For each cost reporting period after a 
facility migrated to the new system, the facility-specific portion of 
the blend decreased and the Federal portion increased in 25 percentage 
point increments. For most facilities, the facility-specific rate was 
based on allowable costs from FY 1995; however, since the last year of 
the transition was FY 2001, all facilities were paid at the full 
Federal rate by the following fiscal year (FY 2002). Therefore, we are 
no longer including adjustment factors related to facility-specific 
rates for the coming fiscal year.
    [sbull] Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the 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 involving level of 
care determinations with the outputs of beneficiary assessment and RUG-
III classifying activities. We discuss this coordination in greater 
detail in section III.E of this final rule. Another SNF benefit 
requirement is that the SNF must be certified by Medicare as meeting 
the requirements for program participation contained in section 1819 of 
the Act. This provision of the law defines a SNF as ``* * * an 
institution (or a distinct part of an institution). * * *'' In section 
III.K of this final rule, we discuss a clarification that we are making 
in defining the term ``distinct part'' with respect to SNFs.
    [sbull] Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills for almost all of the services that the resident receives during 
the course of a covered Part A stay. (In addition, this provision 
places with the SNF the Medicare billing responsibility for physical, 
occupational, and speech-language therapy that the resident receives 
during a noncovered stay.) The statute excludes from the consolidated 
billing provision a few services--primarily those of physicians and 
certain other types of practitioners--which remain separately billable 
to Part B by the outside entity that furnishes them. We discuss this 
provision in greater detail in section III.I of this final rule.
    [sbull] Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section III.J of this final rule.
    [sbull] Technical corrections. We are also taking this opportunity 
to make a number of technical corrections in the text of the 
regulations, as discussed in greater detail in section IV of this final 
rule.

B. Requirements of the Balanced Budget Act of 1997 (the BBA) for 
Updating the SNF PPS

    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 fiscal year.
    2. The case-mix classification system to be applied with respect to 
these services during the fiscal year.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In the July 30, 1999 final rule (64 FR 41670), we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to modifications in the RUG-III classification 
structure (see section III.E of this final rule).

C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (the BBRA)

    There were several provisions in the BBRA that resulted in 
adjustments to the SNF PPS. These provisions were described in detail 
in the final rule that we published in the Federal Register on July 31, 
2000 (65 FR 46770). In particular, section 101 of the BBRA provided for 
a temporary 20 percent increase in the per diem adjusted payment rates 
for 15 specified RUG-III groups (SE3, SE2, SE1, SSC, SSB, SSA, CC2, 
CC1, CB2, CB1, CA2, CA1, RHC, RMC, and RMB). Under the statute, this 
temporary increase remains in effect

[[Page 46038]]

until the later of October 1, 2000, or the implementation of case-mix 
refinements in the PPS. Section 101 also included a 4 percent across-
the-board increase in the adjusted Federal per diem payment rates each 
year for FYs 2001 and 2002, exclusive of the 20 percent increase. 
Accordingly, this 4 percent temporary increase has now expired.
    We included further information on all of the provisions of the 
BBRA that affect the SNF PPS in Program Memoranda A-99-53 and A-99-61 
(December 1999), and Program Memorandum AB-00-18 (March 2000). In 
addition, for swing-bed hospitals with more than 49 (but less than 100) 
beds, section 408 of the BBRA provided for the repeal of certain 
statutory restrictions on length of stay and aggregate payment for 
patient days, effective with the end of the SNF PPS transition period 
described in section 1888(e)(2)(E) of the Act. In the July 31, 2001 
final rule (66 FR 39562), we made conforming changes to the regulations 
in Sec.  413.114(d), effective for services furnished in cost reporting 
periods beginning on or after July 1, 2002 to reflect section 408 of 
the BBRA.

D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (the BIPA)

    The BIPA included several provisions that resulted in adjustments 
to the PPS for SNFs. These provisions were described in detail in the 
final rule that we published in the Federal Register on July 31, 2001 
(66 FR 39562) as follows:
    [sbull] Section 203 of the BIPA exempted critical access hospital 
(CAH) swing-beds from the SNF PPS; we included further information on 
this provision in Program Memorandum A-01-09 (January 16, 2001).
    [sbull] Section 311 of the BIPA eliminated the one percent 
reduction in the SNF market basket that the statutory update formula 
had previously specified for FY 2001, and changed the one percent 
reduction specified for FYs 2002 and 2003 to a 0.5 percent reduction. 
This section also required us to conduct a study of alternative case-
mix classification systems for the SNF PPS, and to submit a report to 
the Congress by January 1, 2005.
    [sbull] Section 312 of the BIPA provided for a temporary 16.66 
percent increase in the nursing component of the case-mix adjusted 
Federal rate for services furnished on or after April 1, 2001, and 
before October 1, 2002. Accordingly, this temporary increase has now 
expired.
    [sbull] Section 313 of the BIPA repealed the consolidated billing 
requirement for services (other than physical, occupational, and 
speech-language therapy) furnished to SNF residents during noncovered 
stays, effective January 1, 2001. This provision also specified that 
consolidated billing applies only to services furnished to those 
individuals residing in an institution (or portion of an institution) 
that is actually certified by Medicare as a SNF.
    [sbull] Section 314 of the BIPA adjusted the payment rates for all 
of the rehabilitation RUGs to correct an anomaly under which the 
existing payment rates for the RHC, RMC, and RMB rehabilitation groups 
were higher than the rates for some other, more intensive 
rehabilitation RUGs.
    [sbull] Section 315 of the BIPA authorized us to establish a 
geographic reclassification procedure that is specific to SNFs, but 
only after collecting the data necessary to establish a SNF wage index 
that is based on wage data from nursing homes.
    We included further information on several of these provisions in 
Program Memorandum A-01-08 (January 16, 2001).

E. General Overview of the SNF PPS

    We implemented the Medicare SNF PPS for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, we pay SNFs through 
prospective, case-mix adjusted per diem payment rates applicable to all 
covered SNF services. These payment rates cover all the costs of 
furnishing covered skilled nursing services (routine, ancillary, and 
capital-related costs) other than costs associated with approved 
educational activities. Covered SNF services include post-hospital 
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 
covered Part A stay. A complete discussion of these provisions appears 
in the May 12, 1998 interim final rule (63 FR 26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the 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 incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of PPS (the 15-month period beginning July 1, 
1998) using a SNF market basket, and then standardized for the costs of 
facility differences in case-mix and for geographic variations in 
wages. The database used to compute the Federal payment rates excluded 
providers that received new provider exemptions from the routine cost 
limits, as well as costs related to payments for exceptions to the 
routine cost limits. 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 computed and applied separately the 
payment rates for facilities located in urban and rural areas. In 
addition, we adjusted 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, Resource Utilization Groups, version III (RUG-
III), uses beneficiary assessment data from the Minimum Data Set (MDS) 
completed by SNFs to assign beneficiaries to one of 44 RUG-III groups. 
The May 12, 1998 interim final rule (63 FR 26252) included a complete 
and detailed description of the RUG-III classification system, and a 
further discussion appears in section III.B of this final rule.
    The Federal rates in this final rule reflect an update to the rates 
that we published in the July 31, 2002 Federal Register (67 FR 49798) 
equal to the full change in the SNF market basket index. According to 
section 1888(e)(4)(E)(ii)(IV) of the Act, for FY 2004, we have adjusted 
the current rates by the full SNF market basket index. In addition, the 
FY 2004 rates will be adjusted by an additional 3.26 percent to reflect 
the cumulative forecast error since the start of the SNF PPS on July 1, 
1998.
2. Payment Provisions--Initial Transition Period
    The SNF PPS included an initial, phased transition from a facility-
specific rate (which reflected the individual facility's historical 
cost experience) to the Federal case-mix adjusted rate. The transition 
extended through the

[[Page 46039]]

facility's first three cost reporting periods under the PPS, up to, and 
potentially including, the one that began in FY 2001. Furthermore, 
according to section 102 of BBRA, a facility could nonetheless elect to 
be paid entirely under the Federal rates. Accordingly, starting with 
cost reporting periods beginning in FY 2002, we base payments entirely 
on the Federal rates and, as mentioned previously in this final rule, 
we no longer include adjustment factors related to facility-specific 
rates for the coming fiscal year.

F. Use of the SNF Market Basket Index

    Section 1888(e)(5) of the Act requires us to establish a SNF market 
basket index that reflects changes over time in the prices of an 
appropriate mix of goods and services included in the covered SNF 
services. The SNF market basket index is used to update the Federal 
rates on an annual basis, and is discussed in greater detail in section 
III.H of this final rule.

II. Provisions of the Proposed Rule and the Supplemental Proposed Rule

    The proposed rule that we published in the Federal Register on May 
16, 2003 (68 FR 26758) included proposed FY 2004 updates to the Federal 
payment rates used under the SNF PPS. In accordance with section 
1888(e)(4)(E)(ii)(IV) of the Act, the updates reflect the full SNF 
market basket percentage change for the fiscal year. The proposed rule 
also proposed introducing a one-year lag in the wage index data, 
similar to the PPS methodologies already being used for home health and 
inpatient rehabilitation facility services. This one-year lag would 
avoid the problems associated with multiple mid-year corrections in the 
hospital wage data. We also proposed clarifying the distinct part 
criteria to be used, in part, to help identify those SNFs that are 
hospital-based rather than freestanding. Further, we invited public 
comments on additional HCPCS codes that could represent the type of 
``high-cost, low probability'' services within certain service 
categories (that is, chemotherapy and its administration, radioisotope 
services, and customized prosthetic devices) that section 103 of the 
BBRA has authorized us to exclude from the SNF consolidated billing 
provision.
    In addition to discussing these general issues in the proposed 
rule, we also proposed making the following specific revisions to the 
existing text of the regulations:
    [sbull] In Sec.  409.20, we would make a technical correction to 
the cross-reference in paragraph (c).
    [sbull] We would revise Sec.  483.5 to include specific definitions 
of the terms ``distinct part'' and ``composite distinct part.'' This 
revision would also involve making conforming changes elsewhere in 
subpart B of part 483 of the regulations, as well as in parts 413 and 
440. In addition, we proposed correcting a typographical error that 
currently appears in the regulations text at Sec.  483.20(k)(1).
    In the supplemental proposed rule that we published in the Federal 
Register on June 10, 2003 (68 FR 34768), we invited public comments on 
the advisability of amending the regulations text at Sec.  
413.337(d)(2), to include an adjustment to the annual update of the 
previous fiscal year's rate that would account for forecast error in 
the SNF market basket, beginning with FY 2004. In addition, we also 
invited comments on methods for ensuring that additional payments that 
could result from that adjustment would be used to promote quality of 
care in the SNF setting (including direct care services to residents). 
We also proposed to make a technical correction to the second sentence 
of the regulations text in Sec.  413.345, in order to correct the 
spelling of the word ``standardized.''
    More detailed information on each of these issues, to the extent 
that we received public comments on them, appears in the discussion 
contained in the following section of this preamble.

III. Analysis of and Responses to Public Comments

    In response to the publication of the proposed rule on May 16, 2003 
(68 FR 26758) and the supplemental proposed rule on June 10, 2003 (68 
FR 34768), we received over 400 comments. Many consisted of form 
letters, in which we received multiple copies of an identically worded 
letter that had been signed and submitted by different individuals. 
Further, we received numerous comments from various trade associations 
and major organizations. Comments originated from nursing homes, 
hospitals, and other providers, suppliers, and practitioners, nursing 
home resident advocacy groups, health care consulting firms and private 
citizens. The following discussion, arranged by subject area, includes 
a description of the comments that we received, along with our 
responses.
    Comment: A few commenters expressed concern about the abbreviated 
comment periods available for the proposed rule and the supplemental 
proposed rule. They asserted that the shorter timeframes were 
burdensome, and affected their ability to furnish comprehensive 
responses. They asked us to provide the full 60-day comment period in 
the future.
    Response: While the proposed rule was not actually published until 
May 16, 2003, we note that this document went on public display at the 
Office of the Federal Register several days earlier, on May 10, 2003. 
Accordingly, the contents of the proposed rule were, in fact, publicly 
available for the full 60-day comment period. Further, we note that in 
contrast to the proposed rule, the supplemental proposed rule did not 
attempt to address the SNF PPS in a comprehensive manner, but instead 
focused exclusively on a single issue--the possibility of introducing 
an adjustment to account for forecast error. As noted in the preamble 
to the supplemental proposed rule (68 FR 34772), given the extremely 
narrow scope of this document, we believe that even a comment period of 
less than 60 days provided interested parties with sufficient 
opportunity to comment adequately on it.

A. Update of Federal Payment Rates Under the SNF PPS

    This final rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2003. The schedule incorporates per diem Federal rates that 
provide Part A payment for all costs of services furnished to a 
beneficiary in a SNF during a Medicare-covered stay.
1. Costs and Services Covered by the Federal Rates
    The Federal rates apply to all costs (routine, ancillary, and 
capital-related costs) of covered SNF services other than costs 
associated with approved educational activities as defined in Sec.  
413.85. Under section 1888(e)(2) of the Act, covered SNF services 
include post-hospital 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 through 26297)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2004 rates reflect an update using the full amount of the 
latest market basket index. The FY 2004 market basket increase factor 
is 3.0

[[Page 46040]]

percent. A complete description of the multi-step process is delineated 
in the May 12, 1998 interim final rule (63 FR 26252). We note that in 
accordance with section 101(a) of the BBRA and section 314 of the BIPA, 
the existing, temporary increase in the per diem adjusted payment rates 
of 20 percent for certain specified RUGs (and 6.7 percent for certain 
others) remains in effect until the implementation of case-mix 
refinements. As we discuss elsewhere in this final rule, while we are 
proceeding with our ongoing research in this area, we are not 
implementing case-mix refinements in this final rule.
    We used the SNF market basket to adjust each per diem component of 
the Federal rates forward to reflect cost increases occurring between 
the midpoint of the Federal fiscal year beginning October 1, 2002, and 
ending September 30, 2003, and the midpoint of the Federal fiscal year 
beginning October 1, 2003, and ending September 30, 2004, to which the 
payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) 
of the Act, the payment rates for FY 2004 are updated by a factor equal 
to the full market basket index percentage increase to determine the 
payment rates for FY 2004. In addition, the FY 2004 rates will be 
adjusted by an additional 3.26 percent to reflect the cumulative 
forecast error since the start of the SNF PPS on July 1, 1998. The 
rates are further adjusted by a wage index budget neutrality factor, 
described later in this section. Tables 1 and 2 reflect the updated 
components of the unadjusted Federal rates for FY 2004.

                            Table 1.--FY 2004 Unadjusted Federal Rate Per Diem Urban
----------------------------------------------------------------------------------------------------------------
                                                      Nursing--case-  Therapy--case-  Therapy--non-   Non-case-
                   Rate component                           mix             mix          case-mix        mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.....................................        $129.96          $97.89         $12.89        $66.32
----------------------------------------------------------------------------------------------------------------


                            Table 2.--FY 2004 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                                      Nursing--case-  Therapy--case-  Therapy--non-   Non-case-
                   Rate component                           mix             mix          case-mix        mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.....................................        $124.16         $112.89         $13.77        $67.55
----------------------------------------------------------------------------------------------------------------

B. Case-Mix Adjustment

    Under the BBA, we must publish the SNF PPS case-mix classification 
methodology applicable for the next Federal fiscal year before August 1 
of each year. As noted in the following discussion, we are proceeding 
with our ongoing research regarding possible refinements in the 
existing case-mix classification system, but we are not implementing 
the refinements in this final rule.
    As discussed previously in this final rule, section 101(a) of the 
BBRA provided for a temporary 20 percent increase in the per diem 
adjusted payment rates for 15 specified RUG-III groups. This 
legislation specified that the 20 percent increase would be effective 
for SNF services furnished on or after April 1, 2000, and would 
continue until the later of: (1) October 1, 2000, or (2) implementation 
of a refined case-mix classification system under section 
1888(e)(4)(G)(i) of the Act that would better account for medically 
complex patients.
    In the SNF PPS proposed rule for FY 2001 (65 FR 19190, April 10, 
2000), we proposed making an extensive, comprehensive set of 
refinements to the existing case-mix classification system that 
collectively would have significantly expanded the existing 44-group 
structure. However, when our subsequent validation analyses indicated 
that the refinements would afford only a limited degree of improvement 
in explaining resource utilization relative to the significant increase 
in complexity that they would entail, we decided not to implement them 
at that time (see the FY 2001 final rule published July 31, 2000 (65 FR 
46773)). Nevertheless, since the BBRA provision had demonstrated a 
Congressional interest in improving the ability of the payment system 
to account for the care furnished to medically complex patients in 
SNFs, we continued to conduct research in this area.
    The Congress subsequently enacted section 311(e) of the BIPA, which 
directed us to conduct a study of the different systems for 
categorizing patients in Medicare SNFs in a manner that accounts for 
the relative resource utilization of different patient types, and to 
issue a report with any appropriate recommendations to the Congress by 
January 1, 2005. The extended timeframe for conducting the study, and 
the broad mandate in the BIPA to consider various classification 
systems and the full range of patient types, stood in sharp contrast to 
the BBRA language regarding more incremental refinements to the 
existing case-mix classification system under section 1888(e)(4)(G)(i) 
of the Act. This underscored the fact that implementing the latter type 
of refinements to the existing system in order to better account for 
medically complex patients need not await the completion of the more 
comprehensive changes envisioned in the BIPA. Accordingly, we 
considered the possibility of including these refinements as part of 
last year's annual update of the SNF payment rates.
    However, in the July 31, 2002 update notice (67 FR 49801), we 
determined that the research was not sufficiently advanced to implement 
any case-mix refinements at that time, thus leaving the current 
classification system in place. This also left in place the temporary 
add-on payments enacted in section 101(a) of the BBRA. Further, while 
we have continued with our ongoing research regarding possible 
refinements in the existing case-mix classification system, this 
research has not yet provided the basis for proceeding with those 
refinements. Accordingly, we are not implementing case-mix refinements 
in this final rule.
    As a result, the payment rates set forth in this final rule reflect 
the continued use of the 44-group RUG-III classification system 
discussed in the May 12, 1998 interim final rule (63 FR 26252). We are 
also maintaining the add-ons to the Federal rates for the specified 
RUG-III groups required by section 101(a) of the BBRA and subsequently 
modified by section 314 of the BIPA. The case-mix adjusted payment 
rates are listed separately for urban and rural SNFs in Tables 3 and 4, 
with the corresponding case-mix

[[Page 46041]]

values. These tables do not reflect the temporary add-on to the 
specified RUG-III groups provided in the BBRA, which is applied only 
after all other adjustments (wage and case-mix) have been made.
    Meanwhile, we are continuing to explore both short-term and longer-
range revisions to our case-mix classification methodology. In July 
2001, we awarded a contract to the Urban Institute for research to aid 
us in making incremental refinements to the case-mix classification 
system under section 1888(e)(4)(G)(i) of the Act and to begin the case-
mix study mandated by section 311(e) of the BIPA. The results of our 
current research will be included in the report to the Congress that 
section 311(e) of the BIPA requires us to submit by January 1, 2005. As 
we noted in the May 10, 2001 proposed rule (66 FR 23990), this research 
may also support a longer term goal of developing more integrated 
approaches for the payment and delivery system for Medicare post acute 
services in general. This broader, ongoing research project will pursue 
several avenues in studying various case-mix classification systems. 
Our preliminary research has focused on incorporating comorbidities and 
complications into the classification strategy, and we will thoroughly 
explore and evaluate this approach and other approaches (including 
procedures that might account more accurately for ancillary services) 
in our ongoing work.
    Comment: Several commenters commended our decision not to implement 
case-mix refinements in FY 2004. They expressed the belief that 
incremental refinements may only represent ``patches'' on a system that 
needs a more comprehensive redesign, and could destabilize an already 
vulnerable health care industry. Other commenters urged us to move 
quickly to identify and implement short-term incremental improvements 
to provide more appropriate reimbursement for patients with heavy non-
therapy ancillary needs.
    Response: As discussed in the proposed rule, we continue to explore 
both short-term case-mix refinements and longer-range redesign of the 
SNF PPS methodology. Our primary goal is to enhance the accuracy of our 
reimbursement system by more closely matching payment with resource 
utilization, particularly in the utilization of non-therapy 
ancillaries. We have made this issue a research priority to ensure 
continued access to quality care for this very vulnerable heavy care 
population. However, we are cautious about premature implementation of 
any policy that has not been thoroughly analyzed to allocate payment 
dollars more accurately. Therefore, we have decided not to implement 
case-mix refinements for FY 2004. However, we are proceeding with our 
research and plan to evaluate the feasibility of implementing 
refinements again next year.
    Comment: Several commenters agreed with the need for short-term 
action to stabilize the SNF PPS and suggested some alternative 
methodologies for achieving these goals, including more frequent 
updating of the SNF market basket and the development of an outlier 
pool that could address beneficiaries with heavy non-therapy ancillary 
needs. A few commenters suggested addressing the non-therapy ancillary 
needs by seeking a legislative change to redirect the 6.7 percent add-
on payments for the 14 RUG-III therapy groups to those RUG-III groups 
used for beneficiaries with complex medical conditions and high 
utilization of non-therapy ancillary services.
    Response: Each of the suggestions discussed above would require 
statutory authority that does not currently exist. However, we will 
carefully consider the comments that we received and use these comments 
to assist us in exploring potential solutions. While we will continue 
to focus on the needs of those beneficiaries who require an unusually 
heavy combination of clinical care, rehabilitation services, and 
ancillary utilization, we will also continue to consider a broad range 
of potential changes. We expect to discuss our research findings by 
January 1, 2005, in the report to the Congress that is required under 
section 311(e) of the BIPA.
    Comment: Most of the commenters supported the continuation of our 
long-term research efforts designed to identify possible alternatives 
to the existing SNF PPS. Many commenters suggested expanding 
communications with providers and other interest groups in a manner 
similar to the approach that we have adopted for Open Door meetings. 
Most commenters recommended that we also enhance communications by 
sharing our research findings, and by including a detailed analysis in 
the 2005 report to the Congress.
    Response: We appreciate the interest shown by providers and other 
stakeholders in our continuing research. We plan to consider all of the 
comments that we have received regarding potential changes to the 
classification system, as well as to other components of the SNF PPS, 
as we continue our analysis and prepare the required report to the 
Congress. As we pursue our research effort and evaluate our options, we 
will seek appropriate means to establish ongoing communication with, 
and input from, all stakeholder groups.
    Comment: Most commenters urged us to minimize provider burden by 
providing adequate lead time for comment and for implementation of any 
significant changes. One commenter also suggested that we improve our 
coordination of related projects such as the Minimum Data Set (MDS) 3.0 
implementation and the SNF PPS redesign, so that providers can 
incorporate changes smoothly and provide necessary staff training with 
minimal disruption to staff and patients.
    Response: We recognize the inherent difficulties in coordinating 
potential changes to the MDS with potential changes to the SNF PPS. In 
fact, our staff in the payment, quality monitoring, and survey and 
certification areas have addressed this issue by establishing an in-
house work group to share information and coordinate activities. By 
working together, we believe that we enhance our effectiveness and can 
introduce changes with minimal disruption and burden to providers. In 
addition, the introduction of the MDS 3.0 and any case-mix refinement 
changes to the SNF PPS would be accomplished through established 
administrative processes that will solicit stakeholder input. Finally, 
we fully agree that providers and other stakeholders will need adequate 
lead time to implement significant policy and operational changes.
BILLING CODE 4120-01-P

[[Page 46042]]

[GRAPHIC] [TIFF OMITTED] TR04AU03.011


[[Page 46043]]


[GRAPHIC] [TIFF OMITTED] TR04AU03.012


[[Page 46044]]


[GRAPHIC] [TIFF OMITTED] TR04AU03.013


[[Page 46045]]


[GRAPHIC] [TIFF OMITTED] TR04AU03.014

BILLING CODE 4120-01-C

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs. We are continuing that practice for FY 2004.
    Section 315 of the BIPA authorizes us to establish a 
reclassification system for SNFs, similar to the hospital methodology. 
This geographic reclassification system cannot be implemented until we 
have collected the data necessary to establish an area wage index for 
SNFs based on SNF wage data. We presented a comprehensive discussion of 
this wage data in the May 10, 2001 proposed rule (66 FR 23984) and the 
July 31, 2001 final rule (66 FR 39562).
1. Selecting the Most Appropriate Wage Index
    In the May 10, 2001 proposed rule, we published a wage index 
prototype based on SNF data, along with the wage index based on the 
hospital wage data that were used in the preceding year's final rule 
(July 31, 2000, 65 FR 46770). In addition, we included a discussion of 
the wage index computations for the SNF prototype. We also indicated 
our concern about the reliability of the existing data used in 
establishing a SNF wage index, in view of the significant variations in 
the SNF-specific wage data and the large number of SNFs that are unable 
to provide adequate wage and hourly data. Accordingly, we expressed the 
belief that a wage index based on hospital wage data remains the best 
and most appropriate to use in adjusting payments to SNFs, since both 
hospitals and SNFs compete in the same labor markets.
    In the July 31, 2001 final rule (66 FR 39579), we indicated that we 
had decided not to adopt the SNF-specific wage index prototype from the 
proposed rule, citing concerns such as the significant amount of 
volatility in the data. In addition, while we acknowledged that 
auditing all SNFs would provide more accurate and reliable data, we 
observed that this would place a burden on providers in terms of 
recordkeeping and completion of the cost report worksheet. We also 
noted that adopting such an approach would require a significant 
commitment of resources by us and by our contractors.
    As we noted in the May 16, 2003 proposed rule (68 FR 26767), while 
we continue to believe that the development of a SNF-specific wage 
index potentially could improve the accuracy of SNF payments, we do not 
regard an undertaking of this magnitude as being feasible within the 
current level of programmatic resources. However, we remain willing to 
consider the adoption of a SNF-specific wage index should sufficient 
staffing and budgetary resources to support it become available in the 
future.
    In the May 16, 2003 rule, we proposed continuing to use the final 
FY 2003 hospital wage index to adjust SNF PPS payments beginning 
October 1, 2003. Then, for future rate years, we proposed continuing to 
use the most recently published wage index values (that is, the final 
FY 2003 wage index data) final wage index values rather than following 
our current practice of using the most recent available data. The 
impact of this change would have been to establish a one-year lag 
between the wage index values used in the hospital PPS (that is, FY 
2004 wage index) and the data used in the SNF PPS. As explained in our 
responses to the comments shown later in this section, we have decided 
not to implement this one-year lag. Therefore, the wage index values in 
Tables 7 and 8 reflect the most recent available data; that is, the 
same FY 2004 wage data that will be used for the FY 2004 inpatient 
hospital PPS rates.
    Comment: A substantial number of commenters expressed concern about 
the appropriateness of using the most recently published wage index 
values to adjust the payments for SNFs, when more recent data are 
available. Many asked that we use the more recent data, even if they 
are more vulnerable to errors requiring mid-year correction. They 
pointed out that the most recently published wage index values are 
already several years old, since the data have to be reviewed and 
audited before use in a wage index. These commenters argued that 
imposing an additional 1-year lag on wage data ignores the current 
trends in the labor markets, fails to recognize fully those areas where 
severe nursing shortages necessitate paying a higher rate to attract 
nurses, and results in a less accurate reimbursement rate. In addition, 
a few commenters were concerned about the burden on hospital-based 
providers that would have to maintain two wage index systems, one for 
the hospital and another for the SNF.
    Response: Based on our review of the comments, we have determined 
to continue using the most current available wage index data in 
determining the SNF payment rates, and we are not adopting the position 
taken in the May 16, 2003 proposed rule.
    Comment: A few commenters, while opposing the use of the most 
recently published wage index values, urged us to make a retroactive 
wage index adjustment to account for errors in a prior year's reporting 
of hospital wage

[[Page 46046]]

data that lowered payments to SNFs located in the Baltimore MSA.
    Response: The SNF PPS does not include a methodology for 
retroactive adjustments to the wage index. The payment rates and wage 
indices are applied prospectively. Similarly, any corrections to the 
wage indices are also applied prospectively. We rely on the best 
available data reported by hospitals and audited by our fiscal 
intermediaries. Clearly, retroactive application of these wage index 
changes would jeopardize the prospective nature of the system and 
introduce an even higher level of instability.
    The commenters cited Sec.  412.63(x)(2) of the regulations to 
support their request for this retroactive adjustment. However, this 
section applies solely to mid-year corrections of the wage index for 
inpatient hospitals and applies only in cases where the FI or CMS made 
an error in tabulating the hospital data. In this case, the error was 
made by the providers and not by either the FI or by CMS. Moreover, the 
errors in the as-reported data were subject to public review and 
comment before adoption under the SNF PPS. In fact, this public process 
has facilitated correction of the data going forward. Unfortunately, 
the errors in this case were not identified until the data were 
audited. By that time, it was too late to make a mid-year rate 
correction. While we regret the impact on Maryland providers, we note 
that this situation is inherent in a system that uses more recent data. 
Under a policy of using the most recently published wage index values, 
the correction to the Baltimore MSA could have been incorporated in the 
published wage index and resulted in revised reimbursement to providers 
in the Baltimore MSA.
    Comment: Several commenters expressed concern that we may have 
discarded the SNF-specific wage index without further work or 
development to ensure its accuracy. Another pointed out that we already 
have the legal authority to develop and collect data necessary to 
establish an SNF wage index through the Social Security Act Amendments 
of 1994 (Pub. L. 103-432). These commenters urged us to work with the 
industry to educate SNF providers, improve the cost reporting tools we 
use to collect the data, and immediately seek funding for the full-
scale auditing of SNF data that would be needed to create and validate 
an SNF-specific wage index. A few commenters suggested that we should 
commit the resources required to implement an SNF-specific wage index 
not later than FY 2006. One commenter expressed concern that the SNF 
community does not participate in the hospital wage data collection 
process. However, a few commenters cautioned us against a precipitous 
conversion until we are sure that the SNF-specific wage index has been 
tested to ensure a high level of stability and accuracy.
    Response: As we discussed in the May 10, 2001 proposed rule (66 FR 
24010 through 24011), there is a great deal of volatility in the SNF-
specific wage index prototype--not only between it and the hospital 
wage data, but also between the 2 years of data that we used in 
developing the SNF-specific wage index prototype. As many commenters 
suggested, the data could be improved if we were to establish better 
controls, edits, and screens of the data, and insist that more of the 
provider's data be audited to ensure its accuracy. We are committed to 
a process to ensure the accuracy of the data and have already 
implemented several edits and screens to improve the quality of data 
reported. We have made several corrections and changes to the cost 
reports/edits/screens as a result of consultation with industry 
representatives. However, these changes were made prospectively, and 
the full year's data needed to evaluate these efforts are not yet 
available. Moreover, while we are proceeding with our analysis, we 
still have concerns about the accuracy of the data being reported. 
Hospitals have been reporting wage and hourly data for years, yet the 
FIs and providers must still spend a considerable amount of time 
resolving problems and changes to the data to derive the published 
hospital wage index. The problem experienced by Maryland providers in 
FY 2001 illustrates the difficulty of timely verification of wage data, 
which often results in changes being made to the wage index even after 
the update regulations are published.
    We agree that auditing all SNFs would provide more accurate and 
reliable data; however, this approach involves a significant commitment 
of our resources and our contractors and may place a significant 
recordkeeping and reporting burden on providers. Developing a desk 
review and audit program similar to what is required in the hospital 
setting would, at a minimum, require significant resources. The FIs 
that are involved in preparing the hospital wage data currently spend 
considerable resources to ensure the accuracy of the wage data 
submitted by approximately 6,000 hospitals. As we noted in the July 31, 
2001 final rule (66 FR 39579), this process involves editing, 
reviewing, auditing, and performing desk reviews of the data. Requiring 
FIs to do the same for the approximately 14,000 SNFs would nearly 
triple the contractors' workload and budgets in this area. While we 
have noted the industry concerns and funding needs, there are no funds 
currently available to develop this system to the point where we could 
rely on the data that any such system would produce. We are committed 
to continuing our investigation of an SNF-specific wage index that 
would enhance our current payment methodology.
    However, we do not expect to propose a SNF-specific wage index 
until we can demonstrate that it would significantly improve our 
ability to determine payments for facilities, and justify the resources 
required to collect the data, as well as the increased burden on 
providers. We also want to point out that the development of the 
hospital wage data can also be scrutinized and evaluated by the SNF 
industry when commenting on the hospital proposed rule that is 
published each spring. Therefore, because of the problems associated 
with the current SNF-specific data, and our inability to demonstrate 
that an SNF-specific wage index would be more reflective of the wages 
and salaries paid in a specific area, we continue to believe that 
hospital wage data are the most appropriate data for adjusting payments 
made to SNFs.
    Comment: A small number of commenters suggested that if SNFs are 
going to use the hospital wage index, several components of the 
hospital PPS should be immediately applied to SNFs. For example, one 
commenter suggested that we ensure that no MSA wage index value is 
lower than the State-wide rural wage index. Other commenters 
recommended an immediate change in SNF PPS methodology to allow 
provider reclassification.
    Response: As discussed above, the calculation of the wage indices 
must be made in a budget neutral manner. If we adopted this hospital 
PPS provision and established a wage index floor, there would be no 
change in the aggregate reimbursement for SNFs. While we are not 
convinced a state-wide floor would provide a more accurate wage index, 
we encourage input from the industry on why this could provide a more 
accurate wage index, noting that the redistribution of funds would 
reduce payments to some providers while it increased payments to 
others.
    Under section 315 of the BIPA, the Congress authorized the use of a 
reclassification methodology in the SNF PPS that would allow providers 
to seek geographic reclassification. However, the statute specifically 
noted that such reclassification could not be

[[Page 46047]]

implemented until we have collected the data necessary to establish an 
SNF-specific wage index. Accordingly, under the current legislative 
authority, we are prohibited from implementing an SNF reclassification 
system until reliable data in this area become available.
    We would also like to point out on June 6, 2003, the Office of 
Management and Budget (OMB) issued OMB Bulletin No. 03-04, announcing 
revised definitions of Metropolitan Statistical Areas, and new 
definitions of Micropolitan Statistical Areas and Combined Statistical 
Areas. A copy of the bulletin may be attained at the following Internet 
address: http://www.whitehouse.gov/omb/bulletins/b03-04.html.
    These new definitions will not be applied to the FY 2004 wage 
index. However, we will be studying the new definitions and their 
impact and, if warranted, may adopt them in the future, using 
appropriate administrative processes. To the extent these definitions 
are used, the concerns expressed by many for the use of a geographical 
reclassification system may be mitigated.

2. Determining the Labor-Related Portion of the SNF PPS Rate

    The wage index adjustment is applied to the labor-related portion 
of the Federal rate, which in FY 2004 is 76.372 percent of the total 
rate. This percentage reflects the labor-related relative importance 
for FY 2004. The labor-related relative importance is calculated from 
the SNF market basket, and approximates the labor-related portion of 
the total costs after taking into account historical and projected 
price changes between the base year and FY 2004. The price proxies that 
move the different cost categories in the market basket do not 
necessarily change at the same rate, and the relative importance 
captures these changes. Accordingly, the relative importance figure 
more closely reflects the cost share weights for FY 2004 than the base 
year weights from the SNF market basket.
    We calculate the labor-related relative importance for FY 2004 in 
four steps. First, we compute the FY 2004 price index level for the 
total market basket and each cost category of the market basket. 
Second, we calculate a ratio for each cost category by dividing the FY 
2004 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2004 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we sum the FY 2004 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, nonmedical professional fees, labor-intensive 
services, and capital-related expenses) to produce the FY 2004 labor-
related relative importance. Tables 5 and 6 show the Federal rates by 
labor-related and non-labor-related components.
3. Calculating the Budget Neutrality Factor
    Section 1888(e)(4)(G)(ii) of the Act also requires that we apply 
this wage index in a manner that does not result in aggregate payments 
that are greater or lesser than would otherwise be made in the absence 
of the wage adjustment. In this sixth PPS year (Federal rates effective 
October 1, 2003), we are applying the wage index applicable to SNF 
payments using the most recent hospital wage data applicable to FY 2004 
payments (as discussed in the following comments), and applying an 
adjustment to fulfill the budget neutrality requirement. This 
requirement is met by multiplying each of the components of the 
unadjusted Federal rates by a factor equal to 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 fiscal year beginning October 1, 2003. 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 this 
year is 1.005. In order to give the public a sense of the magnitude of 
this adjustment, last year's factor was 0.9997.
BILLING CODE 4120-01-P

[[Page 46048]]

[GRAPHIC] [TIFF OMITTED] TR04AU03.015


[[Page 46049]]


[GRAPHIC] [TIFF OMITTED] TR04AU03.016

BILLING CODE 4120-01-C

[[Page 46050]]



                  Table 7.--Wage Index for Urban Areas
------------------------------------------------------------------------
                                                                   Wage
   Urban area  (constituent counties or  county equivalents)      index
------------------------------------------------------------------------
0040 Abilene, TX..............................................    0.7596
  Taylor, TX
0060 Aguadilla, PR............................................    0.4289
  Aguada, PR
  Aguadilla, PR
  Moca, PR
0080 Akron, OH................................................    0.9208
  Portage, OH
  Summit, OH
0120 Albany, GA...............................................    1.0819
  Dougherty, GA
  Lee, GA
0160 Albany-Schenectady-Troy, NY..............................    0.8455
  Albany, NY
  Montgomery, NY
  Rensselaer, NY
  Saratoga, NY
  Schenectady, NY
  Schoharie, NY
0200 Albuquerque, NM..........................................    0.9263
  Bernalillo, NM
  Sandoval, NM
  Valencia, NM
0220 Alexandria, LA...........................................    0.7987
  Rapides, LA
0240 Allentown-Bethlehem-Easton, PA...........................    0.9682
  Carbon, PA
  Lehigh, PA
  Northampton, PA
0280 Altoona, PA..............................................    0.8771
  Blair, PA
0320 Amarillo, TX.............................................    0.8950
  Potter, TX
  Randall, TX
0380 Anchorage, AK............................................    1.2167
  Anchorage, AK
0440 Ann Arbor, MI............................................    1.1029
  Lenawee, MI
  Livingston, MI
  Washtenaw, MI
0450 Anniston, AL.............................................    0.8058
  Calhoun, AL
0460 Appleton-Oshkosh-Neenah, WI..............................    0.8999
  Calumet, WI
  Outagamie, WI
  Winnebago, WI
0470 Arecibo, PR..............................................    0.4138
  Arecibo, PR
  Camuy, PR
  Hatillo, PR
0480 Asheville, NC............................................    0.9680
  Buncombe, NC
  Madison, NC
0500 Athens, GA...............................................    0.9778
  Clarke, GA
  Madison, GA
  Oconee, GA
0520 Atlanta, GA..............................................    1.0089
  Barrow, GA
  Bartow, GA
  Carroll, GA
  Cherokee, GA
  Clayton, GA
  Cobb, GA
  Coweta, GA
  De Kalb, GA
  Douglas, GA
  Fayette, GA
  Forsyth, GA
  Fulton, GA
  Gwinnett, GA
  Henry, GA
  Newton, GA
  Paulding, GA
  Pickens, GA
  Rockdale, GA
  Spalding, GA
  Walton, GA
0560 Atlantic City-Cape May, NJ...............................    1.0751
  Atlantic City, NJ
  Cape May, NJ
0580 Auburn-Opelika, AL.......................................    0.8460
  Lee, AL
0600 Augusta-Aiken, GA-SC.....................................    0.9587
  Columbia, GA
  McDuffie, GA
  Richmond, GA
  Aiken, SC
  Edgefield, SC
0640 Austin-San Marcos, TX....................................    0.9570
  Bastrop, TX
  Caldwell, TX
  Hays, TX
  Travis, TX
  Williamson, TX
0680 Bakersfield, CA..........................................    0.9770
  Kern, CA
0720 Baltimore, MD............................................    0.9879
  Anne Arundel, MD
  Baltimore, MD
  Baltimore City, MD
  Carroll, MD
  Harford, MD
  Howard, MD
  Queen Annes, MD
0733 Bangor, ME...............................................    0.9864
  Penobscot, ME
0743 Barnstable-Yarmouth, MA..................................    1.2904
  Barnstable, MA
0760 Baton Rouge, LA..........................................    0.8372
  Ascension, LA
  East Baton Rouge, LA
  Livingston, LA
  West Baton Rouge, LA
0840 Beaumont-Port Arthur, TX.................................    0.8390
  Hardin, TX
  Jefferson, TX
  Orange, TX
0860 Bellingham, WA...........................................    1.1710
  Whatcom, WA
0870 Benton Harbor, MI........................................    0.8835
  Berrien, MI
0875 Bergen-Passaic, NJ.......................................    1.1644
  Bergen, NJ
  Passaic, NJ
0880 Billings, MT.............................................    0.8925
  Yellowstone, MT
0920 Biloxi-Gulfport-Pascagoula, MS...........................    0.8993
  Hancock, MS
  Harrison, MS
  Jackson, MS
0960 Binghamton, NY...........................................    0.8394
  Broome, NY
  Tioga, NY
1000 Birmingham, AL...........................................    0.9175
  Blount, AL
  Jefferson, AL
  St. Clair, AL
  Shelby, AL
1010 Bismarck, ND.............................................    0.7933
  Burleigh, ND
  Morton, ND
1020 Bloomington, IN..........................................    0.8627
  Monroe, IN
1040 Bloomington-Normal, IL...................................    0.8796
  McLean, IL
1080 Boise City, ID...........................................    0.9172
   Ada, ID
  Canyon, ID
1123 Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH.........    1.1188
  Bristol, MA
  Essex, MA
  Middlesex, MA
  Norfolk, MA
  Plymouth, MA
  Suffolk, MA
  Worcester, MA
  Hillsborough, NH
  Merrimack, NH
  Rockingham, NH
  Strafford, NH
1125 Boulder-Longmont, CO.....................................    1.0008
  Boulder, CO
1145 Brazoria, TX.............................................    0.8105
  Brazoria, TX
1150 Bremerton, WA............................................    1.0537
  Kitsap, WA
1240 Brownsville-Harlingen-San Benito, TX.....................    1.0261
  Cameron, TX
1260 Bryan-College Station, TX................................    0.8983
  Brazos, TX
1280 Buffalo-Niagara Falls, NY................................    0.9565
  Erie, NY
  Niagara, NY
1303 Burlington, VT...........................................    0.9665
  Chittenden, VT
  Franklin, VT
  Grand Isle, VT
1310 Caguas, PR...............................................    0.4141
  Caguas, PR
  Cayey, PR
  Cidra, PR
  Gurabo, PR
  San Lorenzo, PR
1320 Canton-Massillon, OH.....................................    0.9034
  Carroll, OH
  Stark, OH
1350 Casper, WY...............................................    0.9058
  Natrona, WY
1360 Cedar Rapids, IA.........................................    0.8838
  Linn, IA
1400 Champaign-Urbana, IL.....................................    0.9867
  Champaign, IL
1440 Charleston-North Charleston, SC..........................    0.9294
  Berkeley, SC
  Charleston, SC
  Dorchester, SC
1480 Charleston, WV...........................................    0.8845

[[Page 46051]]

 
  Kanawha, WV
  Putnam, WV
1520 Charlotte-Gastonia-Rock Hill, NC-SC......................    0.9721
  Cabarrus, NC
  Gaston, NC
  Lincoln, NC
  Mecklenburg, NC
  Rowan, NC
  Stanly, NC
  Union, NC
  York, SC
1540 Charlottesville, VA......................................    0.9985
  Albemarle, VA
  Charlottesville City, VA
  Fluvanna, VA
  Greene, VA
1560 Chattanooga, TN-GA.......................................    0.9049
  Catoosa, GA
  Dade, GA
  Walker, GA
  Hamilton, TN
  Marion, TN
1580 Cheyenne, WY.............................................    0.8760
  Laramie, WY
1600 Chicago, IL..............................................    1.0848
  Cook, IL
  De Kalb, IL
  Du Page, IL
  Grundy, IL
  Kane, IL
  Kendall, IL
  Lake, IL
  McHenry, IL
  Will, IL
1620 Chico-Paradise, CA.......................................    1.0152
  Butte, CA
1640 Cincinnati, OH-KY-IN.....................................    0.9375
  Dearborn, IN
  Ohio, IN
  Boone, KY
  Campbell, KY
  Gallatin, KY
  Grant, KY
  Kenton, KY
  Pendleton, KY
  Brown, OH
  Clermont, OH
  Hamilton, OH
  Warren, OH
1660 Clarksville-Hopkinsville, TN-KY..........................    0.8211
  Christian, KY
  Montgomery, TN
1680 Cleveland-Lorain-Elyria, OH..............................    0.9632
  Ashtabula, OH
  Geauga, OH
  Cuyahoga, OH
  Lake, OH
  Lorain, OH
  Medina, OH
1720 Colorado Springs, CO.....................................    0.9793
  El Paso, CO
1740 Columbia, MO.............................................    0.8660
  Boone, MO
1760 Columbia, SC.............................................    0.8866
  Lexington, SC
  Richland, SC
1800 Columbus, GA-AL..........................................    0.8659
  Russell, AL
  Chattanoochee, GA
  Harris, GA
  Muscogee, GA
1840 Columbus, OH.............................................    0.9609
  Delaware, OH
  Fairfield, OH
  Franklin, OH
  Licking, OH
  Madison, OH
  Pickaway, OH
1880 Corpus Christi, TX.......................................    0.8486
  Nueces, TX
  San Patricio, TX
1890 Corvallis, OR............................................    1.1470
  Benton, OR
1900 Cumberland, MD-WV........................................    0.8166
  Allegany, MD
  Mineral, WV
1920 Dallas, TX...............................................    0.9934
  Collin, TX
  Dallas, TX
  Denton, TX
  Ellis, TX
  Henderson, TX
  Hunt, TX
  Kaufman, TX
  Rockwall, TX
1950 Danville, VA.............................................    0.8998
  Danville City, VA
  Pittsylvania, VA
1960 Davenport-Moline-Rock Island, IA-IL......................    0.8949
  Scott, IA
  Henry, IL
  Rock Island, IL
2000 Dayton-Springfield, OH...................................    0.9479
  Clark, OH
  Greene, OH
  Miami, OH
  Montgomery, OH
2020 Daytona Beach, FL........................................    0.9042
  Flagler, FL
  Volusia, FL
2030 Decatur, AL..............................................    0.8793
  Lawrence, AL
  Morgan, AL
2040 Decatur, IL..............................................    0.8128
  Macon, IL
2080 Denver, CO...............................................    1.0793
  Adams, CO
  Arapahoe, CO
  Denver, CO
  Douglas, CO
  Jefferson, CO
2120 Des Moines, IA...........................................    0.9069
  Dallas, IA
  Polk, IA
  Warren, IA
2160 Detroit, MI..............................................    1.0060
  Lapeer, MI
  Macomb, MI
  Monroe, MI
  Oakland, MI
  St. Clair, MI
  Wayne, MI
2180 Dothan, AL...............................................    0.7710
  Dale, AL
  Houston, AL
2190 Dover, DE................................................    0.9765
  Kent, DE
2200 Dubuque, IA..............................................    0.8850
  Dubuque, IA
2240 Duluth-Superior, MN-WI...................................    1.0130
  St. Louis, MN
  Douglas, WI
2281 Dutchess County, NY......................................    1.0890
  Dutchess, NY
2290 Eau Claire, WI...........................................    0.9027
  Chippewa, WI
  Eau Claire, WI
2320 El Paso, TX..............................................    0.9159
  El Paso, TX
2330 Elkhart-Goshen, IN.......................................    0.9744
  Elkhart, IN
2335 Elmira, NY...............................................    0.8343
  Chemung, NY
2340 Enid, OK.................................................    0.8524
  Garfield, OK
2360 Erie, PA.................................................    0.8566
  Erie, PA
2400 Eugene-Springfield, OR...................................    1.1410
  Lane, OR
2440 Evansville-Henderson, IN-KY..............................    0.8395
  Posey, IN
  Vanderburgh, IN
  Warrick, IN
  Henderson, KY
2520 Fargo-Moorhead, ND-MN....................................    0.9758
  Clay, MN
  Cass, ND
2560 Fayetteville, NC.........................................    0.8950
  Cumberland, NC
2580 Fayetteville-Springdale-Rogers, AR.......................    0.8362
  Benton, AR
  Washington, AR
2620 Flagstaff, AZ-UT.........................................    1.1287
  Coconino, AZ
  Kane, UT
2640 Flint, MI................................................    1.0814
  Genesee, MI
2650 Florence, AL.............................................    0.7716
  Colbert, AL
  Lauderdale, AL
2655 Florence, SC.............................................    0.8673
  Florence, SC
2670 Fort Collins-Loveland, CO................................    1.0067
  Larimer, CO
2680 Ft. Lauderdale, FL.......................................    1.0122
  Broward, FL
2700 Fort Myers-Cape Coral, FL................................    0.9776
  Lee, FL
2710 Fort Pierce-Port St. Lucie, FL...........................    0.9968
  Martin, FL
  St. Lucie, FL
2720 Fort Smith, AR-OK........................................    0.8390
  Crawford, AR
  Sebastian, AR
  Sequoyah, OK
2750 Fort Walton Beach, FL....................................    0.8930
  Okaloosa, FL
2760 Fort Wayne, IN...........................................    0.9546
  Adams, IN
  Allen, IN
  De Kalb, IN

[[Page 46052]]

 
  Huntington, IN
  Wells, IN
  Whitley, IN
2800 Fort Worth-Arlington, TX.................................    0.9321
  Hood, TX
  Johnson, TX
  Parker, TX
  Tarrant, TX
2840 Fresno, CA...............................................    1.0053
  Fresno, CA
  Madera, CA
2880 Gadsden, AL..............................................    0.8173
  Etowah, AL
2900 Gainesville, FL..........................................    0.9653
  Alachua, FL
2920 Galveston-Texas City, TX.................................    0.9242
  Galveston, TX
2960 Gary, IN.................................................    0.9372
  Lake, IN
  Porter, IN
2975 Glens Falls, NY..........................................    0.8441
  Warren, NY
  Washington, NY
2980 Goldsboro, NC............................................    0.8587
  Wayne, NC
2985 Grand Forks, ND-MN.......................................    0.8601
  Polk, MN
  Grand Forks, ND
2995 Grand Junction, CO.......................................    0.9594
  Mesa, CO.
3000 Grand Rapids-Muskegon-Holland, MI........................    0.9430
  Allegan, MI
  Kent, MI
  Muskegon, MI
  Ottawa, MI
3040 Great Falls, MT..........................................    0.8773
  Cascade, MT
3060 Greeley, CO..............................................    0.9334
  Weld, CO
3080 Green Bay, WI............................................    0.9422
  Brown, WI
3120 Greensboro-Winston-Salem-High Point, NC..................    0.9129
  Alamance, NC
  Davidson, NC
  Davie, NC
  Forsyth, NC
  Guilford, NC
  Randolph, NC
  Stokes, NC
  Yadkin, NC
3150 Greenville, NC...........................................    0.9061
  Pitt, NC
3160 Greenville-Spartanburg-Anderson, SC......................    0.9297
  Anderson, SC
  Cherokee, SC
  Greenville, SC
  Pickens, SC
  Spartanburg, SC
3180 Hagerstown, MD...........................................    0.9135
  Washington, MD
3200 Hamilton-Middletown, OH..................................    0.9176
  Butler, OH
3240 Harrisburg-Lebanon-Carlisle, PA..........................    0.9127
  Cumberland, PA
  Dauphin, PA
  Lebanon, PA
  Perry, PA
3283 Hartford, CT.............................................    1.1508
  Hartford, CT
  Litchfield, CT
  Middlesex, CT
  Tolland, CT
3285 Hattiesburg, MS..........................................    0.7278
  Forrest, MS
  Lamar, MS
3290 Hickory-Morganton-Lenoir, NC.............................    0.9205
  Alexander, NC
  Burke, NC
  Caldwell, NC
  Catawba, NC
3320 Honolulu, HI.............................................    1.1053
  Honolulu, HI
3350 Houma, LA................................................    0.7717
  Lafourche, LA
  Terrebonne, LA
3360 Houston, TX..............................................    0.9794
  Chambers, TX
  Fort Bend, TX
  Harris, TX
  Liberty, TX
  Montgomery, TX
  Waller, TX
3400 Huntington-Ashland, WV-KY-OH.............................    0.9556
  Boyd, KY
  Carter, KY
  Greenup, KY
  Lawrence, OH
  Cabell, WV
  Wayne, WV
3440 Huntsville, AL...........................................    0.9208
  Limestone, AL
  Madison, AL
3480 Indianapolis, IN.........................................    0.9875
  Boone, IN
  Hamilton, IN
  Hancock, IN
  Hendricks, IN
  Johnson, IN
  Madison, IN
  Marion, IN
  Morgan, IN
  Shelby, IN
3500 Iowa City, IA............................................    0.9510
  Johnson, IA
3520 Jackson, MI..............................................    0.8950
  Jackson, MI
3560 Jackson, MS..............................................    0.8324
  Hinds, MS
  Madison, MS
  Rankin, MS
3580 Jackson, TN..............................................    0.8948
  Chester, TN
  Madison, TN
3600 Jacksonville, FL.........................................    0.9490
   Clay, FL
  Duval, FL
  Nassau, FL
  St. Johns, FL
3605 Jacksonville, NC.........................................    0.8510
  Onslow, NC
3610 Jamestown, NY............................................    0.7730
  Chautaqua, NY
3620 Janesville-Beloit, WI....................................    0.9244
  Rock, WI
3640 Jersey City, NJ..........................................    1.1070
  Hudson, NJ
3660 Johnson City-Kingsport-Bristol, TN-VA....................    0.8220
  Carter, TN
  Hawkins, TN
  Sullivan, TN
  Unicoi, TN
  Washington, TN
  Bristol City, VA
  Scott, VA
  Washington, VA
3680 Johnstown, PA............................................    0.8125
  Cambria, PA
  Somerset, PA
3700 Jonesboro, AR............................................    0.7762
  Craighead, AR
3710 Joplin, MO...............................................    0.8646
  Jasper, MO
  Newton, MO
3720 Kalamazoo-Battle Creek, MI...............................    1.0458
  Calhoun, MI
  Kalamazoo, MI
  Van Buren, MI
3740 Kankakee, IL.............................................    1.0377
  Kankakee, IL
3760 Kansas City, KS-MO.......................................    0.9675
  Johnson, KS
  Leavenworth, KS
  Miami, KS
  Wyandotte, KS
  Cass, MO
  Clay, MO
  Clinton, MO
  Jackson, MO
  Lafayette, MO
  Platte, MO
  Ray, MO
3800 Kenosha, WI..............................................    0.9721
  Kenosha, WI
3810 Killeen-Temple, TX.......................................    0.9122
  Coryell, TX
3840 Knoxville, TN............................................    0.8784
  Anderson, TN
  Blount, TN
  Knox, TN
  Loudon, TN
  Sevier, TN
  Union, TN
3850 Kokomo, IN...............................................    0.9008
  Howard, IN
  Tipton, IN
3870 La Crosse, WI-MN.........................................    0.9210
  Houston, MN
  La Crosse, WI
3880 Lafayette, LA............................................    0.8156
  Acadia, LA
  Lafayette, LA
  St. Landry, LA
  St. Martin, LA
3920 Lafayette, IN............................................    0.8549
  Clinton, IN
  Tippecanoe, IN
3960 Lake Charles, LA.........................................    0.7809
  Calcasieu, LA
3980 Lakeland-Winter Haven, FL................................    0.8775
  Polk, FL

[[Page 46053]]

 
4000 Lancaster, PA............................................    0.9244
  Lancaster, PA
4040 Lansing-East Lansing, MI.................................    0.9675
  Clinton, MI
  Eaton, MI
  Ingham, MI
4080 Laredo, TX...............................................    0.8059
  Webb, TX
4100 Las Cruces, NM...........................................    0.8653
  Dona Ana, NM
4120 Las Vegas, NV-AZ.........................................    1.1481
  Mohave, AZ
  Clark, NV
  Nye, NV
4150 Lawrence, KS.............................................    0.8642
  Douglas, KS
4200 Lawton, OK...............................................    0.8234
  Comanche, OK
4243 Lewiston-Auburn, ME......................................    0.9345
  Androscoggin, ME
4280 Lexington, KY............................................    0.8650
  Bourbon, KY
  Clark, KY
  Fayette, KY
  Jessamine, KY
  Madison, KY
  Scott, KY
  Woodford, KY
4320 Lima, OH.................................................    0.9483
  Allen, OH
  Auglaize, OH
4360 Lincoln, NE..............................................    0.9992
  Lancaster, NE
4400 Little Rock-North Little Rock, AR........................    0.8887
  Faulkner, AR
  Lonoke, AR
  Pulaski, AR
  Saline, AR
4420 Longview-Marshall, TX....................................    0.9076
  Gregg, TX
  Harrison, TX
  Upshur, TX
4480 Los Angeles-Long Beach, CA...............................    1.1748
  Los Angeles, CA
4520 Louisville, KY-IN........................................    0.9205
  Clark, IN
  Floyd, IN
  Harrison, IN
  Scott, IN
  Bullitt, KY
  Jefferson, KY
  Oldham, KY
4600 Lubbock, TX..............................................    0.8238
  Lubbock, TX
4640 Lynchburg, VA............................................    0.9097
  Amherst, VA
  Bedford City, VA
  Bedford, VA
  Campbell, VA
  Lynchburg City, VA
4680 Macon, GA................................................    0.8916
  Bibb, GA
  Houston, GA
  Jones, GA
  Peach, GA
  Twiggs, GA
4720 Madison, WI..............................................    1.0222
  Dane, WI
4800 Mansfield, OH............................................    0.8210
  Crawford, OH
  Richland, OH
4840 Mayaguez, PR.............................................    0.4776
  Anasco, PR
  Cabo Rojo, PR
  Hormigueros, PR
  Mayaguez, PR
  Sabana Grande, PR
  San German, PR
4880 McAllen-Edinburg-Mission, TX.............................    0.8347
  Hidalgo, TX
4890 Medford-Ashland, OR......................................    1.0729
  Jackson, OR
4900 Melbourne-Titusville-Palm Bay, FL........................    0.9736
  Brevard, Fl
4920 Memphis, TN-AR-MS........................................    0.8973
  Crittenden, AR
  De Soto, MS
  Fayette, TN
  Shelby, TN
  Tipton, TN
4940 Merced, CA...............................................    0.9651
  Merced, CA
5000 Miami, FL................................................    0.9854
  Dade, FL
5015 Middlesex-Somerset-Hunterdon, NJ.........................    1.1320
  Hunterdon, NJ
  Middlesex, NJ
  Somerset, NJ
5080 Milwaukee-Waukesha, WI...................................    0.9947
  Milwaukee, WI
  Ozaukee, WI
  Washington, WI
  Waukesha, WI
5120 Minneapolis-St Paul, MN-WI...............................    1.0957
  Anoka, MN
  Carver, MN
  Chisago, MN
  Dakota, MN
  Hennepin, MN
  Isanti, MN
  Ramsey, MN
  Scott, MN
  Sherburne, MN
  Washington, MN
  Wright, MN
  Pierce, WI
  St. Croix, WI
5140 Missoula, MT.............................................    0.8683
  Missoula, MT
5160 Mobile, AL...............................................    0.7962
  Baldwin, AL
  Mobile, AL
5170 Modesto, CA..............................................    1.1230
  Stanislaus, CA
5190 Monmouth-Ocean, NJ.......................................    1.0912
  Monmouth, NJ
  Ocean, NJ
5200 Monroe, LA...............................................    0.7890
  Ouachita, LA
5240 Montgomery, AL...........................................    0.7875
  Autauga, AL
  Elmore, AL
  Montgomery, AL
5280 Muncie, IN...............................................    0.8739
  Delaware, IN
5330 Myrtle Beach, SC.........................................    0.9075
  Horry, SC
5345 Naples, FL...............................................    0.9750
  Collier, FL
5360 Nashville, TN............................................    0.9815
  Cheatham, TN
  Davidson, TN
  Dickson, TN
  Robertson, TN
  Rutherford TN
  Sumner, TN
  Williamson, TN
  Wilson, TN
5380 Nassau-Suffolk, NY.......................................    1.2933
  Nassau, NY
  Suffolk, NY
5483 New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT......    1.2335
  Fairfield, CT
  New Haven, CT
5523 New London-Norwich, CT...................................    1.1584
  New London, CT
5560 New Orleans, LA..........................................    0.9137
  Jefferson, LA
  Orleans, LA
  Plaquemines, LA
  St. Bernard, LA
  St. Charles, LA
  St. James, LA
  St. John The Baptist, LA
  St. Tammany, LA
5600 New York, NY.............................................    1.3913
  Bronx, NY
  Kings, NY
  New York, NY
  Putnam, NY
  Queens, NY
  Richmond, NY
  Rockland, NY
  Westchester, NY
5640 Newark, NJ...............................................    1.1471
  Essex, NJ
  Morris, NJ
  Sussex, NJ
  Union, NJ
  Warren, NJ
5660 Newburgh, NY-PA..........................................    1.1462
  Orange, NY
  Pike, PA
5720 Norfolk-Virginia Beach-Newport News, VA-NC...............    0.8584
  Currituck, NC
  Chesapeake City, VA
  Gloucester, VA
  Hampton City, VA
  Isle of Wight, VA
  James City, VA
  Mathews, VA
  Newport News City, VA
  Norfolk City, VA
  Poquoson City, VA
  Portsmouth City, VA
  Suffolk City, VA
  Virginia Beach City, VA
  Williamsburg City, VA
  York, VA

[[Page 46054]]

 
5775 Oakland, CA..............................................    1.4860
  Alameda, CA
  Contra Costa, CA
5790 Ocala, FL................................................    0.9689
  Marion, FL
5800 Odessa-Midland, TX.......................................    0.9290
  Ector, TX
  Midland, TX
5880 Oklahoma City, OK........................................    0.8948
  Canadian, OK
  Cleveland, OK
  Logan, OK
  McClain, OK
  Oklahoma, OK
  Pottawatomie, OK
5910 Olympia, WA..............................................    1.0919
  Thurston, WA
5920 Omaha, NE-IA.............................................    0.9705
  Pottawattamie, IA
  Cass, NE
  Douglas, NE
  Sarpy, NE
  Washington, NE
5945 Orange County, CA........................................    1.1326
  Orange, CA
5960 Orlando, FL..............................................    0.9615
  Lake, FL
  Orange, FL
  Osceola, FL
  Seminole, FL
5990 Owensboro, KY............................................    0.8340
  Daviess, KY
6015 Panama City, FL..........................................    0.8169
  Bay, FL
6020 Parkersburg-Marietta, WV-OH..............................    0.8007
  Washington, OH
  Wood, WV
6080 Pensacola, FL............................................    0.8672
  Escambia, FL
  Santa Rosa, FL
6120 Peoria-Pekin, IL.........................................    0.8699
  Peoria, IL
  Tazewell, IL
  Woodford, IL
6160 Philadelphia, PA-NJ......................................    1.0839
  Burlington, NJ
  Camden, NJ
  Gloucester, NJ
  Salem, NJ
  Bucks, PA
  Chester, PA
  Delaware, PA
  Montgomery, PA
  Philadelphia, PA
6200 Phoenix-Mesa, AZ.........................................    1.0088
  Maricopa, AZ
  Pinal, AZ
6240 Pine Bluff, AR...........................................    0.7833
  Jefferson, AR
6280 Pittsburgh, PA...........................................    0.8865
  Allegheny, PA
  Beaver, PA
  Butler, PA
  Fayette, PA
  Washington, PA
  Westmoreland, PA
6323 Pittsfield, MA...........................................    1.0234
  Berkshire, MA
6340 Pocatello, ID............................................    0.9006
  Bannock, ID
6360 Ponce, PR................................................    0.4689
  Guayanilla, PR
  Juana Diaz, PR
  Penuelas, PR
  Ponce, PR
  Villalba, PR
  Yauco, PR
6403 Portland, ME.............................................    0.9909
  Cumberland, ME
  Sagadahoc, ME
  York, ME
6440 Portland-Vancouver, OR-WA................................    1.1167
  Clackamas, OR
  Columbia, OR
  Multnomah, OR
  Washington, OR
  Yamhill, OR
  Clark, WA
6483 Providence-Warwick-Pawtucket, RI.........................    1.0932
  Bristol, RI
  Kent, RI
  Newport, RI
  Providence, RI
  Washington, RI
6520 Provo-Orem, UT...........................................    0.9936
  Utah, UT
6560 Pueblo, CO...............................................    0.8743
  Pueblo, CO
6580 Punta Gorda, FL..........................................    0.9472
  Charlotte, FL
6600 Racine, WI...............................................    0.8778
  Racine, WI
6640 Raleigh-Durham-Chapel Hill, NC...........................    0.9919
  Chatham, NC
  Durham, NC
  Franklin, NC
  Johnston, NC
  Orange, NC
  Wake, NC
6660 Rapid City, SD...........................................    0.8771
  Pennington, SD
6680 Reading, PA..............................................    0.9096
  Berks, PA
6690 Redding, CA..............................................    1.1306
  Shasta, CA
6720 Reno, NV.................................................    1.0639
  Washoe, NV
6740 Richland-Kennewick-Pasco, WA.............................    1.0566
  Benton, WA
  Franklin, WA
6760 Richmond-Petersburg, VA..................................    0.9311
  Charles City County, VA
  Chesterfield, VA
  Colonial Heights City, VA
  Dinwiddie, VA
  Goochland, VA
  Hanover, VA
  Henrico, VA
  Hopewell City, VA
  New Kent, VA
  Petersburg City, VA
  Powhatan, VA
  Prince George, VA
  Richmond City, VA
6780 Riverside-San Bernardino, CA.............................    1.1296
  Riverside, CA
  San Bernardino, CA
6800 Roanoke, VA..............................................    0.8664
  Botetourt, VA
  Roanoke, VA
  Roanoke City, VA
  Salem City, VA
6820 Rochester, MN............................................    1.1691
  Olmsted, MN
6840 Rochester, NY............................................    0.9392
  Genesee, NY
  Livingston, NY
  Monroe, NY
  Ontario, NY
  Orleans, NY
  Wayne, NY
6880 Rockford, IL.............................................    0.9627
  Boone, IL
  Ogle, IL
  Winnebago, IL
6895 Rocky Mount, NC..........................................    0.9039
  Edgecombe, NC
  Nash, NC
6920 Sacramento, CA...........................................    1.1797
  El Dorado, CA
  Placer, CA
  Sacramento, CA
A6960 Saginaw-Bay City-Midland, MI............................    0.9992
  Bay, MI
  Midland, MI
  Saginaw, MI
6980 St. Cloud, MN............................................    0.9468
  Benton, MN
  Stearns, MN
7000 St. Joseph, MO...........................................    0.9718
  Andrews, MO
  Buchanan, MO
7040 St. Louis, MO-IL.........................................    0.8996
  Clinton, IL
  Jersey, IL
  Madison, IL
  Monroe, IL
  St. Clair, IL
  Franklin, MO
  Jefferson, MO
  Lincoln, MO
  St. Charles, MO
  St. Louis, MO
  St. Louis City, MO
  Warren, MO
  Sullivan City, MO
7080 Salem, OR................................................    1.0440
  Marion, OR
  Polk, OR
7120 Salinas, CA..............................................    1.4281
  Monterey, CA
7160 Salt Lake City-Ogden, UT.................................    0.9873
  Davis, UT
  Salt Lake, UT
  Weber, UT
7200 San Angelo, TX...........................................    0.8500
  Tom Green, TX
7240 San Antonio, TX..........................................    0.8834
  Bexar, TX
  Comal, TX

[[Page 46055]]

 
  Guadalupe, TX
  Wilson, TX
7320 San Diego, CA............................................    1.1102
  San Diego, CA
7360 San Francisco, CA........................................    1.4455
  Marin, CA
  San Francisco, CA
  San Mateo, CA
7400 San Jose, CA.............................................    1.4567
  Santa Clara, CA
7440 San Juan-Bayamon, PR.....................................    0.4880
  Aguas Buenas, PR
  Barceloneta, PR
  Bayamon, PR
  Canovanas, PR
  Carolina, PR
  Catano, PR
  Ceiba, PR
  Comerio, PR
  Corozal, PR
  Dorado, PR
  Fajardo, PR
  Florida, PR
  Guaynabo, PR
  Humacao, PR
  Juncos, PR
  Los Piedras, PR
  Loiza, PR
  Luguillo, PR
  Manati, PR
  Morovis, PR
  Naguabo, PR
  Naranjito, PR
  Rio Grande, PR
  San Juan, PR
  Toa Alta, PR
  Toa Baja, PR
  Trujillo Alto, PR
  Vega Alta, PR
  Vega Baja, PR
  Yabucoa, PR
7460 San Luis Obispo-Atascadero-Paso Robles, CA...............    1.1383
  San Luis Obispo, CA
7480 Santa Barbara-Santa Maria-Lompoc, CA.....................    1.0399
  Santa Barbara, CA
7485 Santa Cruz-Watsonville, CA...............................    1.2890
  Santa Cruz, CA
7490 Santa Fe, NM.............................................    1.0610
  Los Alamos, NM
  Santa Fe, NM
7500 Santa Rosa, CA...........................................    1.2825
  Sonoma, CA
7510 Sarasota-Bradenton, FL...................................    0.9924
  Manatee, FL
  Sarasota, FL
7520 Savannah, GA.............................................    0.9433
  Bryan, GA
  Chatham, GA
  Effingham, GA
7560 Scranton--Wilkes-Barre--Hazleton, PA.....................    0.8378
  Columbia, PA
  Lackawanna, PA
  Luzerne, PA
  Wyoming, PA
7600 Seattle-Bellevue-Everett, WA.............................    1.1516
  Island, WA
  King, WA
  Snohomish, WA
7610 Sharon, PA...............................................    0.7719
  Mercer, PA
7620 Sheboygan, WI............................................    0.8589
  Sheboygan, WI
7640 Sherman-Denison, TX......................................    0.9661
  Grayson, TX
7680 Shreveport-Bossier City, LA..............................    0.9047
  Bossier, LA
  Caddo, LA
  Webster, LA
7720 Sioux City, IA-NE........................................    0.8956
  Woodbury, IA
  Dakota, NE
7760 Sioux Falls, SD..........................................    0.9271
  Lincoln, SD
  Minnehaha, SD
7800 South Bend, IN...........................................    0.9782
  St. Joseph, IN
7840 Spokane, WA..............................................    1.0857
  Spokane, WA
7880 Springfield, IL..........................................    0.8908
  Menard, IL
  Sangamon, IL
7920 Springfield, MO..........................................    0.8423
  Christian, MO
  Greene, MO
  Webster, MO
8003 Springfield, MA..........................................    1.0419
  Hampden, MA
  Hampshire, MA
8050 State College, PA........................................    0.8705
  Centre, PA
8080 Steubenville-Weirton, OH-WV..............................    0.8364
  Jefferson, OH
  Brooke, WV
  Hancock, WV
8120 Stockton-Lodi, CA........................................    1.0362
  San Joaquin, CA
8140 Sumter, SC...............................................    0.8210
  Sumter, SC
8160 Syracuse, NY.............................................    0.9374
  Cayuga, NY
  Madison, NY
  Onondaga, NY
  Oswego, NY
8200 Tacoma, WA...............................................    1.1071
  Pierce, WA
8240 Tallahassee, FL..........................................    0.8485
  Gadsden, FL
  Leon, FL
8280 Tampa-St. Petersburg-Clearwater, FL......................    0.9066
  Hernando, FL
  Hillsborough, FL
  Pasco, FL
  Pinellas, FL
8320 Terre Haute, IN..........................................    0.8292
  Clay, IN
  Vermillion, IN
  Vigo, IN
8360 Texarkana, AR-Texarkana, TX..............................    0.8117
  Miller, AR
  Bowie, TX
8400 Toledo, OH...............................................    0.9343
  Fulton, OH
  Lucas, OH
  Wood, OH
8440 Topeka, KS...............................................    0.9071
  Shawnee, KS
8480 Trenton, NJ..............................................    1.0474
  Mercer, NJ
8520 Tucson, AZ...............................................    0.8945
  Pima, AZ
8560 Tulsa, OK................................................    0.9148
  Creek, OK
  Osage, OK
  Rogers, OK
  Tulsa, OK
  Wagoner, OK
8600 Tuscaloosa, AL...........................................    0.8179
  Tuscaloosa, AL
8640 Tyler, TX................................................    0.9366
  Smith, TX
8680 Utica-Rome, NY...........................................    0.8369
  Herkimer, NY
  Oneida, NY
8720 Vallejo-Fairfield-Napa, CA...............................    1.3323
  Napa, CA
  Solano, CA
8735 Ventura, CA..............................................    1.1019
  Ventura, CA
8750 Victoria, TX.............................................    0.8151
  Victoria, TX
8760 Vineland-Millville-Bridgeton, NJ.........................    1.0363
  Cumberland, NJ
8780 Visalia-Tulare-Porterville, CA...........................    0.9755
  Tulare, CA
8800 Waco, TX.................................................    0.8360
  McLennan, TX
8840 Washington, DC-MD-VA-WV..................................    1.0860
  District of Columbia, DC
  Calvert, MD
  Charles, MD
  Frederick, MD
  Montgomery, MD
  Prince Georges, MD
  Alexandria City, VA
  Arlington, VA
  Clarke, VA
  Culpepper, VA
  Fairfax, VA
  Fairfax City, VA
  Falls Church City, VA
  Fauquier, VA
  Fredericksburg City, VA
  King George, VA
  Loudoun, VA
  Manassas City, VA
  Manassas Park City, VA
  Prince William, VA
  Spotsylvania, VA
  Stafford, VA
  Warren, VA
  Berkeley, WV
  Jefferson, WV
8920 Waterloo-Cedar Falls, IA.................................    0.8332
  Black Hawk, IA
8940 Wausau, WI...............................................    0.9653
  Marathon, WI

[[Page 46056]]

 
8960 West Palm Beach-Boca Raton, FL...........................    0.9759
  Palm Beach, FL
9000 Wheeling, OH-WV..........................................    0.7464
  Belmont, OH
  Marshall, WV
  Ohio, WV
9040 Wichita, KS..............................................    0.9200
  Butler, KS
  Harvey, KS
  Sedgwick, KS
9080 Wichita Falls, TX........................................    0.8307
  Archer, TX
  Wichita, TX
9140 Williamsport, PA.........................................    0.8125
  Lycoming, PA
9160 Wilmington-Newark, DE-MD.................................    1.0838
  New Castle, DE
  Cecil, MD
9200 Wilmington, NC...........................................    0.9524
  New Hanover, NC
  Brunswick, NC
9260 Yakima, WA...............................................    1.0330
  Yakima, WA
9270 Yolo, CA.................................................    0.9167
  Yolo, CA
9280 York, PA.................................................    0.9082
  York, PA
9320 Youngstown-Warren, OH....................................    0.9176
  Columbiana, OH
  Mahoning, OH
  Trumbull, OH
9340 Yuba City, CA............................................    1.0155
  Sutter, CA
  Yuba, CA
9360 Yuma, AZ.................................................    0.8859
  Yuma, AZ
------------------------------------------------------------------------


                  Table 8.--Wage Index for Rural Areas
------------------------------------------------------------------------
                                                                  Wage
                          Rural area                              index
------------------------------------------------------------------------
Alabama.......................................................    0.7461
Alaska........................................................    1.1838
Arizona.......................................................    0.9233
Arkansas......................................................    0.7703
California....................................................    0.9987
Colorado......................................................    0.9291
Connecticut...................................................    1.2134
Delaware......................................................    0.9518
Florida.......................................................    0.8834
Georgia.......................................................    0.8560
Guam..........................................................    0.9611
Hawaii........................................................    0.9918
Idaho.........................................................    0.8937
Illinois......................................................    0.8221
Indiana.......................................................    0.8788
Iowa..........................................................    0.8382
Kansas........................................................    0.8002
Kentucky......................................................    0.7941
Louisiana.....................................................    0.7428
Maine.........................................................    0.8776
Maryland......................................................    0.9088
Massachusetts.................................................    1.0390
Michigan......................................................    0.8848
Minnesota.....................................................    0.9293
Mississippi...................................................    0.7747
Missouri......................................................    0.7860
Montana.......................................................    0.8765
Nebraska......................................................    0.8787
Nevada........................................................    0.9767
New Hampshire.................................................    0.9989
New Jersey \1\................................................  ........
New Mexico....................................................    0.8236
New York......................................................    0.8491
North Carolina................................................    0.8424
North Dakota..................................................    0.7746
Ohio..........................................................    0.8784
Oklahoma......................................................    0.7506
Oregon........................................................    0.9953
Pennsylvania..................................................    0.8344
Puerto Rico...................................................    0.4002
Rhode Island \1\..............................................  ........
South Carolina................................................    0.8464
South Dakota..................................................    0.8162
Tennessee.....................................................    0.7854
Texas.........................................................    0.7748
Utah..........................................................    0.8937
Vermont.......................................................    0.9269
Virginia......................................................    0.8464
Virgin Islands................................................    0.7166
Washington....................................................    1.0346
West Virginia.................................................    0.7986
Wisconsin.....................................................    0.9266
Wyoming.......................................................   0.9073
------------------------------------------------------------------------
\1\ All counties within the State are classified urban.

D. Publication of Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act, the final 
payment rates listed here reflect an update equal to the full SNF 
market basket, which equals 3.0 percent. In addition, the FY 2004 rates 
will be adjusted by an additional 3.26 percent to reflect the 
cumulative forecast error since the start of the SNF PPS on July 1, 
1998. We will continue to publish the rates, wage index, and case-mix 
classification methodology in the Federal Register before August 1 
preceding the start of each succeeding fiscal year. Along with a number 
of other revisions discussed elsewhere in this preamble, this final 
rule provides the annual updates to the Federal rates as mandated by 
the Act.

E. Relationship of RUG-III Classification System to Existing SNF Level-
of-Care Criteria

    As discussed in Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. This 
designation reflects an administrative presumption under the current 
44-group RUG-III classification system. Our presumption is that any 
beneficiary who is correctly assigned to one of the upper 26 RUG-III 
groups in the initial 5-day, Medicare-required assessment is 
automatically classified as meeting the SNF level of care definition up 
to the assessment reference date (ARD) for that assessment.
    Any beneficiary assigned to any of the lower 18 groups is not 
automatically classified as either meeting or not meeting the 
definition, but instead receives an individual level of care 
determination using the existing administrative criteria. This 
presumption recognizes the strong likelihood that beneficiaries 
assigned to one of the upper 26 groups during the immediate post-
hospital period require a covered level of care, which would be 
significantly less likely for those beneficiaries assigned to one of 
the lower 18 groups.
    In this final rule, we are continuing the existing designation of 
the upper 26 RUG-III groups for purposes of this administrative 
presumption. Accordingly, we are designating the following RUG-III 
classifications:
    [sbull] All groups within the Ultra High Rehabilitation category;
    [sbull] All groups within the Very High Rehabilitation category;
    [sbull] All groups within the High Rehabilitation category;
    [sbull] All groups within the Medium Rehabilitation category;
    [sbull] All groups within the Low Rehabilitation category;
    [sbull] All groups within the Extensive Services category;
    [sbull] All groups within the Special Care category; and
    [sbull] All groups within the Clinically Complex category.
    Comment: One commenter supported the continuation of our 
presumption policy based on accurate classification into one of the 
upper 26 RUG-III groups.
    Response: We agree that this policy should be retained.

F. Expiration of Initial Three-Year Transition Period

    As noted previously in sections I.A and I.E.2 of this final rule, 
the initial three-year transition period from facility-specific to 
Federal rates under the SNF PPS has expired. Therefore, payment now 
equals 100 percent of the adjusted Federal per diem rate.

G. 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 Federal per

[[Page 46057]]

diem rate to compute the provider's actual per diem PPS payment. XYZ's 
12-month cost reporting period begins October 1, 2004. XYZ's total PPS 
payment would equal $20,379. The Labor and Non-labor columns are 
derived from Table 5. In addition, the adjustments for certain 
specified RUG-III groups enacted in section 101(a) of the BBRA (as 
amended by section 314 of the BIPA) remain in effect, and are reflected 
in Table 9.

                                 Table 9.--SNF XYZ: Located in State College, PA
                                              [Wage Index: 0.8705]
----------------------------------------------------------------------------------------------------------------
                                                                                Percent    Medicare
    RUG group        Labor    Wage index  Adj. labor   Non-labor   Adj. rate  adjustment     days       Payment
----------------------------------------------------------------------------------------------------------------
RVC.............     $268.21      0.8705     $233.48      $82.98     $316.46    $337.66*          14      $4,727
RHA.............      207.28      0.8705      180.44       64.13      244.57     260.96*          16       4,175
SSC.............      172.65      0.8705      150.29       53.41      203.70    244.44**          30       7,333
IA2.............      117.07      0.8705      101.91       36.22      138.13      138.13          30       4,144
                 -------------
    Total.......  ..........  ..........  ..........  ..........  ..........  ..........          90     20,379
----------------------------------------------------------------------------------------------------------------
* Reflects a 6.7 percent adjustment from section 314 of the BIPA.
** Reflects a 20 percent adjustment from section 101(a) of the BBRA.

H. SNF Market Basket Index

1. Background
    Section 1888(e)(5)(A) of the Act requires us to establish a 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 final rule incorporates the latest available 
projections of the SNF market basket index. Accordingly, 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 July 31, 2001 Federal Register (66 FR 
39562), we included a complete discussion on the rebasing of the SNF 
market basket to FY 1997. There are 21 separate cost categories and 
respective price proxies. These cost categories were illustrated in 
Table 10.A, Table 10.B, and Appendix A, along with other relevant 
information, in the July 31, 2001 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 summarizes the updated labor-related share for FY 2004.

                 Table 10.--FY 2004 Labor-Related Share
------------------------------------------------------------------------
                                              FY 2003         FY 2004
              Cost category                  Relative        Relative
                                            importance      importance
------------------------------------------------------------------------
Wages and Salaries......................          54.796          55.115
Employee Benefits.......................          11.232          11.304
Nonmedical Professional Fees............           2.652           2.651
Labor-Intensive Services................           4.124           4.130
Capital-Related.........................           3.324           3.172
      Total.............................          76.128         76.372
------------------------------------------------------------------------
 Source: (Table 10) Global Insights, Inc., DRI-WEFA, 4th Quarter, 2002.

2. Use of the SNF 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, as 
described in the previous section, from the average index level of the 
prior fiscal year to the average index level of the current fiscal 
year. For the Federal rates established in this final rule, this 
percentage increase in the SNF market basket index is used to compute 
the update factor occurring between FY 2003 and FY 2004. We used the 
Global Insights, Inc. (formerly DRI-WEFA), 4th quarter 2002 forecasted 
percentage increase in the FY 1997-based SNF market basket index for 
routine, ancillary, and capital-related expenses, described in the 
previous section, to compute the update factor.
3. Market Basket Forecast Error Adjustment
    In the supplemental proposed rule, we discussed the possibility of 
developing a market basket forecast adjustment to the rates. We 
solicited comments on--
    [sbull] The appropriateness of making a cumulative market basket 
forecast adjustment reflecting underforecasts since the start of the 
SNF PPS;
    [sbull] The continued use of this forecast error adjustment in 
future rate years;
    [sbull] The appropriateness of applying a threshold to these annual 
rate adjustments; and
    [sbull] Ways that we could use our authority to encourage industry 
innovation and monitor efforts to further promote quality improvement 
efforts among SNFs (see section III.L).
4. Federal Rate Update Factor
    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2004 Federal rates be at a level equal 
to the full market basket percentage change. Accordingly, to establish 
the update factor, we determined the total growth from the average 
market basket level for the period of October 1, 2002 through September 
30, 2003 to the average market basket level for the period of October 
1, 2003 through September 30, 2004. Using this process, the market 
basket update factor for FY 2004 SNF Federal rates is 3.0 percent. In 
addition, as noted in the comments and responses shown below, the rates 
were adjusted by 3.26 percent to reflect the difference between the 
market basket forecast and the actual market basket increase from the 
start of the SNF PPS in July 1998.

[[Page 46058]]

    We used this revised update factor to compute the Federal portion 
of the SNF PPS rate shown in Tables 1 and 2.
    Comment: The majority of commenters strongly supported the proposed 
rule's provision for a full market basket adjustment for FY 2004. 
However, a few commenters cited a MedPAC analysis indicating that an 
across-the-board update may not be appropriate. These commenters 
recommended either a zero update or an update targeted to specific 
types of providers, such as hospital-based SNFs.
    Response: We are required by statute to implement a full market 
basket adjustment for FY 2004. In the proposed rule, we published a 
preliminary market basket factor of 2.9 percent, based on the Global 
Insights Inc., DRI-WEFA, 4th Quarter, 2002 update. For this final rule, 
we are using an updated market basket forecast amount of 3.0 percent, 
based on the Global Insights Inc., DRI-WEFA, 2nd Quarter, 2003 update, 
which is the most recent data available.
    Comment: The vast majority of commenters supported our proposal in 
the supplemental proposed rule to incorporate a market basket forecast 
error adjustment into the SNF PPS rate-setting system. These commenters 
urged us to implement the 3.26 percent cumulative market basket 
adjustment for the FY 2004 rates. They indicated that the cumulative 
adjustment is a necessary stabilizing factor, and reflects actual 
market conditions. A few commenters questioned the necessity of this 
cumulative adjustment, and suggested that the money could be used more 
effectively if targeted to specific programs. However, all commenters 
agreed that, if we proceeded with the cumulative market basket forecast 
error adjustment, we should apply the forecast error adjustment in 
subsequent rate years, even in situations where an overstatement of the 
forecasted market basket adjustment could result in a later downward 
adjustment.
    Response: We carefully considered the implications of adopting this 
market basket forecast error adjustment. We concluded that, in making 
the 3.26 percent adjustment, we are not providing a source of new 
industry funding. Instead, we are correcting an underforecast of 
pricing levels that resulted in lower payments than we would otherwise 
have made if actual, instead of forecast, data were used. To a great 
extent, this underforecast reflects the faster-than-expected growth in 
wages and benefits for nursing home workers since the start of the SNF 
PPS, as a result of continued rapid growth in the health sector and the 
shortage of nurses. As a result of these market conditions, SNFs have 
already incurred expenses at a higher-than-forecasted level. Our 
overarching Medicare integrity goal is to pay the appropriate amount, 
to the correct provider, for the proper service, at the right time. 
Adjusting for this difference between the forecasted and actual market 
basket values is consistent with that goal. Therefore, we will 
implement the 3.26 percent cumulative adjustment for FY 2004. For 
future years, as actual market basket data become available, we will 
apply the forecast error adjustment to subsequent rate years. As 
explained in our supplemental proposed rule, this annual adjustment 
will be applied on a two-year lag basis (that is, the time period for 
obtaining final market basket data), and will reflect both upward and 
downward adjustments, as appropriate.
    Comment: Several commenters expressed concern about the proposed 
use of a 0.25 percentage point threshold for application of the annual 
forecast adjustments. Some commenters maintained that every forecast 
error, however small, should be corrected, and that the use of a 
threshold would build over time, resulting in increasing inaccuracies 
in the rates. Other commenters said that the adjustment should be 
meaningful, and that the 0.25 percent threshold was consistent with 
similar CMS rate-setting provisions. A few commenters suggested 
increasing the threshold.
    Response: In the supplemental proposed rule, we discussed 
establishing an adjustment for forecast error that would take account 
annually a forecast error that was at least 0.25 percentage points 
above or below the actual market basket performance. For the capital 
PPS update and in the hospital PPS update framework, a forecast error 
adjustment is reflected only when the forecast and actual market basket 
percent changes differ by more than 0.25 percentage points. To apply 
this methodology to the SNF PPS would follow an established practice. 
In addition, our experience with those PPS frameworks suggests that the 
forecast errors are relatively small, and generally clustered around 
zero, so we do not anticipate an accumulation that would significantly 
affect the rates over time. We are more concerned that the forecast 
error in any given year is large enough that the SNF PPS base payment 
rate does not adequately reflect the historical price changes faced by 
SNFs. Therefore, we will use the 0.25 percentage point threshold to 
determine whether a forecast error adjustment is appropriate.
    Comment: A few commenters expressed concern about the market basket 
and its methodology and urged us to institute a thorough review of all 
of the weight and price proxy components in the market basket, 
particularly wages, capital, and malpractice insurance. These 
commenters proposed a collaborative effort between the Federal 
government and private industry to review the market basket 
methodology.
    Response: We agree that it is important to review the market basket 
weights and price proxies regularly to ensure that they adequately 
reflect the requirements of section 1888(e)(5) of the Act. It has 
always been our policy to regularly revise and update the market basket 
when appropriate, and we did so most recently in 2001, when we rebased 
the market basket to reflect 1997 cost data. In addition, we have 
discussed issues related to the market basket with interested parties 
since the implementation of the SNF PPS, and continue to do so in order 
to have a technically and conceptually sound market basket that 
satisfies the legislative requirement explained in section 1888(e)(5) 
of the Act.
    In the July 31, 2001 final rule introducing the 1997-based market 
basket, we fully explained our criteria for choosing price proxies for 
market basket cost categories. We use four criteria for this process: 
timeliness (published and available on a regular basis, preferably at 
least quarterly, with little lag), reliability (consistent historical 
time-series as well as being technically and methodologically sound), 
representativeness (reflecting or proxying actual provider experience), 
and relevance (holding non-price factors constant, such as skill mix 
and quality shifts). The current price proxy for wages and salaries, 
the Employment Cost Index (ECI) for nursing home workers, meets all 
four of these criteria. We believe that the ECI better meets our 
criteria than the two other government statistics for nursing home 
wages, the Average Hourly Earnings (AHE) for nonsupervisory workers in 
nursing homes and the Employer Cost for Employee Compensation (ECEC) 
for workers in nursing homes. Although the ECI represents total nursing 
home wages and salaries, SNFs comprise over 75 percent both of 
employment and payroll totals for the nursing home industry and, with 
this representation, SNF wages and salaries are the drivers for changes 
in the ECI for nursing home wages and salaries. Thus, given available 
data, we continue to believe that the ECI for nursing home workers is 
the most appropriate price proxy for growth in wages in SNFs, and we 
will continue to use it in the SNF market basket. It should be noted 
that the use

[[Page 46059]]

of this wage proxy should not be confused with the forecast error 
correction, which is only the difference between the actual and 
forecasted percent change in the ``same'' market basket.
    These commenters disagreed with the use of the average yield for 
AAA bonds as the price proxy for interest costs of for-profit nursing 
homes, rather than the average yield for BAA or lower rated bonds. In 
the SNF market basket, the change in the average yield for AAA bonds is 
used in calculating the SNF market basket price change of the debt held 
by for-profit SNFs. The amount of the bonds issued, the average term of 
these bonds, and the mix of bond ratings issued should all be held 
constant in a fixed-weight Laspeyres price index, such as the SNF 
market basket. The price change of interest costs associated with 
corporate bonds should reflect the change in interest rates (yield) for 
the mix of differently rated corporate bonds held in the base period. 
Our price proxy should represent the change in the interest rates 
associated with this fixed mix.
    We have conducted sensitivity analyses of the market basket using 
the change in the yield for different bond ratings, and the change in 
the long-run yields of AAA, AA, A, and BAA bonds were all very similar. 
The use of any of these bond yields would produce essentially similar 
results. For simplicity, both in the maintenance of the index and in 
the availability of forecasted data, we have chosen to use Moody's AAA 
corporate bonds. Had we used BAA corporate bonds, the resulting SNF 
market basket increases would have been identical.
    We believe that the current method for reflecting corporate bond 
prices in the SNF market basket is appropriate because it keeps the mix 
of corporate bonds issued constant at the base period proportions and 
captures the associated price change in this mix without having to 
reflect the rating on each separately issued bond, since they move 
similarly over time. While we understand the commenter's concern, our 
research and analysis indicate that our method of accounting for change 
in bond prices for for-profit SNFs in the market basket is appropriate.
    These commenters noted that the current price proxies for interest 
costs do not reflect the short-term nature of the debt funding 
currently available to the industry or the fluctuations in rate changes 
in the leasing marketplace. These are important issues and we will 
continue to conduct the necessary research on these topics to ensure 
that they are adequately considered in the market basket. Since we 
currently use a similar debt life for SNFs and hospitals when vintage 
weighting the capital components of the market basket, a movement 
towards shorter average debt terms for SNFs should be considered. 
(Vintage weighting is the process of weighting together the price 
changes of current and prior capital purchases (or debt held) based on 
the average historical acquisition pattern over the useful life of the 
asset or debt instrument.) We will review available data sources on 
this information and make a change if appropriate. While we currently 
believe that leasing costs are appropriately accounted for in the 
market basket, we will also review this issue more fully to ensure that 
this is both theoretically and empirically the case.
    When we rebased the SNF market basket in 2001, we reviewed Medicare 
cost report data on professional liability insurance, and found that 
the vast majority of SNFs did not enter their data into this section of 
the cost reports (only about 20 SNFs provided that information in 
1997). We also looked at Department of Commerce Input-Output data for 
1997, and found that insurance was less than 0.2 percent of total SNF 
expenses. Because the SNF market basket is currently based on the cost 
structure facing SNFs in 1997, it appears that professional liability 
costs are a very small portion of total costs and, thus, would likely 
not have a significant impact on the market basket percentage change. 
However, we also understand the emerging importance of this issue to 
SNFs and will continue to review the Medicare cost report data, as well 
as any other data sources that commenters can recommend to us that 
would meet our criteria, with the hope that we may possibly incorporate 
this information into the market basket structure when appropriate.
    Comment: A commenter stated that we should reconsider the necessity 
of a two-year forecast error correction lag if, over time, data become 
available on a more timely basis.
    Response: It is our policy when determining the forecast error 
correction to use the most recent data available. Currently, this would 
mean a two-year lag on the correction is necessary, since historical 
data for the current fiscal year are not available until after the 
following year's update is determined. Should the data become available 
on a quicker basis, we would investigate the continued need for a two-
year lag. However, a change in availability of data is unlikely, since 
these data (primarily from Federal government databases) are published 
on pre-determined schedules. Producer Price Indices (PPI), for 
instance, are not final until five months after the reference month, 
and Employment Cost Indices (ECI) only become available in the quarter 
following the reference quarter. Based on these schedules, for example, 
a determination of the actual market basket change for FY 2004 would 
not be available until March 2005. Therefore, it would be impossible to 
incorporate this information any earlier than the FY 2006 update, 
creating an unavoidable two-year lag.

I. Consolidated Billing

    As established by section 4432(b) of the BBA, the consolidated 
billing requirement places with the SNF the Medicare billing 
responsibility for virtually all of the services that the SNF's 
residents receive, except for a small number of services that the 
statute specifically identifies as being excluded from this provision. 
Section 103 of the BBRA amended this provision by further excluding a 
number of high-cost, low probability services (identified by Healthcare 
Common Procedure Coding System (HCPCS) codes) within several broader 
categories that otherwise remained subject to the provision. Section 
313 of the BIPA further amended this provision by repealing its Part B 
aspect, that is, its applicability to services furnished to a resident 
during a SNF stay that Medicare does not cover. (However, physical, 
occupational, and speech-language therapy remain subject to 
consolidated billing, regardless of whether the resident who receives 
these services is in a covered Part A stay.) In addition, section 313 
of the BIPA specified that consolidated billing applies only to 
services furnished to those individuals residing in an institution (or 
portion of an institution) that is actually certified by Medicare as a 
SNF.
    To date, the Congress has enacted no further legislation affecting 
the consolidated billing provision. However, as we noted in the April 
10, 2000 proposed rule (65 FR 19232), section 1888(e)(2)(A)(iii) of the 
Act, as added by section 103 of the BBRA, not only identified for 
exclusion from this provision a number of particular service codes 
within four specified categories (that is, chemotherapy items, 
chemotherapy administration services, radioisotope services, and 
customized prosthetic devices), but ``* * * also gives the Secretary 
the authority to designate additional, individual services for 
exclusion within each of the specified service categories.'' In the FY 
2001 proposed rule, we also noted that the BBRA Conference Report (H.R. 
Conf.

[[Page 46060]]

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 * * *.'' By 
contrast, we noted that the Congress declined to designate for 
exclusion any of the remaining services within those four categories 
(thus leaving all of those services subject to SNF consolidated 
billing), because they are relatively inexpensive and are furnished 
routinely in SNFs.
    As we further explained in the July 31, 2000 final rule (65 FR 
46790), any additional service codes that we might designate for 
exclusion under our discretionary authority must meet the same criteria 
that the Congress used in identifying the original codes excluded from 
consolidated billing under section 103(a) of the BBRA: they must fall 
within one of the four service categories specified in the BBRA, and 
they also must meet the same standards of high cost and low probability 
in the SNF setting. Accordingly, we characterized this statutory 
authority to identify additional service codes for exclusion ``* * * as 
essentially affording the flexibility to revise the list of excluded 
codes in response to changes of major significance that may occur over 
time (for example, the development of new medical technologies or other 
advances in the state of medical practice)'' (65 FR 46791). In view of 
the amount of time that has elapsed since we made that statement, we 
invited public comments in the May 16, 2003 proposed rule (68 FR 26776) 
on codes in any of these four service categories which represent recent 
medical advances that might meet the BBRA criteria for exclusion from 
SNF consolidated billing.
    Comment: Although the proposed rule specifically invited comments 
on possible exclusions within the specific service categories 
identified in the BBRA legislation, a number of commenters took this 
opportunity to reiterate concerns about other aspects of consolidated 
billing. For example, we received a number of comments concerning the 
possible exclusion of additional categories of services from SNF 
consolidated billing, beyond those specified in the BBRA. The 
commenters identified services such as modified barium swallows, stress 
tests, hyperbaric oxygen treatments, doppler studies, and nuclear 
medicine scans as appropriate candidates for exclusion. In addition, a 
number of commenters recommended a further set of services for 
exclusion. These additional services are durable medical equipment 
(including, but not limited to, ventilators, speech devices, specialty 
beds, wheelchairs, wound care devices and diabetic shoes), antibiotics, 
TPN, and diagnostic tests.
    Response: As enacted by section 4432(b) of the BBA, the original 
set of consolidated billing exclusions at section 1888(e)(2)(A)(ii) of 
the Act broadly excluded entire categories of services from 
consolidated billing (primarily, those of physicians and certain other 
types of medical practitioners). By contrast, the set of statutory 
exclusions at section 1888(e)(2)(A)(iii) of the Act, as subsequently 
enacted by section 103 of the BBRA, was more specifically targeted 
within a number of broader service categories. In the proposed rule, we 
noted that the original BBRA legislation (as well as the implementing 
regulations) provides the Secretary the authority to designate 
additional, individual services for exclusion within each of the BBRA-
specified service categories. However, the statute does not provide the 
Secretary the authority to create additional categories of excluded 
services beyond those specified in the law. Therefore, based on the 
statute, we cannot exclude services and items from consolidated billing 
unless they fall into the categories of services provided in the 
statute and addressed in the BBRA.
    Comment: Several commenters recommended that we exclude a variety 
of additional chemotherapy agents and radioisotopes used for cancer 
treatment. One commenter specifically recommended that we exclude 
Zevalin which is used in the treatment of non-Hodgkins lymphoma.
    Response: The BBRA specified that certain chemotherapy drugs and 
radioisotope services (sections 1888(e)(2)(A)(iii)(II) and (IV) of the 
Act) be excluded from the SNF PPS payments. Specific chemotherapy drugs 
and radioisotope services were then identified by HCPCS code in the 
statute. The BBRA authorized us to update the list of excluded services 
to reflect advances in technology and medical practice.
    We note that most of the chemotherapy drugs and radioisotope 
services mentioned by commenters were considered for exclusion under 
the BBRA, but were not adopted by the Congress in the BBRA list of 
excluded items and services.
    However, we did identify a new radiopharmaceutical (that is, 
radiotherapeutic substance linked to a radioisotope administered to 
deliver therapeutic radioactivity), Zevalin, which combines elements of 
both the chemotherapy and radioisotope categories excluded under the 
BBRA. This radiopharmaceutical links monoclonal antibodies with a 
radioisotope. In the case of Zevalin, the monoclonal antibody it uses 
is a chemotherapy drug that is already excluded from the SNF PPS 
payments. In addition, the Food and Drug Administration (FDA) has 
recently approved Bexxar, a radiopharmaceutical equivalent to Zevalin. 
We believe that these two radiopharmaceutical agents meet the criteria 
that were used to create the original lists of items to be excluded, 
because they are high-cost services that are unlikely to be used in the 
SNF setting, and that could not have been reflected in the base year 
costs for the SNF PPS (since neither of these products were available 
at that time).
    Accordingly, we will add Zevalin (HCPCS codes A9522 and A9523) and 
Bexxar (HCPCS code not yet available) to the list of items excluded 
from consolidated billing. These exclusions will appear in the 
Consolidated Billing Annual Update Program Memorandum that we will 
issue at the end of CY 2003, and will be effective as of January 1, 
2004.
    In excluding the additional services from consolidated billing and 
the SNF PPS (and, thus, qualifying them for separate payment under Part 
B), section 103 of the BBRA also mandated a corresponding proportional 
reduction in Part A SNF payments, beginning with FY 2001. Specifically, 
section 1888(e)(4)(G)(iii) of the Act provides that the Secretary ``* * 
* shall provide for an appropriate proportional reduction in payments'' 
so that the aggregate reduction in Part A payments is equal to the 
aggregate increase in Part B payments attributable to the exclusions 
provided under section 1888(e)(2)(A)(iii) of the Act. This requirement 
applies not only to the original legislation, but to the BBRA-
authorized update process. Thus, the actual result of this provision's 
mandatory Part A payment reduction is to take the expense of the 
excluded items (which could be financially devastating to an individual 
SNF that actually incurs it, if borne solely by that particular 
facility) and effectively redistribute it over the entire universe of 
providers. As we noted in the July 31, 2000 final rule (65 FR 46792), 
in much the same way that an insurance pool reduces the degree of 
financial risk to an

[[Page 46061]]

individual member of the pool in the event of a catastrophic loss, 
effectively spreading the expense of the excluded items over such a 
large provider population helps minimize the potential financial 
liability that any individual provider might otherwise incur.
    The consolidated billing exclusions addressed under the BBRA were 
items and services that had been in use for many years. We had data for 
the SNF PPS base year that were used to determine utilization of these 
services and make the appropriate adjustment. In our July 31, 2001 
final rule, we implemented a $.05 reduction in the SNF PPS rate to 
reflect this proportional adjustment.
    The situation is slightly different when applied to these new 
consolidated billing exclusions. Since these two radiopharmaceuticals 
were not in existence during the SNF PPS base year, we cannot rely on 
historical utilization data to develop an appropriate reduction. In 
addition, as a new class of treatment, there may not be a relationship 
between the use of these radiopharmaceuticals and the use of other 
chemotherapy agents or radioisotopes used during the SNF PPS base year.
    In light of these considerations, we have developed the following 
approach. We estimate the combined utilization of these two 
radiopharmaceuticals to be approximately 25 doses per year, which most 
closely equates to a $.01 reduction to the unadjusted urban and rural 
SNF PPS per diem rates to reflect the FY 2004 revision of the 
consolidated billing exclusions. (For comparison purposes, as stated 
above, the offset used to adjust for the complete list of BBRA 
exclusions was a negative $.05 adjustment.) Once we have collected 
actual utilization data on the use of these new radiopharmaceuticals 
(as well as on changes in utilization in other chemotherapy and 
radioisotope agents), we will reassess whether the $.01 offset most 
accurately represents an ``appropriate proportional reduction'' in Part 
A SNF payments under section 1888(e)(4)(G)(iii) of the Act, and will 
make any appropriate adjustments in the amount of that offset. This 
aggregate adjustment could involve either an increase or decrease in 
the interim $.01 offset amount applied for FY 2004, in order to ensure 
that the final adjustment most accurately reflects the ``appropriate 
proportional reduction'' required under section 1888(e)(4)(G)(iii) of 
the Act.
    Comment: Some commenters cited the existing list of exclusions (in 
Sec.  411.15(p)(3)(iii)) for certain high-intensity outpatient hospital 
services, and expressed the view that these exclusions should not be 
limited to only those services that actually require the intensity of a 
hospital setting, but rather, should also encompass services furnished 
in other, nonhospital settings as well. As an example, they cited 
services such as magnetic resonance imaging (MRIs) furnished in 
freestanding imaging centers and radiation therapy furnished in 
freestanding oncology centers, both of which may be cheaper and more 
accessible in certain particular localities than those furnished by 
hospitals.
    Response: As we noted in the May 12, 1998 interim final rule (63 FR 
26298), and again in the July 31, 2000 final rule (65 FR 46790 through 
46791), the exclusion of certain outpatient hospital services (in Sec.  
411.15(p)(3)(iii)) is targeted specifically at those services ``* * * 
that, under commonly accepted standards of medical practice, lie 
exclusively within the purview of hospitals * * *'' (emphasis added); 
that is, services which generally require the intensity of the hospital 
setting in order to be furnished safely and effectively. Basically, we 
determined that this high level of outpatient hospital care is beyond 
the scope of SNF comprehensive care plans and should be excluded from 
consolidated billing. The intensive outpatient hospital services 
identified under this exclusion were not subject to consolidated 
billing. However, this exclusion does not encompass services furnished 
in any other health care setting. Thus, to the extent that advances in 
medical practice over time may make it feasible to perform such a 
service more widely in a less intensive, nonhospital setting, this 
would not argue in favor of unbundling the nonhospital performance of 
the service under these regulations, but rather, of considering whether 
to rebundle the service entirely back to the SNF. In addition, we note 
that unlike the outpatient hospital exclusions in Sec.  
411.15(p)(3)(iii), the statutory exclusions enacted by the BBRA for 
certain chemotherapy and other services apply regardless of the setting 
(hospital versus freestanding) in which the services are furnished. 
Adding services such as MRIs and radiation therapy to the existing 
statutory list of exclusions would require legislation by the Congress 
to amend the law itself.
    Comment: One commenter requested the exclusion of specific speech-
language pathology evaluations and treatments.
    Response: As we noted in the FY 2002 proposed rule (66 FR 24020), 
we regard the provision of therapy services as an inherent and integral 
function of an SNF, and we believe that the statutory provisions on 
consolidated billing clearly reflect this position. Section 
1888(e)(2)(A)(ii) of the Act provides that physical, occupational, and 
speech-language therapy services are subject to consolidated billing, 
even when performed by a type of practitioner (for example, a 
physician) whose services would otherwise be excluded. In addition, 
section 1862(a)(18) of the Act specifies that consolidated billing 
applies to these services when furnished to any resident of an SNF, 
even if Part A does not cover the resident's stay. Accordingly, all 
physical, occupational, and speech-language therapy services furnished 
to SNF residents are subject to consolidated billing, and any changes 
to this aspect of the provision would require legislation by the 
Congress to amend the law.
    Comment: Several commenters also proposed expanding the list of 
excluded services by redefining categories of service that are 
currently excluded from consolidated billing. For example, while the 
BBRA excludes specific chemotherapy services by HCPCS codes, these 
commenters recommended not only adding to the list of excluded 
chemotherapy pharmaceuticals, but expanding the exclusion to encompass 
all related services associated with a chemotherapy treatment, such as 
supplies and other pharmaceuticals used to treat side effects. In 
addition, several commenters recommended exclusion of oral chemotherapy 
agents that are not separately billable to Medicare Part B for any 
beneficiary, and are currently covered only as part of the overall 
package of services furnished under the Part A inpatient hospital or 
SNF benefits.
    Response: In the proposed rule, we noted that the BBRA's list of 
services excluded by HCPCS code is a targeted list, narrowly carving 
out only certain individual ``high-cost, low probability'' services 
within a number of broader service categories--such as chemotherapy 
services--that otherwise remained subject to consolidated billing. As 
we noted in the proposed rule (68 FR 26776), the BBRA provides the 
Secretary the authority to designate additional, individual services 
for exclusion within each of the service categories that it specifies. 
However, the statute does not provide authority to exclude other 
services that, while related, fall outside of the specified service 
categories themselves. For example, although anti-nausea drugs are 
commonly used in conjunction with chemotherapy, they are not in 
themselves chemotherapeutic agents and, consequently, do not fall 
within

[[Page 46062]]

one of the excluded categories designated in the BBRA. Further, we 
believe that the Congress was clear in its intent regarding the 
particular items and services to be excluded from consolidated billing, 
by use of the HCPCS codes specified in the Act. Regarding the 
suggestion to exclude from consolidated billing those oral chemotherapy 
agents that are not separately billable to Part B (and are currently 
covered only under the Part A inpatient hospital and SNF benefits), we 
note that expanding the existing drug coverage available under Part B 
to include those drugs is not within our authority. Implementing this 
change would require legislation by the Congress to amend the law.
    We note that some chemotherapy pharmaceuticals that commenters 
proposed for exclusion have already been included in the list of HCPCS 
codes excluded from the consolidated billing provisions. The most 
recent annual update regarding HCPCS exclusions from consolidating 
billing can be found in Program Memorandum A-02-118 (Change Request 
(CR) 2459), published November 8, 2002.
    Comment: Two commenters requested an expansion of the dialysis 
exclusion to encompass dialysis services furnished directly by the SNF. 
In addition, several commenters noted that erythropoietin (EPO) 
currently is excluded from consolidated billing only when furnished in 
conjunction with the Part B dialysis benefit, and they recommended 
expanding this exclusion to encompass its use in connection with other, 
non-dialysis forms of treatment (such as chemotherapy).
    Response: Under section 1888(e)(2)(A)(ii) of the Act, the exclusion 
of dialysis services from consolidated billing applies only to those 
services that meet the requirements for coverage under the separate 
Part B dialysis benefit at section 1861(s)(2)(F) of the Act. The Part B 
benefit allows for home dialysis and dialysis performed on the premises 
of a certified dialysis facility. By contrast, if the SNF itself elects 
to furnish dialysis services to a resident during a covered Part A stay 
(either directly with its own resources, or under an ``arrangement'' 
with a certified dialysis facility in which the SNF itself does the 
billing), the services are no longer considered Part B dialysis 
services, but rather, are Part A SNF services. Accordingly, they would 
no longer qualify for the statutory exclusion of Part B dialysis 
services from consolidated billing, and would instead be bundled into 
the comprehensive PPS per diem payment that the SNF receives for the 
package of services that it furnishes during the resident's covered 
Part A stay. Any change in the scope of the dialysis exclusion from 
consolidated billing would require legislation by the Congress to amend 
the law. We note that we are proactively monitoring the impact of the 
SNF PPS to ensure that beneficiary access is not compromised. To that 
end, we have requested that the Office of the Inspector General (OIG) 
specifically examine the effect of the PPS on SNF residents' access to 
dialysis treatment. We will continue to gather extensive information 
from around the country with respect to SNF PPS implementation and will 
look to a variety of sources for objective information and evidence of 
the impact of this policy on access to quality care.
    Similarly, under section 1888(e)(2)(A)(ii) of the Act, the 
exclusion of EPO from consolidated billing applies only to those 
services that meet the requirements for coverage under the separate 
Part B EPO benefit at section 1861(s)(2)(O) of the Act. Section 
1861(s)(2)(O) of the Act permits coverage of EPO and items related to 
its administration for those dialysis patients who can self-administer 
the drug, subject to methods and standards established by the Secretary 
for its safe and effective use (as described in Sec.  405.2163(g) and 
(h)). Since EPO that is used for non-dialysis patients does not fall 
within the scope of section 1861(s)(2)(O) of the Act, that usage does 
not fall within the scope of the EPO exclusion from consolidated 
billing.
    Comment: One commenter requested that we ``develop a system to 
eliminate the billing of SNFs for extraneous physician visits.''
    Response: Under section 1888(e)(2)(A)(ii) of the Act and Sec.  
411.15(p)(2)(i) of the regulations, physician services that meet the 
criteria for payment on a fee schedule basis are excluded from 
consolidated billing and, accordingly, can already be billed directly 
to the Part B carrier by physicians themselves.
    Comment: A few commenters recommended expanding the consolidated 
billing exclusions to provide short-term relief pending the 
implementation of SNF PPS refinements. They urged this course of action 
as a way of ensuring continued access to SNF care for beneficiaries 
with heavy non-therapy ancillary needs.
    Response: We agree that the SNF PPS needs to identify more 
accurately those beneficiaries with high pharmaceutical and other non-
therapy ancillary needs, and we are actively conducting research 
designed to address these issues. However, we do not have the 
authority, nor do we believe it is appropriate, to expand the 
consolidated billing exclusions as a substitute for actual refinements. 
As we noted in the July 31, 2001 final rule (66 FR 39588) in response 
to similar comments,

* * * we do not share the view of those commenters who suggested 
that the creation of additional exclusions from consolidated billing 
could serve, in effect, as an interim substitute for implementing 
case-mix refinements. We believe that payment adjustments relating 
to case-mix would best be accomplished directly through refinements 
in the case-mix classification system. Further, we note that the 
Congress has already provided an interim adjustment until the 
refinements can be implemented, in the form of the temporary rate 
increases for certain specified RUG-III groups [enacted by section 
101(a) of the BBRA, as amended by section 314 of the BIPA].

J. Application of the SNF PPS to SNF Services Furnished by Swing-Bed 
Hospitals

    In the July 31, 2001 final rule (66 FR 39562), we announced the 
conversion of swing-bed hospitals to the SNF PPS, effective with the 
start of the provider's first cost reporting period beginning on or 
after July 1, 2002. We selected this date consistent with the statutory 
provision to integrate swing-bed hospitals into the SNF PPS by the end 
of the SNF transition period, that is, June 30, 2002.
    As of July 31, 2003, the SNF PPS covers all swing-bed rural 
hospitals (as noted previously in section I.D of this final rule, 
section 203 of the BIPA exempted critical access hospital (CAH) swing-
beds from the SNF PPS). Therefore, all rates and wage indices outlined 
in earlier sections of this final rule for SNF PPS also apply to all 
swing-bed hospitals. A complete discussion of assessment schedules, the 
MDS and the transmission software, Raven-SB for Swing Beds, can be 
found in the July 31, 2001 final rule (66 FR 39562). The latest changes 
in the MDS for swing-bed hospitals are listed on our SNF PPS Web site, 
http://www.cms.hhs.gov/providers/snfpps/snfpps_mds.asp.

K. Distinct Part Definition

    In the May 16, 2003 proposed rule (68 FR 26777), we noted that 
while some SNFs function as separate, independent entities, we have 
recognized since the inception of the Medicare program that it is also 
possible for a SNF to operate as a component, or ``distinct part'' of a 
larger organization. However, there was no precise definition of a 
``distinct part.'' In this final rule, we are clarifying the definition 
of a distinct part, by adopting a set of criteria that provides

[[Page 46063]]

more precise guidance to providers and State licensure and 
certification agencies. This guidance will assist providers in 
understanding the criteria that govern the financial and organizational 
structure of these entities to facilitate the Medicare and Medicaid 
approval process.
    Further, we proposed adopting certain additional criteria that 
would apply specifically to what we define in the rule as a composite 
distinct part SNF and/or NF. Under these criteria, a composite distinct 
part would be treated as a single distinct part of the institution of 
which it is a distinct part, and, as such, would operate under a single 
provider agreement with a single provider number. Further, to ensure 
quality of care and quality of life for all residents, we proposed that 
the composite distinct part would be required to meet all of the 
participation requirements set forth in subpart B of part 483 
independently in each location. We also proposed amending Sec.  483.10 
and Sec.  483.12 to afford certain protections and rights to residents 
located in a composite distinct part SNF and/or NF.
    Comment: A commenter believed that the new criteria for distinct 
part certification were intended to determine if a facility was 
provider-based and a distinct part of a larger facility. Several other 
commenters believe that if a SNF meets the requirements of Sec.  413.65 
(provider-based), it is automatically considered a distinct part of the 
hospital to which it claims to be based.
    Response: The distinct part certification requirements set forth in 
Sec.  483.5 are separate and apart from the requirements to be 
considered ``provider based'' as set forth in Sec.  413.65. Indeed, 
SNFs are no longer required to request or be approved for provider-
based status and are not subject to the provider-based regulations in 
Sec.  413.65. Moreover, simply meeting the provider-based requirements, 
which, as we have previously stated do not apply to SNFs, does not 
translate to automatically meeting the distinct part requirements. 
Accordingly, we will evaluate each request for approval of a distinct 
part SNF or NF against the criteria outlined in Sec.  483.5.
    Comment: Several facilities have questioned whether the receipt of 
a higher rate of Medicaid reimbursement is a justifiable reason for us 
to determine that a particular nursing facility is a part of a distinct 
part composite.
    Response: We do not consider it an efficient use of public monies 
to approve a composite distinct part or, for that matter, a distinct 
part for the sole purpose of enhancing its Medicaid payment.
    Comment: Several commenters recommend that we eliminate the 
condition that beds cannot be scattered throughout the facility.
    Response: The Committee Report that accompanied the original 
Medicare legislation (Sen. Fin. Comm. Rep. No. 404, 89th Congress, 1st 
Session 31-32 (1965)) stated that a posthospital extended care facility 
could be an institution such as a skilled nursing home or a distinct 
part of an institution, such as a ward or wing of a hospital or a 
section of a facility another part of which might serve as an old age 
home. The regulations at 42 CFR 440.155 describe a distinct part as `` 
* * * an identifiable unit such as an entire ward or contiguous ward, a 
wing, floor or building.'' Thus, we believe that there is no legal 
basis for permitting the scattering of beneficiaries throughout the 
institution's physical plant. Also, the scattering of beneficiaries 
throughout the physical plant would make the survey and certification 
of SNFs and NFs a much more burdensome and complicated process. 
Finally, it would mean that we would be applying our rules to residents 
or beds per se rather than to providers. We apply our requirements to 
facilities, not beds or residents. Thus, the institution must clearly 
designate the area that is the proposed distinct part SNF and/or NF.
    Comment: Several commenters suggested that we allow facilities to 
designate the number of beds to be approved and to identify those beds 
anywhere within the facility for cost accounting or survey purposes. 
The commenters add that in the approval process of a SNF distinct part, 
the facility would demonstrate to us the cost accounting methodology 
for a Medicare distinct part. Regulations for cost accounting for a 
Medicaid distinct part would be at the discretion of the State. The 
commenters indicate that, during the onsite survey, the facility would 
disclose the beds/rooms that the facility has designated as comprising 
the SNF or NF distinct part.
    Response: We agree that an institution or institutional complex 
should be allowed to identify the number of beds to be approved in 
accordance with our policy. We also agree that an institution or 
institutional complex be allowed to identify the building(s) or 
identify parts of building(s) (that is wings, wards, or floors) where 
the distinct part is located as long as the location comports with the 
distinct part rules. However, for both cost accounting and survey and 
certification purposes, we must know in advance of the initial or 
recertification surveys, the number of beds in the distinct part and 
the location of the distinct part with respect to the entire complex. 
This assures that the surveying entity, either the State survey agency 
or our regional office, can allocate adequate resources to conduct the 
survey and then proceed directly to the distinct part to begin the 
survey. It also provides for adequate cost information from the 
provider's records to support payments made for services furnished to 
beneficiaries. If there are changes in the number of distinct part beds 
and/or their location in an approved distinct part facility, we must 
approve those changes in accordance with established policy.
    Comment: One commenter states that we are forcing nursing homes to 
transfer residents to different rooms based on the certification of 
beds.
    Response: We disagree with the commenter. It is the nursing home, 
not the Medicare or Medicaid program, that decides in which room an 
individual will be placed. As noted previously, facilities are 
certified, not beds. An individual, in selecting a nursing home for 
Medicare or Medicaid purposes, may choose any facility he/she likes 
provided the selected facility chooses to accept him or her. If a 
nursing home wants to place a person anywhere in the home, the facility 
could choose to have the entire nursing home participate in both 
Medicare and Medicaid.
    Comment: Several commenters expressed concern with the ``close 
proximity'' requirements set forth in the definition of a distinct part 
relating to location. Another commenter even recommended that the 
definition of a distinct part exclude reference to location. Instead, 
the commenter suggested that the definition be revised to include being 
adjacent to, on the same campus of, or on multiple campuses of an 
institution that meets all the criteria of ownership and management 
control mentioned in Sec.  483.5(b)(2). Yet another commenter believes 
that the requirements for location required that the distinct part be 
located strictly in the main building and not be allowed to exist at 
another location that is part of the institution's campus.
    Response: In the definition of a distinct part set forth in the 
proposed rule of May 16, 2003 (68 FR 26758), we stated that an SNF or 
NF distinct part may be comprised of one or more buildings or 
designated parts of buildings (that is, wings, wards, or floors) that 
are--

[[Page 46064]]

    [sbull] In the same physical area immediately adjacent to the 
institution's main buildings;
    [sbull] Other areas and structures that are not strictly contiguous 
to the main buildings but are located within close proximity of the 
main buildings; and
    [sbull] Any other areas that we determine on an individual basis, 
to be part of the institution's campus.
    While we understand the concerns expressed by these commenters, we 
are retaining the language in the proposed rule regarding location and 
close proximity to afford flexibility in our determinations. It is our 
view that, in order to meet the requirements for supervision and 
control, and to function as an integral and subordinate part of the 
institution, with significant common resource usage of buildings, 
equipment, personnel and services, a distinct part would need to be 
located in close proximity to the institution of which it is a part. 
However, to clarify and address some of the commenters' concerns, we 
are revising Sec.  483.5(b)(1) by clarifying that a distinct part SNF 
or NF is ``physically distinguishable from the larger institution'' 
rather than ``a physically identifiable component.'' As for concerns 
with respect to locations outside the institution's main building, we 
believe the definition provides flexibility to recognize distinct part 
SNFs or NFs that are not co-located at the institution's main building 
and, in conformity with the regulations as finalized, will continue to 
do so by making such determinations on an individual basis.
    Comment: A commenter suggested that, instead of creating the term 
``composite distinct part,'' we broaden the definition of distinct 
part, thus negating the necessity to make composite distinct part a 
separate term.
    Response: Although we certainly want to keep our definitions of 
terms as simple and as realistic as possible, we are retaining our 
definition of a composite distinct part because the term best describes 
the situations we have encountered that were not previously addressed 
in regulations.
    Comment: Several commenters recommended that existing SNFs and NFs 
that are a physically identifiable component of an institution be 
grandfathered as appropriate as a distinct part of that institution 
without having to submit a written request to us. Another commenter 
encouraged us to provide a transition period before implementation of 
the distinct part definition and composite distinct part definition to 
allow providers time to come into compliance with the accompanying 
requirements.
    Response: We do not agree that existing distinct part SNFs and NFs 
should be grandfathered. All proposed and existing distinct parts must 
submit a written request to us as set forth at Sec.  483.5(b)(2)(vi). 
At a minimum, an SNF and/or NF must demonstrate in writing how it meets 
the definition of a distinct part or composite distinct part. This 
definition has been discussed in detail in both the proposed rule and 
in this final rule, and provides extensive guidance to providers on 
compliance with these requirements.
    The effective date of this final rule is October 1, 2003. However, 
in response to these comments, we will disseminate administrative 
guidance to implement the regulation with minimal burden to providers 
and States, in accordance with the requirement at Sec.  
483.5(b)(2)(vi).
    Comment: A commenter suggested that we allow the approval to be a 
distinct part to be made on a retroactive basis.
    Response: We disagree. The purpose of this regulation is to codify 
existing criteria for approval of distinct parts. For most facilities, 
the impact of this regulation will be that the criteria are easier to 
understand and can be more readily used by facility staff to monitor 
continued compliance. For those entities requesting initial Medicare 
and/or Medicaid approval, there is no reason that the SNF or NF could 
not be in compliance with the criteria at the time approval is 
requested. Indeed, we are requiring that a request for a distinct part 
be part of the Medicare and/or Medicaid approval process. The same is 
true in situations where there is a change of ownership or a change in 
bed size of an existing facility. When a provider is contemplating a 
change of ownership, the provider must notify us in advance; thus, we 
are requiring that a request for distinct part approval be included as 
part of its notification to us. In those instances where an existing 
SNF or NF requests a change in bed size, that request must be filed 45 
days in advance of the change as stated in established policy; 
therefore, we are requiring that the request for distinct part approval 
be included in the request for a change in bed size.
    Comment: There were a number of comments regarding specific 
administrative procedures, such as those relating to the process for 
requesting a distinct part approval and the appeal of a denial of a 
request.
    Response: We believe that the detailed distinct part criteria set 
forth in the regulations, as discussed further in the proposed rule and 
in this final rule, already provide extensive guidance to providers on 
compliance with these requirements. However, as we noted in the July 
31, 2000 final rule (65 FR 46791), and again in the July 31, 2001 final 
rule (66 FR 39588), specific operational instructions are beyond the 
scope of the SNF PPS final rule, and are addressed instead through 
program issuances.
    Comment: A commenter had several questions regarding the term 
``composite distinct part.'' The commenter asked whether an institution 
may operate two or more physically separate locations all of which 
would qualify as SNFs, and whether we will treat them as if they are a 
single SNF. On the other hand, if an institution operates a SNF at two 
locations, will only one location qualify as a SNF and the other will 
qualify as a NF? The commenter also asked whether all of the various 
locations comprise a single composite distinct part or whether each 
location itself qualifies as a composite distinct part.
    Response: By definition, a composite distinct part is a combination 
of two or more physically separate locations where SNF and/or NF 
services are provided, all of which operate under a single Medicare or 
Medicaid provider agreement, constituting a single distinct part SNF 
and/or a single distinct part NF.
    Comment: A commenter requested that we further explain the 
administrative implications relating to a composite distinct part SNF 
or NF. The commenter specifically asked for guidance with respect to 
the filing of the Medicare cost report, the selection of a cost 
reporting period, the issuance of a provider number, the selection of a 
fiscal intermediary, and any additional administrative requirements.
    Response: As we have stated above, a composite distinct part is in 
fact a combination of two or more physically separated locations where 
SNF and/or NF services are provided, all of which operate under a 
single Medicare or Medicaid provider agreement, constituting a single 
distinct part SNF and/or a single distinct part NF. Therefore, a 
composite distinct part SNF must file a single Medicare cost report, 
use the same cost reporting period selected by the institution of which 
it is a distinct part, use a single provider number and the same fiscal 
intermediary as that selected by the institution of which it is a 
distinct part. The composite distinct part is subject to the change in 
bed size policies that we establish for all SNFs and NFs.
    Comment: Several commenters were unclear as to the reason why we 
were creating the term ``composite distinct part.''

[[Page 46065]]

    Response: As we stated in the proposed rule of May 16, 2003 (68 FR 
26758), the growing frequency of hospital mergers (in which each of the 
merging hospitals brings its own distinct part SNF and/or NF into the 
merger) has created situations where the newly merged hospital entity 
includes multiple physical plants in which SNF and/or NF services are 
provided in different physical locations: that is, the creation of a 
composite distinct part SNF and/or NF. Moreover, that hospital might 
additionally purchase a freestanding SNF and/or NF for use in placing 
those of its inpatients who are ready for hospital discharge. Existing 
guidance on what constitutes a distinct part does not address these 
types of situations. Thus, we have established these criteria in an 
effort to reduce uncertainty and to allow providers to make informed 
decisions. This rule also establishes protections for beneficiaries who 
reside in composite distinct parts.
    Comment: A commenter questioned if States would be required to 
apply the same definition in determining distinct part approval for 
purposes of State licensing and Medicaid reimbursement laws.
    Response: The criteria and definitions set forth in this rule apply 
to SNFs and NFs that are approved to participate in either the Medicare 
program or the State Medicaid program (or both). As such, for 
participation in the Medicare and/or Medicaid programs, the criteria in 
this rule must be met.
    Comment: A commenter stated that we should consider CMS staff time 
that will be required to approve mergers.
    Response: Providers who are participating in the Medicare and/or 
Medicaid program are required to notify us of any proposed change of 
ownership before the effective date of the transaction, since these 
transactions directly affect the provider agreement. Reviewing these 
transactions is a function that our Regional Offices are currently 
performing and will not require additional CMS staff time.
    In the proposed Sec.  483.5(c)(2)(iii), we inadvertently used the 
term ``hospitals'' rather than ``institutions'' in our discussion of 
changes of ownership. We are revising Sec.  483.5(c)(2)(iii) by 
replacing the word ``hospitals'' with ``institutions,'' since this 
provision is meant to apply more generally to institutions, which could 
include, but are not limited to, hospitals. We are also replacing the 
word ``merged'' with ``change of ownership'' throughout the regulations 
text since this provision more accurately applies in all cases where 
there is a change of ownership. For the same reason, we are deleting 
the examples referencing hospitals at Sec.  483.5(b)(1).
    Comment: A commenter stated that our policy of allowing only one 
distinct part SNF and/or one distinct part NF is problematic as it 
could jeopardize the funding for certain programs that are predicated 
on specific State program requirements.
    Response: It has been our longstanding policy that an institution 
or institutional complex only be allowed to have one distinct part SNF 
and/or one distinct part NF. Moreover, our policy is based on sections 
1819(a) and 1919(a) of the Act, which define a SNF and a NF, 
respectively, as ``an institution (or a distinct part of an 
institution). * * *'' It is our view that this reference to the 
singular, that is, ``a'' distinct part indicates that the Congress did 
not contemplate permitting the establishment of more than one distinct 
part SNF or NF in any given institution. This language is also 
reflected in the Committee Report accompanying the original Medicare 
legislation previously discussed in the May 16, 2003 proposed rule (68 
R 26777).
    Comment: Several commenters suggested the term ``distinct part'' be 
defined using language that had previously appeared in the State 
Operations Manual Sec.  2110, ``The term 'distinct part' denotes that 
the unit is organized and operated to give a distinct type of care 
within a larger organization which otherwise renders other types or 
levels of care. * * *''
    Response: We are not making the revision, as suggested by the 
commenters, because this would necessitate a change in the statute.
    Comment: Two commenters expressed a concern that the restrictions 
on room changes made within the locations of the composite distinct 
part would affect the transfer of residents between levels of care 
(that is, skilled nursing facility services are provided in one 
location of the composite distinct part and nursing facility services 
are provided in another location of the composite distinct part.)
    Response: We do not consider the resident protections in newly 
added Sec.  483.12(a)(8) that apply to room changes to have any impact 
on residents transferring between different levels of care within a 
composite distinct part. There is a distinction between room changes 
and transfers. Room changes occur within the same certified facility, 
such as within a composite distinct part. Section 483.12(a)(1) defines 
transfers and discharges as, ``* * * movement of a resident to a bed 
outside of the certified facility whether that bed is in the same 
physical plant or not. Transfer and discharge does not refer to the 
movement of a resident within the same certified facility.''
    Comment: The commenter urged us to implement the definitions for 
distinct parts and composite distinct parts in a manner that neither 
adds administrative burden on SNFs or NFs, nor adversely affects their 
quality of care or financial status. The commenter stated further that 
State Medicaid programs and other payers should not be required to use 
the new definitions, and that the creation of the definitions should 
not hamper their ability to use the previous definitions.
    Response: It is not our intent in defining the terms distinct part 
and composite distinct part to add to a SNF's or NF's administrative 
burdens or to adversely affect the quality of care provided to the 
residents, or to affect the SNF's or NF's financial status. We believe 
that our definitions of these terms should be clearly stated in 
regulations in order to reduce uncertainty and allow providers to make 
informed decisions and enhance the survey and certification process.
    We do expect that the distinct part regulations be applied to SNFs 
participating in the Medicare program and NFs participating in the 
Medicaid program in exactly the same manner. As we have discussed 
previously, the statutory definitions of a SNF and a NF that appear in 
sections 1819(a) and 1919(a) of the Act, respectively, use identical 
language, ``an institution (or a distinct part of an institution)'' and 
thus are not intended to be treated differently. Moreover, Sec.  
440.155 and the Medicare guidelines concerning distinct parts have 
always correlated, and we believe that to allow different distinct part 
rules for the two programs would only create confusion and would not be 
consistent with the intent of the Congress. We are also making 
editorial technical changes to Sec.  440.40(a)(1)(ii)(A), Sec.  
483.5(b)(1), Sec.  483.5(b)(2), Sec.  483.5(c), and Sec.  
483.10(b)(12). These were made solely to clarify and make more 
understandable the regulations text.

L. Quality of Care Efforts Under the SNF PPS

    In the supplemental proposed rule (68 FR 34772), we expressed our 
expectation that the majority of any additional payments that might 
result from the introduction of a forecast error adjustment (as 
discussed previously in section III.H.3 of this final rule) would be 
used for direct care services to nursing home residents and quality 
improvement activities and programs. We also solicited comments on how 
SNFs could account for these direct care

[[Page 46066]]

funds, and on how we can further promote quality improvement efforts 
among SNFs.
    Comment: A number of commenters pointed out that a primary 
objective of any prospective payment system is to allow providers the 
flexibility to manage their facilities effectively and to allocate 
their funding to best serve the needs of their patients. These 
commenters generally agreed that providers should use this flexibility 
to develop innovative programs to ensure high quality care, but 
generally did not support targeting funding to a specific service or 
rate component. Several commenters referenced several locally-developed 
programs focusing on quality improvement and customer satisfaction as 
examples of provider initiatives in a PPS environment. On the other 
hand, a few commenters took a more positive view of targeted payment 
rates, and recommended that we consider recent State initiatives that 
incorporate quality incentives or establish mandatory SNF staffing 
ratios.
    Response: In considering the adoption of a market basket forecast 
error adjustment, we carefully evaluated industry comments for the 
implications of targeting this additional funding to quality 
improvements. While generally positive about the need to maintain and 
enhance direct care services, many commenters strongly urged us to 
maintain the integrity of the PPS as the best means of achieving 
improved patient care. These commenters maintained that the most 
effective way to manage operations and improve quality is to allow 
managers the flexibility they need to address the needs of their 
patients quickly. They expressed concern that earmarking funds for a 
specific care component (such as nurse staffing or pharmaceuticals) 
would restrict rather than enhance this flexibility, and could result 
in a negative, rather than a positive impact on patient care. While we 
strongly support the development of quality incentives within the 
structure of our payment systems, we agree that any such initiatives 
will need to be carefully designed and tested to ensure an appropriate 
and beneficial effect on direct care and patient outcomes.
    A few commenters recommended that we establish specific quality 
and/or staffing standards. Although we do have research data that links 
staffing levels and patient outcomes, these research projects have not 
provided us with the specific analyses (including the trade off between 
cost and quality) that we would need to establish either minimum or 
recommended staffing levels, or to adjust those staffing levels for 
specific acuity or functional limitation populations. Therefore, it 
became apparent that we do not currently have a clear way to target 
payments to quality improvements in a uniform manner that will benefit 
the Medicare program in general. However, we want to reiterate our 
expectation that this additional funding be used to improve direct 
care. We strongly encourage providers to continue their efforts to 
develop and expand programs such as the grass roots initiatives 
discussed later in this preamble that promote high quality care.
    We are also continuing to explore a variety of quality initiatives, 
including the relationship between staffing and quality outcomes. We 
have recently awarded a contract to generate an informed set of CMS 
options for establishing a system of public reporting of nursing home 
staffing information. The report will detail a set of options for us to 
consider with respect to which data elements to collect, and how those 
data elements can best be transmitted, audited, and displayed on our 
Web site along with other consumer information. The data obtained with 
this contract will be used in continuing analysis of staffing levels 
and resident outcomes. We are also in the process of awarding another 
contract that will expand on the current nurse staffing study. This 
contract will examine staffing in general in an attempt to develop a 
quality measure(s) for reporting as part of the Nursing Home Quality 
Initiative (NHQI) effort.
    Finally, the Department has recently completed, under contract, a 
study of State-initiated nursing home quality programs and will soon be 
completing another contracted study on State-initiated nursing home 
nurse staffing ratios. We plan to further investigate various State 
initiatives designed to integrate quality incentives into their payment 
systems. For example, some States already tie direct care reimbursement 
to actual direct care staffing expenditures. In addition, other States 
are looking at a variety of best practice standards that could be 
monitored and recognized through incentive payments. We plan to 
incorporate any promising State initiatives into our ongoing research 
efforts, which could serve as the basis for future recommendations.
    Comment: Several commenters pointed out that the national nursing 
facility trade associations and their State affiliates are already 
strongly committed to enhancing quality, and described a number of 
grass roots initiatives, including State-wide customer service and 
public reporting programs, State-association-run quality monitoring and 
early warning systems, and a variety of programs to train staff, 
provide career ladders, and increase retention. These commenters 
pointed out that the national nursing facility trade associations have 
strongly supported the development of our quality measures, and are 
working in partnership with us on a number of other quality 
initiatives. Other commenters cited industry interest in and support 
for a number of initiatives, including the Eden Alternative, 
Wellspring, and the Pioneer Network, which have demonstrated the 
ability to attract and retain high quality staff.
    Response: We have focused significant resources in the past two 
years on improving the quality of health care provided by Medicare 
providers. Our efforts with respect to nursing home quality have been 
particularly intensive. We recognize that several national 
organizations and their members have worked with us on several quality 
initiatives, including the Nursing Home Quality Initiative (NHQI). The 
NHQI is a four-prong effort that consists of--
    [sbull] Regulation and enforcement efforts conducted by State 
survey agencies and by us;
    [sbull] Improved consumer information on the quality of care in 
nursing homes;
    [sbull] Continual, community-based quality improvement programs 
designed to help nursing homes improve their quality of care; and
    [sbull] Collaboration and partnership to utilize available 
knowledge and resources effectively.

    We are pleased that several commenters shared their efforts to have 
a positive impact on beneficiaries' outcomes. A variety of programs 
have been designed on the State or organization level to improve staff 
knowledge and expertise by providing unique training and educational 
opportunities. In addition, many providers are participating in several 
new and innovative programs that explore different ways to better serve 
patients. For example, the Pioneer Network, Eden Alternative, and 
Wellspring programs are designed to impart a culture change that 
positively influences the aging population. Providers involved in these 
three programs report improvements in staff retention, staff morale, 
and resident outcomes, including decreased pharmaceutical utilization 
and improved mobility. These improvements have also been associated 
with more positive patient outcomes, as evidenced by the results of 
State surveys.

[[Page 46067]]

    We encourage the national associations and their affiliates to 
communicate information on these innovative programs to their entire 
membership, and to encourage expansion of these innovative programs 
across the country. We also encourage the development of partnerships 
among nursing homes, CMS, the State agencies, Quality Improvement 
Organizations (QIOs), consumers, and other stakeholders in developing 
and promoting programs designed to maintain and enhance high quality 
care. We also encourage the national organizations to continue to share 
information on potential quality initiatives with and between their 
State affiliates and providers. Finally, we encourage these 
stakeholders to work with us to design Federal demonstration projects 
to examine more fully a variety of quality models, including the 
development of payment systems with integrated quality incentives.

IV. Provisions of the Final Rule

    The provisions of this final rule are as follows:
    [sbull] We are revising Sec.  411.15(p)(2)(xii) to incorporate 
additional chemotherapy service exclusions from SNF consolidated 
billing, as well as a conforming revision in the regulations at Sec.  
489.20(s)(12).
    [sbull] We are revising Sec.  413.337(d) by adding a new paragraph 
(2), which establishes an adjustment to the annual increase in the SNF 
market basket index amount to account for forecast error.
    [sbull] We are revising Sec.  483.5 to include specific definitions 
of the terms ``distinct part'' and ``composite distinct part.'' We are 
also making conforming changes in subpart B of part 483 of the 
regulations, as well as in parts 413 and 440.
    In addition, we are making the following technical corrections in 
the regulations text, as discussed in the proposed rule:
    [sbull] We are revising a cross-reference that appears in Sec.  
409.20(c) of the regulations. Section 409.20 provides a general 
introduction to the subsequent sections (Sec.  409.21 through Sec.  
409.36) that set forth the specific requirements pertaining to the SNF 
benefit. However, in referring to the sections that follow, the cross-
reference in Sec.  409.20(c) concerning terminology inadvertently omits 
a reference to Sec.  409.21, and we are now correcting that omission by 
revising the cross-reference to read ``Sec.  409.21 through Sec.  
409.36''.
    [sbull] We are correcting the spelling of the word ``describe'' as 
it appears in the second sentence of the regulations text at Sec.  
483.20(k)(1).

Also, as discussed in the supplemental proposed rule, we are correcting 
the spelling of the word ``standardized'' in the second sentence of 
Sec.  413.345 of the regulations. Further, we are taking this 
opportunity to make the following additional technical corrections:
    [sbull] We are restoring a portion of the regulations text that was 
inadvertently deleted from Sec.  488.438(d), dealing with civil money 
penalties. As originally published in the Federal Register on November 
10, 1994 (59 FR 56248), paragraph (d) of Sec.  88.438 contained three 
numbered paragraphs. However, when this section of the regulations was 
republished on March 18, 1999 (64 FR 13361), paragraph (3) was 
inadvertently omitted. Accordingly, we are now restoring this portion 
of the regulations text, which reads as follows: ``(3) Repeated 
deficiencies are deficiencies in the same regulatory grouping of 
requirements found at the last survey, subsequently corrected, and 
found again at the next survey.''
    [sbull] In paragraph (d) of Sec.  489.22, which deals with 
prepayment requirements in providers, we are correcting the phrase 
``covered impatient services'' to read ``covered inpatient services''.

V. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register to provide a period for public comment before the 
provisions of the technical corrections included in this final rule 
take effect. We can waive this procedure, however, if we find good 
cause that a notice and comment procedure is impracticable, 
unnecessary, or contrary to the public interest and incorporate a 
statement of the finding and its reasons in the notice issued.
    We find it unnecessary to undertake notice and comment rulemaking 
as to these technical changes as they merely provide technical 
corrections to the regulations and do not make any substantive changes 
to the regulations. Therefore, for good cause, we waive notice and 
comment procedures.

VI. 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.).

VII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act (the Act), the 
Unfunded Mandates Reform Act of 1995 (UMRA), (Pub. L. 104-4), and 
Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
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 in any 1 year). 
This final rule is a major rule, as defined in Title 5, United States 
Code, section 804(2), because we estimate the impact of the standard 
update will increase payments to SNFs by approximately $400 million. In 
addition, we have adjusted the FY 2004 rates to reflect the 3.26 
percent cumulative forecast error since the start of the SNF PPS on 
July 1, 1998. This adjustment increases payments to SNFs by an 
additional $450 million, for an aggregate increase in payments of $850 
million.
    The update set forth in this final rule applies to payments in FY 
2004. Accordingly, the analysis that follows describes the impact of 
this one fiscal year only. In accordance with the requirements of the 
Act, we will publish a notice for each subsequent fiscal year that will 
provide for an update to the payment rates and that will include an 
associated impact analysis.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most SNFs and most other providers and suppliers are small entities, 
either by their nonprofit status or by having revenues of $11.5 million 
or less in any 1 year. For purposes of the RFA, approximately 53 
percent of SNFs are considered small businesses according to the Small 
Business Administration's latest size standards with total revenues of 
$11.5 million or less in any 1 year (for further information, see 65 FR 
69432, November 17, 2000). Individuals and

[[Page 46068]]

States are not included in the definition of a small entity.
    This final rule updates the SNF PPS rates published in the July 31, 
2002 update notice (67 FR 49798), thereby increasing aggregate payments 
by an estimated $850 million. As indicated in Table 11, the effect on 
facilities will be an aggregate positive impact of 6.4 percent. We note 
that some individual providers may experience larger increases in 
payments than others due to the distributional impact of the FY 2004 
wage indices and the degree of Medicare utilization. While this final 
rule is a major rule, its overall impact is extremely small; that is, 
less than 3 percent of total SNF revenues from all payor sources. Since 
the overall impact is positive on the industry as a whole, and on small 
entities specifically, it is not necessary to consider regulatory 
alternatives.
    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. For a 
final rule, 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 100 beds. Because the 
payment rates set forth in this final rule also affect rural hospital 
swing-bed services, we believe that this final rule will have a 
positive fiscal impact on small rural hospitals. However, because this 
incremental increase in payments for Medicare swing-bed services is 
relatively minor in comparison to overall rural hospital revenues, this 
final rule will not have a significant impact on the overall operations 
of these small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any 1 year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million or more. This final rule will increase 
payments to SNFs by over 6 percent, but will have no other substantial 
effect on State, local, or tribal governments. Again, we believe that 
the aggregate impact of this major rule is positive, and does not meet 
the significance thresholds for determining added costs under the 
Unfunded Mandates Reform Act.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. As stated above, this final rule will have no substantial 
effect on State and local governments.
    The purpose of this final rule is not to initiate significant 
policy changes with regard to the SNF PPS; rather, it is to provide an 
update to the rates for FY 2004 and to address a number of policy 
issues related to the PPS. We believe that the revisions and 
clarifications mentioned elsewhere in this final rule (for example, 
with respect to determining distinct part status) will have, at most, 
only a negligible overall effect upon the regulatory impact estimate 
specified in the rule. As such, these revisions will not represent an 
additional burden to the industry.

B. Anticipated Effects

    This final rule sets forth updates of the SNF PPS rates contained 
in the July 31, 2002 update (67 FR 49798). The impact analysis of this 
final rule represents the projected effects of the changes in the SNF 
PPS from FY 2003 to FY 2004. We estimate the effects 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 these 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 the 
latest available Medicare claims from 2001. 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, the BBRA, the 
BIPA, or new statutory provisions. Although these changes may not be 
specific to the SNF PPS, the nature of the Medicare program is such 
that the changes may interact, and the complexity of the interaction of 
these changes could make it difficult to predict accurately the full 
scope of the impact upon SNFs.
    In accordance with section 1888(e)(4)(E) of the Act, the payment 
rates for FY 2004 are updated by a factor equal to the market basket 
index percentage increase to determine the payment rates for FY 2004. 
We note that in accordance with section 101(a) of the BBRA and section 
314 of the BIPA, the existing, temporary increase in the per diem 
adjusted payment rates of 20 percent for certain specified RUGs (and 
6.7 percent for certain others) remains in effect until the 
implementation of case-mix refinements. In updating the rates for FY 
2004, we made a number of standard annual revisions and clarifications 
mentioned elsewhere in this notice (for example, the update to the wage 
and market basket indices used for adjusting the Federal rates). These 
revisions will increase payments to SNFs by approximately $400 million. 
In addition, we have adjusted the FY 2004 rates to reflect the 3.26 
percent cumulative forecast error since the start of the SNF PPS on 
July 1, 1998. This adjustment increases payments to SNFs by an 
additional $450 million, for an aggregate increase in payments of $850 
million.
    The impacts are shown in Table 11. The breakdown of the various 
categories of data in the table follows.
    The first column shows the breakdown of all SNFs by urban or rural 
status, hospital-based or freestanding status, and census region.
    The first row of figures in the first column describes the 
estimated effects of the various changes on all facilities. The next 
six rows show the effects on facilities split by hospital-based, 
freestanding, urban, and rural categories. The next twenty rows show 
the effects on urban versus rural status by census region. The final 
four rows show the effects on facilities by ownership type.
    The second column in the table shows the number of facilities in 
the impact database.
    The third column of the table shows the effect of the annual update 
to the wage index. The total impact of this change is zero percent; 
however, there are distributional effects of the change.
    The fourth column of the table shows the effect of all of the 
changes on the FY 2003 payments. The market basket increase of 3.0 
percentage points is constant for all providers and, though not shown 
individually, is included in the total column. Similarly, the 3.26 
percent forecast error adjustment is included in the fourth column and 
is constant for all providers. It is projected that aggregate payments 
will increase by 6.4 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

[[Page 46069]]

vary by specific types of providers and by location.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TR04AU03.017

BILLING CODE 4120-01-C

C. Alternatives Considered

    Section 1888(e) of the Act establishes the SNF PPS for the payment 
of Medicare SNF services for cost reporting periods beginning on or 
after July 1, 1998. This section of the statute

[[Page 46070]]

prescribes a detailed formula for calculating payment rates under the 
SNF PPS, and does not provide for the use of any alternative 
methodology. It specifies that the base year cost data to be used for 
computing the RUG-III payment rates must be from FY 1995 (October 1, 
1994, through September 30, 1995.) In accordance with the statute, we 
also incorporated a number of elements into the SNF PPS, such as case-
mix classification methodology, the MDS assessment schedule, a market 
basket index, a wage index, and the urban and rural distinction used in 
the development or adjustment of the Federal rates. Further, section 
1888(e)(4)(H) of the Act specifically requires us to publish the 
payment rates for each new fiscal year in the Federal Register, and to 
do so before the August 1 that precedes the start of the new fiscal 
year. Accordingly, we are not pursuing alternatives.

D. Conclusion

    For the reasons set forth in the preceding discussion, we are not 
preparing analyses for either the RFA or section 1102(b) of the Act 
because we have determined that this final rule will not have a 
significant economic impact on a substantial number of small entities 
or a significant impact on the operations of a substantial number of 
small rural hospitals.
    Finally, in accordance with the provisions of Executive Order 
12866, this regulation was reviewed by the Office of Management and 
Budget.

List of Subjects

42 CFR Part 409

    Health facilities, Medicare.

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 413

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

42 CFR Part 440

    Grants programs--health, Medicaid.

42 CFR Part 483

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

42 CFR Part 488

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as follows:

PART 409--HOSPITAL INSURANCE BENEFITS

0
1. The authority citation for part 409 continues to read as follows:

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

Subpart C--Posthospital SNF Care

0
2. In Sec.  409.20, the introductory text to paragraph (c) is revised 
to read as follows:


Sec.  409.20  Coverage of services.

* * * * *
    (c) Services not generally provided by (or under arrangements made 
by) SNFs. In Sec.  409.21 through Sec.  409.36--
* * * * *

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

0
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

0
2. Section 411.15 is amended by:
0
A. Republishing the introductory text to the section and the paragraph 
(p)(2) introductory text.
0
B. Revising paragraph (p)(2)(xii).


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, provided that the claim for payment includes the SNF's 
Medicare provider number in accordance with Sec.  424.32(a)(5) of this 
chapter:
* * * * *
    (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; and, as of January 1, 2004, 
by HCPCS codes A9522 and A9523.
* * * * *

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

0
1. The authority citation for part 413 continues to read as follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i) and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart E--Payments to Providers

0
2. In Sec.  413.65, paragraph (a)(1)(ii)(D) is revised to read as 
follows:


Sec.  413.65  Requirements for a determination that a facility or an 
organization has provider-based status.

    (a) Scope and definitions. (1) Scope. * * *
    (ii) * * *
    (D) Skilled nursing facilities (SNFs) (determinations for SNFs are 
made in accordance with the criteria set forth in Sec.  483.5 of this 
chapter).
* * * * *

Subpart J--Prospective Payment for Skilled Nursing Facilities

0
3. In Sec.  413.337, paragraph (d)(2) is revised to read as follows:


Sec.  413.337  Methodology for calculating the prospective payment 
rates.

* * * * *
    (d) Annual updates of Federal unadjusted payment rates.
    (2) For subsequent fiscal years, the unadjusted Federal rate is 
equal to the rate for the previous fiscal year increased by the 
applicable SNF market basket index amount. Beginning with fiscal year 
2004, an adjustment to the annual update of the previous fiscal year's 
rate will be computed to account for forecast error. The initial 
adjustment (in fiscal year 2004) to the update of the previous fiscal 
year's rate will take into account the cumulative forecast error 
between fiscal years 2000 and 2002. Subsequent adjustments in 
succeeding fiscal years will take into account the forecast error from 
the most recently available fiscal year for which there is final data.
* * * * *

[[Page 46071]]

Sec.  413.345  [Amended]

    4. In the second sentence of Sec.  413.345, the word 
``tandardized'' is removed and the word ``standardized'' is added in 
its place.

PART 440--SERVICES: GENERAL PROVISIONS

0
1. The authority citation for part 440 continues to read as follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

Subpart A--Definitions

0
2. In Sec.  440.40, paragraph (a)(1)(ii)(A) is revised to read as 
follows:


Sec.  440.40  Nursing facility services for individuals age 21 or older 
(other than services in an institution for mental disease), EPSDT, and 
family planning services and supplies.

    (a) * * *
    (1) * * *
    (ii) * * *
    (A) A facility or distinct part (as defined in Sec.  483.5(b) of 
this chapter) that meets the requirements for participation under 
subpart B of part 483 of this chapter, as evidenced by a valid 
agreement between the Medicaid agency and the facility for providing 
nursing facility services and making payments for services under the 
plan; or
* * * * *
0
2a. In Sec.  440.155, the introductory text to paragraph (c) is revised 
to read as follows:


Sec.  440.155  Nursing facility services, other than in institutions 
for mental diseases.

* * * * *
    (c)``Nursing facility services'' may include services provided in a 
distinct part (as defined in Sec.  483.5(b) of this chapter) of a 
facility other than a nursing facility if the distinct part (as defined 
in Sec.  483.5(b) of this chapter)--
* * * * *

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

0
1. The authority citation for part 483 continues to read as follows:

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

Subpart B--Requirements for Long Term Care Facilities

0
2. Section 483.5 is revised to read as follows:


Sec.  483.5  Definitions.

    (a) Facility defined. For purposes of this subpart, facility means 
a skilled nursing facility (SNF) that meets the requirements of 
sections 1819(a), (b), (c), and (d) of the Act, or a nursing facility 
(NF) that meets the requirements of sections 1919(a), (b), (c), and (d) 
of the Act. ``Facility'' may include a distinct part of an institution 
(as defined in paragraph (b) of this section and specified in Sec.  
440.40 and Sec.  440.155 of this chapter), but does not include an 
institution for the mentally retarded or persons with related 
conditions described in Sec.  440.150 of this chapter. For Medicare and 
Medicaid purposes (including eligibility, coverage, certification, and 
payment), the ``facility'' is always the entity that participates in 
the program, whether that entity is comprised of all of, or a distinct 
part of, a larger institution. For Medicare, an SNF (see section 
1819(a)(1) of the Act), and for Medicaid, an NF (see section 1919(a)(1) 
of the Act) may not be an institution for mental diseases as defined in 
Sec.  435.1009 of this chapter.
    (b) Distinct part--(1) Definition. A distinct part SNF or NF is 
physically distinguishable from the larger institution or institutional 
complex that houses it, meets the requirements of this paragraph and of 
paragraph (b)(2) of this section, and meets the applicable statutory 
requirements for SNFs or NFs in sections 1819 or 1919 of the Act, 
respectively. A distinct part SNF or NF may be comprised of one or more 
buildings or designated parts of buildings (that is, wings, wards, or 
floors) that are: In the same physical area immediately adjacent to the 
institution's main buildings; other areas and structures that are not 
strictly contiguous to the main buildings but are located within close 
proximity of the main buildings; and any other areas that CMS 
determines on an individual basis, to be part of the institution's 
campus. A distinct part must include all of the beds within the 
designated area, and cannot consist of a random collection of 
individual rooms or beds that are scattered throughout the physical 
plant. The term ``distinct part'' also includes a composite distinct 
part that meets the additional requirements of paragraph (c) of this 
section.
    (2) Requirements. In addition to meeting the participation 
requirements for long-term care facilities set forth elsewhere in this 
subpart, a distinct part SNF or NF must meet all of the following 
requirements:
    (i) The SNF or NF must be operated under common ownership and 
control (that is, common governance) by the institution of which it is 
a distinct part, as evidenced by the following:
    (A) The SNF or NF is wholly owned by the institution of which it is 
a distinct part.
    (B) The SNF or NF is subject to the by-laws and operating decisions 
of a common governing body.
    (C) The institution of which the SNF or NF is a distinct part has 
final responsibility for the distinct part's administrative decisions 
and personnel policies, and final approval for the distinct part's 
personnel actions.
    (D) The SNF or NF functions as an integral and subordinate part of 
the institution of which it is a distinct part, with significant common 
resource usage of buildings, equipment, personnel, and services.
    (ii) The administrator of the SNF or NF reports to and is directly 
accountable to the management of the institution of which the SNF or NF 
is a distinct part.
    (iii) The SNF or NF must have a designated medical director who is 
responsible for implementing care policies and coordinating medical 
care, and who is directly accountable to the management of the 
institution of which it is a distinct part.
    (iv) The SNF or NF is financially integrated with the institution 
of which it is a distinct part, as evidenced by the sharing of income 
and expenses with that institution, and the reporting of its costs on 
that institution's cost report.
    (v) A single institution can have a maximum of only one distinct 
part SNF and one distinct part NF.
    (vi) (A) An institution cannot designate a distinct part SNF or NF, 
but instead must submit a written request with documentation that 
demonstrates it meets the criteria set forth above to CMS to determine 
if it may be considered a distinct part.
    (B) The effective date of approval of a distinct part is the date 
that CMS determines all requirements (including enrollment with the 
fiscal intermediary (FI)) are met for approval, and cannot be made 
retroactive.
    (C) The institution must request approval from CMS for all proposed 
changes in the number of beds in the approved distinct part.
    (c) Composite distinct part--(1) Definition. A composite distinct 
part is a distinct part consisting of two or more noncontiguous 
components that are not located within the same campus, as defined in 
Sec.  413.65(a)(2) of this chapter.
    (2) Requirements. In addition to meeting the requirements of 
paragraph (b) of this section, a composite distinct part must meet all 
of the following requirements:
    (i) A SNF or NF that is a composite of more than one location will 
be treated

[[Page 46072]]

as a single distinct part of the institution of which it is a distinct 
part. As such, the composite distinct part will have only one provider 
agreement and only one provider number.
    (ii) If two or more institutions (each with a distinct part SNF or 
NF) undergo a change of ownership, CMS must approve the existing SNFs 
or NFs as meeting the requirements before they are considered a 
composite distinct part of a single institution. In making such a 
determination, CMS considers whether its approval or disapproval of a 
composite distinct part promotes the effective and efficient use of 
public monies without sacrificing the quality of care.
    (iii) If there is a change of ownership of a composite distinct 
part SNF or NF, the assignment of the provider agreement to the new 
owner will apply to all of the approved locations that comprise the 
composite distinct part SNF or NF.
    (iv) To ensure quality of care and quality of life for all 
residents, the various components of a composite distinct part must 
meet all of the requirements for participation independently in each 
location.

0
3. In Sec.  483.10, the following new paragraph (b)(12) is added to 
read as follows:


Sec.  483.10  Resident rights.

* * * * *
    (b) * * *
    (12) Admission to a composite distinct part. A facility that is a 
composite distinct part (as defined in Sec.  483.5(c) of this subpart) 
must disclose in its admission agreement its physical configuration, 
including the various locations that comprise the composite distinct 
part, and must specify the policies that apply to room changes between 
its different locations under Sec.  483.12(a)(8).
* * * * *

0
4. In Sec.  483.12, the following changes are made:
0
A. A new paragraph (a)(8) is added.
0
B. A new paragraph (b)(4) is added.
    The additions read as follows:


Sec.  483.12  Admission, transfer, and discharge rights.

    (a) * * *
    (8) Room changes in a composite distinct part. Room changes in a 
facility that is a composite distinct part (as defined in Sec.  
483.5(c)) must be limited to moves within the particular building in 
which the resident resides, unless the resident voluntarily agrees to 
move to another of the composite distinct part's locations.
* * * * *
    (b) * * *
    (4) Readmission to a composite distinct part. When the nursing 
facility to which a resident is readmitted is a composite distinct part 
(as defined in Sec.  483.5(c) of this subpart), the resident must be 
permitted to return to an available bed in the particular location of 
the composite distinct part in which he or she resided previously. If a 
bed is not available in that location at the time of readmission, the 
resident must be given the option to return to that location upon the 
first availability of a bed there.
* * * * *


Sec.  483.20  [Amended]

0
3. In Sec.  483.20(k)(1), the word ``describer'' is revised to read 
``describe''.

PART 488--SURVEY, CERTIFICATION, AND ENFORCEMENT PROCEDURES

0
1. The authority citation for part 488 continues to read as follows:

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

0
2. In Sec.  488.438, a new paragraph (d)(3) is added to read as 
follows:


Sec.  488.438  Civil money penalties: Amount of penalty.

* * * * *
    (d) * * *
    (3) Repeated deficiencies are deficiencies in the same regulatory 
grouping of requirements found at the last survey, subsequently 
corrected, and found again at the next survey.
* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

0
1. The authority citation for part 489 continues to read as follows:

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

Subpart B--Essentials of Provider Agreements

0
2. Section 489.20 is amended by:
0
A. Republishing the introductory text and paragraph (s) introductory 
text.
0
B. Revising paragraph (s)(12).


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:
* * * * *
    (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; and, as of January 1, 2004, 
by HCPCS codes A9522 and A9523.


Sec.  489.22  [Amended]

0
3. In Sec.  489.22(d), the word ``impatient'' is removed, and the word 
``inpatient'' is added in its place.


(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare-Hospital Insurance Program; and No. 93.774, Medicare-
Supplementary Medical Insurance Program)
    Dated: July 10, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 25, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-19677 Filed 7-31-03; 8:45 am]
BILLING CODE 4120-01-P