[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45775-45822]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-17443]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1249-N]
RIN 0938-AM46


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

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

ACTION: Notice.

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SUMMARY: This notice updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2005, as required by statute. 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 (the BBRA), the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (the BIPA), and 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (the MMA), relating to Medicare payments and consolidated billing 
for SNFs.

EFFECTIVE DATE: This notice is effective on October 1, 2004.

FOR FURTHER INFORMATION CONTACT: John Davis, (410) 786-0008 (for 
information related to the Wage Index, and to swing-bed providers). 
Ellen Gay, (410) 786-4528 (for information related to the case-mix 
classification methodology). Jeanette Kranacs, (410) 786-9385 (for 
information related to the development of the payment rates). Bill 
Ullman, (410) 786-5667 (for information related to level of care 
determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION: Because of the many terms to which we refer 
by abbreviation in this notice, we are listing these abbreviations and 
their corresponding terms in alphabetical order below:

ADL Activity of Daily Living
AHE Average Hourly Earnings
AIDS Acquired Immune Deficiency Syndrome
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
BEA (U.S.) Bureau of Economic Analysis
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
CPT (Physicians') Current Procedural Terminology
DRG Diagnosis Related Group
FI Fiscal Intermediary
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO General Accounting Office
HCPCS Healthcare Common Procedure Coding System
ICD-9-CM International Classification of Diseases, Ninth Edition, 
Clinical Modification
IFC Interim Final Rule with Comment Period
MDS Minimum Data Set
MEDPAR Medicare Provider Analysis and Review File
MIP Medicare Integrity Program
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub.L. 108-173
MSA Metropolitan Statistical Area
NECMA New England County Metropolitan Area
OIG Office of the Inspector General
OMRA Other Medicare Required Assessment
PCE Personal Care Expenditures
PPI Producer Price Index
PPS Prospective Payment System
PRM Provider Reimbursement Manual
RAI Resident Assessment Instrument
RAP Resident Assessment Protocol
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Pub. L. 96-354
RHC Rural Health Clinic
RIA Regulatory Impact Analysis
RUG Resource Utilization Groups
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
STM Staff Time Measure
UMRA Unfunded Mandates Reform Act, Pub. L. 104-4

I. Background

    On August 4, 2003, we published in the Federal Register (68 FR 
46036) a final rule that set forth updates to the payment rates used 
under the prospective payment system (PPS) for skilled nursing 
facilities (SNFs) for fiscal year (FY) 2004. (We subsequently published 
a correction notice (68 FR 55882, September 29, 2003) with respect to 
those payment rate updates.) 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), the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA), and the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
relating to Medicare payments and consolidated billing for SNFs.

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

    Section 4432 of the Balanced Budget Act of 1997 (BBA) 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. In this notice, we are updating the 
per diem payment rates for SNFs for FY 2005. Major elements of the SNF 
PPS include:
     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, had been 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 II.C of this notice, we discuss the wage index adjustment in 
greater detail.) A correction notice was published on October 10, 2003 
(68 FR 58756) that announced a wage index for a particular MSA that had 
been inadvertently omitted from the September 29, 2003 correction 
notice

[[Page 45776]]

(68 FR 55882). Additionally, as noted in the August 4, 2003 final rule 
(68 FR 46036), section 101 of the BBRA and sections 311, 312, and 314 
of the BIPA also affect the payment rate. Further, as explained in 
section I.E of this update notice, the Congress has subsequently 
enacted additional legislation, in section 511 of the MMA, that also 
affects the payment rate.
     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. The last year of the transition was FY 
2001. All facilities have been paid at the full Federal rate since the 
following fiscal year (FY 2002). Therefore, as discussed in section 
I.F.2 of this notice, we no longer include adjustment factors related 
to facility-specific rates for the coming fiscal year.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage; however, because 
RUG-III classification is based, in part, on the beneficiary's need for 
skilled nursing care and therapy, we have attempted, where possible, to 
coordinate claims review procedures with the outputs of beneficiary 
assessment and RUG-III classifying activities. We discuss this 
coordination in greater detail in section II.E of this notice.
     Consolidated Billing. The SNF PPS includes a consolidated 
billing provision (described in greater detail in section IV. of this 
notice) that requires a SNF to submit consolidated Medicare bills for 
almost all of the services that its residents receive 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 a small list of services from the 
consolidated billing provision (primarily those of physicians and 
certain other types of practitioners), which remain separately billable 
to Part B when furnished to a SNF's Part A resident. As discussed in 
section IV. of this notice, section 410 of the MMA contains a provision 
that affects the applicability of the consolidated billing requirement 
to certain practitioner and other services furnished to SNF residents 
by rural health clinics (RHCs) and Federally Qualified Health Centers 
(FQHCs).
    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 V. of this notice.

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

    Section 1888(e)(4)(H) of the Act requires that we publish in the 
Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the FY.
    2. The case-mix classification system to be applied with respect to 
these services during the FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In 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 II.E of this notice).
    This notice provides the annual updates to the Federal rates as 
mandated by the Act.

C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (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(a) 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 until the later of October 1, 
2000, or the implementation of case-mix refinements in the PPS. Section 
101(d) 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.
    We included further information on all of the provisions of the 
BBRA that affect the SNF PPS in Program Memorandums 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 
at 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 (BIPA)

    The BIPA also 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:
     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).
     Section 311 of the BIPA eliminated the one percentage 
point reduction in the SNF market basket that the statutory update 
formula had previously specified for FY 2001, changed the one 
percentage point reduction specified for FY 2002 to a 0.5 percentage 
point reduction, and established an update factor for FY 2003 of market 
basket minus 0.5 percentage point. 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.
     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. This section also required the General 
Accounting Office (GAO) to conduct an audit of SNF nursing staff ratios 
and submit a report to the Congress on whether the temporary increase 
in the nursing component should be continued. GAO issued this report 
(GAO-03-176) in November 2002.
     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.

[[Page 45777]]

     Section 314 of the BIPA adjusted the payment rates for all 
of the fourteen rehabilitation RUGs (RUC, RUB, RUA, RVC, RVB, RVA, RHC, 
RHB, RHA, RMC, RMB, RMA, RLB, and RLA), in order to correct an anomaly 
under which the existing payment rates for three particular 
rehabilitation RUGs--RHC, RMC, and RMB--were higher than the rates for 
some other, more intensive rehabilitation RUGs. Under the BIPA 
adjustment, the temporary increase that section 101(a) of the BBRA had 
applied to the RHC, RMC, and RMB rehabilitation RUGs was revised from 
20 percent to 6.7 percent, and the BIPA adjustment also applied this 
temporary 6.7 percent increase to each of the other eleven 
rehabilitation RUGs as well.
     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. The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA)

    On December 8, 2003, the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) was signed into law. This 
legislation introduces a new provision that results in a further 
adjustment to the PPS for SNFs. Specifically, section 511 of the MMA 
amends paragraph (12) of section 1888(e) of the Act to provide for a 
temporary 128 percent increase in the PPS per diem payment for any SNF 
resident with Acquired Immune Deficiency Syndrome (AIDS), effective 
with services furnished on or after October 1, 2004. Like the temporary 
add-on payments created by section 101(a) of the BBRA (as amended by 
section 314 of the BIPA), this special AIDS add-on remains in effect 
until the implementation of case-mix refinements in the SNF PPS. The 
law further provides that the 128 percent increase in payment under the 
AIDS add-on is ``* * * determined without regard to any increase'' 
under section 101 of the BBRA (as amended by section 314 of the BIPA). 
As explained in the MMA Conference report, this means that if a 
resident qualifies for the temporary 128 percent increase in payment 
under the special AIDS add-on, ``the BBRA temporary RUG add-on does not 
apply in this case. * * *'' (H.R. Conf. Rep. No. 108-391 at 662). The 
AIDS add-on is also discussed in Transmittal 160 (Change 
Request 3291), issued on April 30, 2004, which is available 
online at http://www.cms.hhs.gov/manuals/transmittals/comm_date_
dsc.asp.
    Implementation of this provision results in a significant increase 
in payment. For example, using 2002 data we identified 773 SNF 
residents with a principal diagnosis code of 042. The average payment 
per day for these residents was approximately $261, including any 
applicable add-ons from Section (312) of the BIPA, Section (314) of the 
BIPA, and Section (101) of the BBRA. For FY2005, an urban facility with 
a resident with AIDS in the SSA RUG would have a case-mix adjusted 
payment of almost $216 (see Table 4) before the application of the 
section 511 MMA adjustment. After an increase of 128 percent, this 
urban facility would receive a case-mix adjusted payment of 
approximately $492.
    In addition, section 410 of the MMA contains a provision that 
affects the consolidated billing requirement, which we discuss in 
section IV. of this notice.

F. Skilled Nursing Facility Prospective Payment--General Overview

    The Medicare SNF PPS was implemented for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, SNFs are paid 
through 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 the PPS (the 15-month period beginning July 
1, 1998) using a SNF market basket index, and then standardized for the 
costs of facility differences in case-mix and for geographic variations 
in wages. Providers that received new provider exemptions from the 
routine cost limits were excluded from the database used to compute the 
Federal payment rates, 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.
    Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the 
Act, the Federal rates in this notice reflect an update to the rates 
that we published in the August 4, 2003 final rule for FY 2004 (68 FR 
46036) and the associated correction notice (68 FR 55882, September 29, 
2003), equal to the full change in the SNF market basket index. A more 
detailed discussion of the SNF market basket index and related issues 
appears in sections I.G and III. of this notice.
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 facility's first three cost reporting periods 
under the PPS, up to and including the one that began in FY

[[Page 45778]]

2001. Accordingly, starting with cost reporting periods beginning in FY 
2002, we base payments entirely on the Federal rates and, as indicated 
in section II.F of this notice, we no longer include adjustment factors 
related to facility-specific rates for the coming fiscal year.

G. Use of the Skilled Nursing Facility 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. The final rule published on July 31, 2001 (66 
FR 39562) revised and rebased the market basket to reflect 1997 total 
cost data.
    In addition, as explained in the FY 2004 final rule (68 FR 46058) 
and in section III.B of this notice, the annual update of the payment 
rates includes, as appropriate, an adjustment to account for market 
basket forecast error. This adjustment takes into account the forecast 
error from the most recently available fiscal year for which there is 
final data, and is applied whenever the difference between the 
forecasted and actual change in the market basket exceeds a 0.25 
percentage point threshold. For FY 2003 (the most recently available 
fiscal year for which there is final data), the estimated increase in 
the market basket index was 3.1 percentage points, while the actual 
increase was 3.3 percentage points, resulting in only a 0.2 percentage 
point underforecast. Accordingly, as the difference between the 
estimated and actual amounts of change does not exceed the 0.25 
percentage point threshold, the payment rates for FY 2005 do not 
include a forecast error adjustment. Table 1 below shows the forecasted 
and actual market basket amounts for FY 2003.
[GRAPHIC] [TIFF OMITTED] TN30JY04.052

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

A. Federal Prospective Payment System

    This notice sets forth a schedule of Federal prospective payment 
rates applicable to Medicare Part A SNF services beginning October 1, 
2004. 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 26295-97)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2005 rates reflect an update using the full amount of the 
latest market basket index. The FY 2005 market basket increase factor 
is 2.8 percent. For a complete description of the multi-step process, 
see 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. This is also the case for the temporary 128 percent 
increase in the per diem adjusted payment rates for SNF residents with 
AIDS, enacted by section 511 of the MMA. As discussed elsewhere in this 
notice, while we are proceeding with our ongoing research in this area, 
we are not implementing case-mix refinements at the present time.
    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, 2003, and 
ending September 30, 2004, and the midpoint of the Federal fiscal year 
beginning October 1, 2004, and ending September 30, 2005, to which the 
payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) 
of the Act, the payment rates for FY 2005 are updated by a factor equal 
to the full market basket index percentage increase. The rates are 
further adjusted by a wage index budget neutrality factor, described 
later in this section. Tables 2 and 3 reflect the updated components of 
the unadjusted Federal rates for FY 2005.

[[Page 45779]]

[GRAPHIC] [TIFF OMITTED] TN30JY04.053

B. Case-Mix Refinements

    Under the BBA, each update of the SNF PPS payment rates must 
include the case-mix classification methodology applicable for the 
coming Federal fiscal 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 notice. Therefore, we continue at 
present to utilize the existing case-mix classification system that 
employs the 44 RUG-III groups.
    As discussed previously in this notice, 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 again 
considered the possibility of including these refinements as part of 
the following 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. Moreover, 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 notice.
    As a result, the payment rates set forth in this notice 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

[[Page 45780]]

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 4 and 5, with the 
corresponding case-mix values. These tables do not reflect the 
temporary add-on to the specified RUG-III groups provided in the BBRA, 
or the new AIDS add-on enacted by section 511 of the MMA, which are 
applied only after all other adjustments (wage and case-mix) are made.
    Meanwhile, we continue 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 to perform 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.
    In addition, we note that certain questions have arisen recently in 
connection with a particular aspect of a previous discussion of the 
case-mix classification system, which appeared in the preamble to the 
FY 2000 SNF PPS final rule (64 FR 41660-61, July 30, 1999). 
Specifically, that portion of the preamble discussed the coverage of 
rehabilitation therapy services (that is, physical, occupational, and 
speech-language therapy) under the SNF PPS. This discussion noted the 
longstanding requirement for such therapy services to be furnished 
under ``an active written treatment regimen established by the 
physician. * * *'' We further indicated that while Medicare allows the 
professional therapist to begin providing services based on that plan 
prior to obtaining the physician's signature on the plan,

     * * * a physician signature must be obtained before the 
facility bills Medicare for payment for the rehabilitation therapy 
services provided to the beneficiary based on the plan of treatment 
he or she has approved. In this way, the facility can be sure that 
the level of therapy for which it bills Medicare is the level the 
physician deems to be medically necessary.

    In view of the questions that have arisen recently regarding that 
portion of the preamble discussion, we would like to take this 
opportunity to clarify the requirement for physician verification as it 
relates to rehabilitation therapy services provided to a beneficiary 
during a covered Part A SNF stay that is being paid under the SNF PPS. 
Under section 1814(a)(2)(B) of the Act and the implementing regulations 
at 42 CFR 424.20, the physician must certify (and periodically 
recertify) that a beneficiary requires daily skilled nursing or 
rehabilitation services which, as a practical matter, can only be 
provided in the SNF on an inpatient basis (OMB approval number 0938-
0454 with a current expiration date of June 30, 2006). However, beyond 
this overall statement as to the beneficiary's need for a SNF level of 
care, the law and regulations do not require, as a prerequisite for 
Part A coverage of rehabilitation therapy under the SNF benefit, the 
completion of a further physician certification, specifically with 
reference to the therapy plan of treatment.
    Accordingly, notwithstanding the statement in the preamble to the 
1999 final rule, as the Part A SNF benefit requires rehabilitation 
therapy to be furnished according to an active written treatment 
regimen established and certified by the physician, it is not necessary 
for a SNF to obtain a separate physician signature on the therapy 
treatment plan itself prior to billing Part A for the therapy services. 
We wish to note explicitly that the foregoing discussion applies 
specifically to coverage of rehabilitation therapy in the context of 
the Part A SNF benefit, and does not address plan of care requirements 
under the separate Part B therapy benefits, which are subject to their 
own set of coverage requirements.

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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 2005.
    The wage index adjustment is applied to the labor-related portion 
of the Federal rate, which is 76.222 percent of the total rate. This 
percentage reflects the labor-related relative importance for FY 2005. 
The labor-related relative importance for FY 2004 was 76.372 as shown 
in Table 11. The decrease in the labor share benefits rural areas. 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 2005. 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 2005 than the base year weights 
from the SNF market basket.
    We calculate the labor-related relative importance for FY 2005 in 
four steps. First, we compute the FY 2005 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 
2005 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2005 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we sum the FY 2005 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, nonmedical professional fees, labor-intensive 
services, and a portion of capital-related expenses) to produce the FY 
2005 labor-related relative importance. Tables 6 and 7 show the Federal 
rates by labor-related and non-labor-related components.

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    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 seventh PPS year (Federal rates 
effective October 1, 2004), we are applying the most recent wage index 
using the hospital wage data, and applying an adjustment to fulfill the 
budget neutrality requirement. This requirement will be 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 FY 
beginning October 1, 2004. 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 1.0011.
    The wage index applicable to FY 2005 can be found in Table 8 and 
Table 9 of this notice. We note that section 1886(d)(3)(E) of the Act 
(as amended by section 304(c)(2) of the BIPA) directs the Secretary to 
construct an occupational mix adjustment for the hospital area wage 
index, for application beginning October 1, 2004. However, the 
occupational mix adjustment outlined in section 1886(d)(3)(E) of the 
Act applies only to the inpatient hospital PPS, which utilizes a 
diagnosis-related group (DRG) payment system. While we are updating the 
wage index to reflect the latest hospital wage data, we have never 
included any adjustment for occupational mix in the SNF PPS, and we are 
not doing so now.
    We continue to believe that the hospital wage data represent the 
best measure of wages and wage-related costs paid in the SNF setting. 
However, the occupational mix adjustment utilized by the hospital 
inpatient PPS serves specifically to define the occupational categories 
more clearly in a hospital setting. The collection of the occupational 
wage data also excludes any wage data related to SNFs; therefore, we 
believe that using the updated wage data exclusive of the occupational 
mix adjustment continues to be appropriate for SNF payments.
    We also note that we are not adopting in this notice any of the 
changes discussed in Office of Management and Budget (OMB) Bulletin No. 
03-04 (June 6, 2003), which announced revised definitions for 
Metropolitan Statistical Areas, and the creation of Micropolitan 
Statistical Areas and Combined Statistical Areas. A copy of that 
bulletin may be obtained at the following Internet address: http://
www.whitehouse.gov/omb/bulletins/b03-04.html.
    The proposed rule for the FY 2005 payment rates under the inpatient 
hospital PPS (69 FR 28249, May 18, 2004) discusses some of the problems 
and concerns associated with using these new definitions. We believe it 
is appropriate to wait until the public comments on that proposed rule 
have been submitted and analyzed before we consider proposing any new 
labor market definitions in the SNF context. Further, since the use of 
new definitions may have a significant impact on the SNF wage index and 
SNF payments, we believe that the nursing home industry and other 
interested parties should have sufficient time and opportunity to 
provide comment before we reach any conclusions on whether adopting 
these new definitions would produce an ``appropriate'' wage index for 
the SNF PPS under section 1888(e)(4)(G)(ii) of the Act. Accordingly, we 
plan to publish in a proposed rule any changes that we consider for new 
labor market definitions, in order to provide the public with an 
opportunity to comment on the possible use of these new labor market 
definitions in the SNF context. Until then, interested parties who 
would like to provide input on this issue are invited to do so by 
contacting either John Davis or Jeanette Kranacs (please refer to the 
section entitled, FOR FURTHER INFORMATION CONTACT at the beginning of 
this document).

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D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act and section 311 
of the BIPA, the payment rates listed here reflect an update equal to 
the full SNF market basket, which equals 2.8 percentage points. We will 
continue to disseminate the rates, wage index, and case-mix 
classification methodology through the Federal Register before August 1 
preceding the start of each succeeding fiscal year.

E. Relationship of RUG-III Classification System to Existing Skilled 
Nursing Facility 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 that beneficiaries who are 
correctly assigned to one of the upper 26 RUG-III groups in the initial 
5-day, Medicare-required assessment are automatically classified as 
meeting the SNF level of care definition up to that point.

[[Page 45817]]

    A 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 notice, we are continuing the existing designation of the 
upper 26 RUG-III groups for purposes of this administrative 
presumption, consisting of the following RUG-III classifications: All 
groups within the Ultra High Rehabilitation category; all groups within 
the Very High Rehabilitation category; all groups within the High 
Rehabilitation category; all groups within the Medium Rehabilitation 
category; all groups within the Low Rehabilitation category; all groups 
within the Extensive Services category; all groups within the Special 
Care category; and, all groups within the Clinically Complex category.

F. Initial Three-Year Transition Period

    As previously discussed in sections I.A and I.F.2 of this notice, 
the PPS is no longer operating under the initial three-year transition 
period from facility-specific to Federal rates. 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 10, the following shows the 
adjustments made to the Federal per 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 $25,161. 
The Labor and Non-labor columns are derived from Table 6. 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 10.
[GRAPHIC] [TIFF OMITTED] TN30JY04.090

III. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires us to establish an SNF 
market basket index (input price index) that reflects changes over time 
in the prices of an appropriate mix of goods and services included in 
the SNF PPS. This notice incorporates the latest available projections 
of the SNF market basket index. Accordingly, we have developed an SNF 
market basket index that encompasses the most commonly used cost 
categories for SNF routine services, ancillary services, and capital-
related expenses. 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 Tables 10.A, 
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 11 summarizes the updated labor-related share for FY 2005.

[[Page 45818]]

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A. Use of the Skilled Nursing Facility Market Basket Percentage

    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index, as 
described in the previous section, from the average of the prior fiscal 
year to the average of the current fiscal year. For the Federal rates 
established in this notice, the percentage increase in the SNF market 
basket index is used to compute the update factor occurring between FY 
2004 and FY 2005. We used the Global Insight, Inc. (formerly DRI-WEFA), 
2nd quarter 2004 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. Finally, we no longer compute update factors to adjust a 
facility-specific portion of the SNF PPS rates, because the three-year 
transition period from facility-specific to full Federal rates that 
started with cost reporting periods beginning in July of 1998 has 
expired.

B. Market Basket Forecast Error Adjustment

    As discussed in the June 10, 2003, supplemental proposed rule (68 
FR 34768) and finalized in the August 4, 2003, final rule (68 FR 
46067), the regulations at 42 CFR 413.337(d)(2) provide for an 
adjustment to account for market basket forecast error. The initial 
adjustment applied to the update of the FY 2003 rate that occurred in 
FY 2004, and took into account the cumulative forecast error for the 
period from FY 2000 through FY 2002. Subsequent adjustments in 
succeeding FYs take into account the forecast error from the most 
recently available fiscal year for which there is final data, and are 
applied whenever the difference between the forecasted and actual 
change in the market basket exceeds a 0.25 percentage point threshold. 
As discussed previously in section I.G of this notice, as the 
difference between the estimated and actual amounts of increase in the 
market basket index for FY 2003 (the most recently available fiscal 
year for which there is final data) did not exceed the 0.25 percentage 
point threshold, the payment rates for FY 2005 do not include a 
forecast error adjustment.

C. Federal Rate Update Factor

    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2005 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, 2003 through September 
30, 2004 to the average market basket level for the period of October 
1, 2004 through September 30, 2005. Using this process, the market 
basket update factor for FY 2005 SNF Federal rates is 2.8 percentage 
points. We used this revised update factor to compute the Federal 
portion of the SNF PPS rate shown in Tables 2 and 3.

IV. 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 individual services, identified by Healthcare Common 
Procedure Coding System (HCPCS) code, 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 
an 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.)
    Among the services that sections 1888(e)(2)(A)(ii) through (iii) of 
the Act exclude from the consolidated billing requirement are those of 
physicians and certain other specified types of medical practitioners, 
which remain separately billable to Part B when furnished to an SNF's 
Part A resident. Since the statute does not exclude the services of 
rural health clinics (RHCs) or Federally Qualified Health Centers 
(FQHCs), we have always regarded those specified types of practitioner 
services, when furnished to an SNF's Part A resident by an RHC or FQHC, 
as being a part of RHC or FQHC services (which are subject to 
consolidated billing). However, section 410 of the MMA amended section 
1888(e)(2)(A)(iv) of the Act to specify that when an RHC or FQHC 
furnishes the services of a physician, or another type of service that 
section 1888(e)(2)(A)(ii) of the Act identifies as being excluded from 
SNF consolidated billing, those services do not become subject to 
consolidated billing merely by virtue of being furnished under the 
auspices of the RHC or FQHC. In effect, this amendment enables such 
services to retain their separate identity as excluded ``practitioner'' 
services in this context, rather than being treated as bundled ``RHC'' 
or ``FQHC'' services. As such, these services would remain separately 
billable to Part B when furnished to a resident of the SNF during a 
covered Part A stay. The MMA specifies that this provision becomes 
effective with services furnished on or after January 1, 2005. In 
accordance with added section 1888(e)(2)(A)(iv) of the Act, this 
provision applies to the following excluded service categories,

[[Page 45819]]

as identified in section 1888(e)(2)(A)(ii) of the Act:
     Physician services.
     Services of physician assistants working under a 
physician's supervision.
     Services of nurse practitioners and clinical nurse 
specialists working in collaboration with a physician.
     Certified nurse-midwife services.
     Qualified psychologist services.
     Certified registered nurse anesthetist services.
     Home dialysis supplies and equipment, self-care home 
dialysis support services, and institutional dialysis services and 
supplies as described in section 1861(s)(2)(F) of the Act.
     Erythropoietin (EPO) for certain dialysis patients as 
described in section 1861(s)(2)(O) of the Act, subject to methods and 
standards established by the Secretary in regulations for its safe and 
effective use (see Sec. Sec.  405.2163(g) and (h)).
    Further, we note that the amendment enacted in section 410 of the 
MMA does not affect the applicability of the consolidated billing 
requirement to any physical, occupational, or speech-language therapy 
services furnished by RHCs and FQHCs. As specified in section 
1888(e)(2)(A)(ii) of the Act, such services are always subject to SNF 
consolidated billing, even when performed by a type of practitioner 
whose services would otherwise be excluded from this provision.

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

    In accordance with section 1888(e)(7) of the Act (as amended by 
section 203 of the BIPA), Part A pays critical access hospitals (CAHs) 
on a reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, as noted previously in section I.A of this notice, 
the services furnished by non-CAH rural hospitals are paid under the 
SNF PPS. In the July 31, 2001 final rule (66 FR 39562), we announced 
the conversion of swing-bed rural 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 rural hospitals into the SNF 
PPS by the end of the SNF transition period, June 30, 2002.
    As of June 30, 2003, all swing-bed rural hospitals have come under 
the SNF PPS. Therefore, all rates and wage indexes outlined in earlier 
sections of this notice for SNF PPS also apply to all swing-bed rural 
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 rural hospitals are listed on our SNF PPS Web site, 
http://www.cms.hhs.gov/providers/snfpps/default.asp.

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 notice 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 notice is major, as defined in Title 5, United States Code, 
section 804(2), because we estimate the impact of the standard update 
will be to increase payments to SNFs by approximately $440 million.
    The update set forth in this notice applies to payments in FY 2005. 
Accordingly, the analysis that follows describes the impact of this one 
year only. In accordance with the requirements of the Act, we will 
publish a notice for each subsequent FY that will provide for an update 
to the payment rates and include an associated impact analysis.
    The 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 States are not included in 
the definition of a small entity. In addition, approximately 29 percent 
of SNFs are nonprofit organizations.
    This notice updates the SNF PPS rates published in the August 4, 
2003 final rule (68 FR 46036) and the associated correction notice (68 
FR 55882, September 29, 2003), thereby increasing aggregate payments by 
an estimated $440 million. As indicated in Table 12, the effect on 
facilities will be an aggregate positive impact of 2.8 percent. We note 
that some individual providers may experience larger increases in 
payments than others due to the distributional impact of the FY 2005 
wage indices and the degree of Medicare utilization. While this notice 
is considered major, its overall impact is extremely small; that is, 
less than 3 percent of total SNF revenues from all payor sources. As 
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. 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 notice also affect rural hospital swing-bed services, 
we believe that this notice 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 notice 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

[[Page 45820]]

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 notice will increase payments to SNFs by 2.8 
percent, but will have no other substantial effect on State, local, or 
tribal governments. Again, we believe that the aggregate impact of this 
notice 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 regulations that impose 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. As stated 
above, this notice will have no substantial effect on State and local 
governments.

B. Anticipated Effects

    This notice sets forth updates of the SNF PPS rates contained in 
the August 4, 2003 final rule (68 FR 46036) and the associated 
correction notice (68 FR 55882, September 29, 2003). The impact 
analysis of this notice represents the projected effects of the changes 
in the SNF PPS from FY 2004 to FY 2005. 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 2002. 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, the MMA, 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 2005 are updated by a factor equal to the full market 
basket index percentage increase to determine the payment rates for FY 
2005. 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 the SNF PPS. Similarly, the 
special AIDS add-on established by section 511 of the MMA remains in 
effect until the implementation of case-mix refinements. In updating 
the rates for FY 2005, 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 $440 million.
    The impacts are shown in Table 12. 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 2005 payments. The market basket increase of 2.8 
percentage points is constant for all providers and, though not shown 
individually, is included in the total column. It is projected that 
aggregate payments will increase by 2.8 percent in total, assuming 
facilities do not change their care delivery and billing practices in 
response.
    As can be seen from this table, the combined effects of all of the 
changes vary by specific types of providers and by location.

[[Page 45821]]

[GRAPHIC] [TIFF OMITTED] TN30JY04.092

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 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,

[[Page 45822]]

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 
disseminate the payment rates for each new fiscal year through 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 with respect to the payment methodology. Further, as 
discussed previously in section II.B of this notice, we are not 
implementing case-mix refinements at the present time, but instead are 
proceeding with our ongoing research in this area.

D. Conclusion

    This notice does not initiate any policy changes with regard to the 
SNF PPS; rather, it simply provides an update to the rates for FY 2005. 
Therefore, 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 notice 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.

VIII. 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 a notice such as this take effect. We can waive this 
procedure, however, if we find good cause that notice and comment 
procedure is impracticable, unnecessary, or contrary to the public 
interest and incorporate a statement of the finding and the reasons for 
it into the notice issued.
    We believe it is unnecessary to undertake notice-and-comment 
rulemaking in this instance, as the statute requires annual updates to 
the SNF PPS rates, the methodologies used to update the rates have been 
previously subject to public comment, and this notice initiates no 
policy changes with regard to the SNF PPS but simply reflects the 
application of previously established methodologies. Therefore, we find 
good cause to waive notice and comment procedures.

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

    Dated: June 24, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: July 27, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-17443 Filed 7-29-04; 8:45 am]
BILLING CODE 4120-01-P