Medicare Program; Optional Payment System for Low Medicare Volume Skilled Nursing Facilities

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[BPD-409-P]

RIN 0938-AD02

Medicare Program; Optional Payment System for Low Medicare Volume

Skilled Nursing Facilities

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement section 9126 of the

Consolidated Omnibus Budget Reconciliation Act of 1985 by allowing

skilled nursing facilities (SNFs) that provide fewer than 1,500 days of

care to Medicare beneficiaries in a cost reporting period to have the

option of receiving prospectively determined payment rates in the

following cost reporting period. The prospectively determined payment

rates would be based on components of SNF costs such as routine

operating costs, capital-related costs, and a return on equity for

proprietary facilities for routine services furnished before October 1,

1993. This proposed rule would also specify, as required by section

13503(c) of the Omnibus Budget Reconciliation Act of 1993, that the

return on equity provision for proprietary SNFs is eliminated for

services furnished on or after October 1, 1993.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on August

8, 1994.

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: BPD-409-P, P.O. Box 7517,

Baltimore, MD 21207.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,

Washington, DC 20201, or

Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore,

MD 21207.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code BPD-409-P. Comments received timely will be available for

public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in room 309-G of

the Department's offices at 200 Independence Avenue, SW., Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(phone: (202) 690-7890).

For comments that relate to information collection requirements,

mail a copy of comments to: Allison Herron Eydt, HCFA Desk Officer,

Office of Information and Regulatory Affairs, Room 3001, New Executive

Office Building, Washington, DC 20503.

Copies: To order copies of the Federal Register containing this

document, send your request to: New Orders, Superintendent of

Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. 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) 783-3238 or by faxing to (202) 275-

6802. The cost for each copy is $4.50. As an alternative, you can view

and photocopy the Federal Register document at most libraries

designated as Federal Depository Libraries and at many other public and

academic libraries throughout the country that receive the Federal

Register.

FOR FURTHER INFORMATION CONTACT:

David Goldberg--Simplified Cost Reporting (410) 966-4517

Robert Kuhl--All Other Issues (410) 966-4597

SUPPLEMENTARY INFORMATION:

I. Background

A. Payment on a Reasonable Cost Basis

Skilled nursing facilities (SNFs) are paid on the basis of

reasonable cost as defined by section 1861(v)(1) of the Social Security

Act (the Act). Under this section, the Secretary is also authorized to

establish limits on the allowable costs incurred by providers of health

care services, such as SNFs, in furnishing care to Medicare

beneficiaries. The limits are based on estimates of the costs necessary

for the efficient delivery of needed health services. Implementing

regulations appear at 42 CFR 413.30.

Sections 1861(v)(1)(A), (v)(1)(E), (v)(7), and 1888 of the Act

provide authority for the payment of routine service costs to SNFs.

Section 1888 of the Act provides for the following:

Separate cost limits for hospital-based and freestanding

SNFs.

Cost limits for freestanding SNFs are to be set at 112

percent of the mean inpatient routine service costs for freestanding

SNFs in urban and rural areas respectively.

Cost limits for hospital-based SNFs are to be set at the

freestanding limit plus 50 percent of the difference between 112

percent of mean per diem hospital-based inpatient routine service costs

for urban and rural SNFs, respectively, and the freestanding limit.

For cost reporting periods beginning before October 1,

1993, cost differences between hospital-based and freestanding SNFs

attributable to excess overhead allocations resulting from Medicare

payment principles are recognized as an add-on to the cost limit for

hospital-based SNFs, as determined by the Secretary. Section

13503(a)(3) of the Omnibus Budget Reconciliation Act of 1993 (Pub. L.

103-66) eliminated this add-on for cost reporting periods beginning on

or after October 1, 1993.

B. Legislation

On April 7, 1986, the Consolidated Omnibus Budget Reconciliation

Act of 1985 (Pub. L. 99-272) was enacted. Section 9126(a) of Public Law

99-272 added a new section (d) to section 1888 of the Act to require

the establishment of prospectively determined payment rates for routine

services furnished by certain SNFs. (Technical changes to section

1888(d) of the Act were subsequently made in sections 1895(b)(7)(A) and

(b)(7)(B) of the Tax Reform Act of 1986 (Pub. L. 99-514).)

In response to a strong interest by Congress in beneficiary access

to SNF care, HCFA conducted a study of SNF payment on a reasonable cost

basis. The first results of this study were reported to Congress in

1985 (See Health Care Financing Review, Fall 1986, Vol. 8, No. 1). This

study showed that it was widely believed that the current payment

system contributed to the limited access to care and that the reporting

burden involved plus the time delay in determining exact payment

amounts inherent in this system due to retrospective payment

adjustments may have discouraged facilities that would have had a low

Medicare patient load from furnishing services to Medicare

beneficiaries. A change was needed to increase beneficiary access to

SNF services by easing the reporting burden for low volume SNFs. In

enacting section 9126(a) of Public Law 99-272, Congress made this

change possible.

Section 1888(d) of the Act provides that the prospectively

determined payment rate is optional for the eligible SNFs, and it is to

be determined on a per diem basis for the cost of furnishing inpatient

routine services and associated capital-related costs. As specified in

the Conference Committee Report accompanying Public Law 99-272 (H.R.

Rep. No. 453, 99th Cong., 2nd Sess. 480 (1985)), the rates paid to

proprietary SNFs were to include a component for return on equity

related to routine service costs.

The specific provisions of section 9126 of Public Law 99-272 are as

follows:

Requirements for Eligibility To Receive SNF Prospectively

Determined Payment Rate: Maximum Medicare Inpatient Days

Under section 1888(d)(1) of the Act, SNFs that had fewer than 1,500

Medicare inpatient days in one cost reporting period have the option of

being paid on the basis of a prospectively determined payment rate in

the following cost reporting period.

Determining the Amount of Payment for Routine Services

Section 1888(d)(2) of the Act requires that the amount of payment

under the SNF prospectively determined payment rate system be

determined on a per diem basis. However, it may not exceed the limit on

routine service costs set forth in section 1888(a) of the Act with

respect to the facility, adjusted to take into account average capital-

related costs with respect to the type and location of the facility.

The limit used for this purpose is the applicable routine service cost

limit in effect when the provider elects to be paid a prospectively

determined payment rate.

For SNFs located in an urban area, the prospectively determined

payment amount is equal to 105 percent of the mean of the per diem

reasonable routine service and routine capital-related costs of

services for SNFs in urban areas within the same census region. The

mean per diem is determined without regard to the limitations of

section 1888(a) of the Act and is adjusted for different area wage

levels.

For SNFs located in a rural area, the prospectively determined

payment amount is equal to 105 percent of the mean of the per diem

reasonable routine service and routine capital-related costs of covered

services for SNFs in rural areas within the same census region. The

mean per diem is determined without regard to the limitations of

section 1888(a) of the Act and is adjusted for different area wage

levels.

Determining Area Prospectively Determined Payment Rates

Section 1888(d)(3) of the Act requires that, for purposes of

determining SNF prospectively determined payment rates, urban and rural

areas be determined in the same manner as for purposes of section

1888(a) of the Act (that is, the provisions governing the SNF cost

limits). It further requires that the term ``region'' have the same

meaning as that under section 1886(d)(2)(D) of the Act. That section

defines ``region'' for purposes of the inpatient hospital prospective

payment system as one of the nine census divisions, comprising the 50

States and the District of Columbia, that are established by the Bureau

of the Census for statistical and reporting purposes. Since rates must

be determined on a regional basis, eligibility is limited to SNFs

within the areas for which rates are available.

Notification Required

Under section 1888(d)(4) of the Act, the Secretary is required to

establish the prospectively determined payment rates for each Federal

fiscal year, at least 90 days prior to the beginning of that fiscal

year. The law also requires an SNF to notify the Secretary of its

intention to be paid a prospectively determined payment rate no later

than 30 days before the beginning of the cost reporting period for

which the request is made.

Cost Report Simplification

Under section 1888(d)(5) of the Act, the Secretary is required to

provide for a simplified cost report to be filed by SNFs being paid

under prospectively determined payment rates. This cost report must

require only the cost information necessary for determining

prospectively determined payment rates in accordance with section

1888(d)(2) of the Act and reasonable costs of ancillary services.

Payment for Ancillary Services

Section 1888(d)(6) of the Act provides that, in the case of an SNF

receiving prospectively determined payment rates, the Secretary may pay

for ancillary services on a reasonable charge basis, rather than on a

cost basis, if the Secretary determines that a reasonable charge basis

provides an equitable level of payment and eases the SNF's reporting

burden.

Costs of Implementing Nursing Home Reform Provisions

Section 1888(d)(7) of the Act requires that the computation of the

rates of payment take into account the additional costs of implementing

nursing home reform provisions (including the costs of conducting nurse

aide training and competency evaluation programs). In the manual

issuances effective on or after October 1, 1989, we have allowed for an

adjustment to the prospectively determined payment rates to account for

these additional costs. However, this adjustment is necessary only if

the cost data used to develop the prospectively determined payment

rates were compiled from cost reporting periods that began prior to

October 1, 1990, the effective date of the nursing home reform

provisions. In the future, when later cost report data reflect these

additional costs, the resulting prospectively determined payment rates

will automatically include these costs and an adjustment will not be

necessary. Therefore, we believe that it is not necessary to implement

this provision in the proposed regulations.

In addition, section 9311(a) of the Omnibus Budget Reconciliation

Act of 1986 (Pub. L. 99-509), which was enacted on October 21, 1986,

amended section 1815 of the Act to identify situations in which we are

to provide (or continue to provide) payment on a periodic interim

basis. Section 1815(e)(2)(C) of the Act specifically directs that

periodic interim payments be made available to facilities furnishing

extended care services, including facilities being paid on a reasonable

cost basis as well as those being paid prospectively determined payment

rates.

Section 1815(e)(2) of the Act provides that periodic interim

payments be made under the standards established under Sec. 405.454(j)

of the regulations (now redesignated as Sec. 413.64(h); see 51 FR

34790, September 30, 1986). Section 413.64(h)(2) sets forth the

requirements that providers of health care services (such as SNFs) must

meet in order to qualify for periodic interim payments. The

requirements concern the level of a provider's estimated annual

Medicare payment, whether a Medicare cost report has been filed, and

recordkeeping and financial matters.

While SNFs that elect prospectively determined payment rates may

qualify for periodic interim payments, we note that electing a bill-by-

bill payment method has the advantage of providing a payment amount for

routine services under prospectively determined payment rates that

would not create the need for retroactive payment adjustments. Such

adjustments would be necessary under the periodic interim payment

method and are the source of some criticism under payment on a

reasonable cost basis.

On August 10, 1993, Public Law 103-66 was enacted. Section 13503(c)

of Public Law 103-66 amended section 1861(v)(1)(B) of the Act to

eliminate the provision for payment for a return on equity for services

furnished by proprietary SNFs on or after October 1, 1993. Also, we

note that section 13503(b) states that the Secretary may not change the

amount of any prospectively determined payment rate paid to a SNF under

section 1888(d) of the Act for services furnished during cost reporting

periods beginning during FYs 1994 and 1995, except as necessary to take

into account the elimination of the return on equity provision.

C. Manual Issuance

As noted above, section 1888(d) of the Act, as enacted by section

9126(a) of Public Law 99-272, provides for the optional prospectively

determined payment rate system for SNF routine services. In order to

provide the public with information on the rates as soon as possible

and to implement the prospectively determined rates, we issued sections

2820 through 2822 of Chapter 28 of the Provider Reimbursement Manual

(HCFA Pub. 15-1) in August 1986.

In the manual transmittal, we provided guidelines for implementing

per diem prospectively determined payment rates for SNF routine

services. The rates were effective for cost reporting periods beginning

on or after October 1, 1986, but before October 1, 1987. Additional

transmittals were issued providing rates for subsequent cost reporting

periods. The provisions of Chapter 28 of the Provider Reimbursement

Manual closely adhere to the requirements of section 1888(d) of the

Act, as described below. In calculating the prospectively determined

payment rates announced in the manual transmittals, we used the most

recent data available at that time.

The provisions of Chapter 28 of the Provider Reimbursement Manual

are as follows:

Eligibility Criteria

We stipulated the statutory criterion that an SNF may choose to be

paid under the prospectively determined payment rate option for general

inpatient routine services if the facility had, in its immediately

preceding cost reporting period, fewer than 1,500 Medicare patient

days.

Classification Criteria

For prospectively determined payment rate purposes, we grouped SNFs

by census region, and by urban area or rural area designation within

the region. As required by section 1888(d)(3) of the Act and as stated

above, the term ``region'' means one of the nine census divisions,

comprising the fifty States and the District of Columbia. The term

``urban area'' means an area within a Metropolitan Statistical Area

(MSA) (as defined by the Office of Management and Budget (OMB)). The

term ``rural area'' means any area outside an urban area.

Adjustment of SNF Cost Data by Wage Index

We adjust the labor portion of the prospectively determined payment

rate to account for area wage differences through the application of an

appropriate wage index.

The labor-related costs are those costs in the market basket that

change with local wage variations. This method of adjusting labor-

related costs is the same as that used in implementing the current SNF

limits. The wage index values are the same as those used to compute the

SNF limits in effect for the same period as the prospectively

determined payment rates.

Use of SNF Market Basket Index

We based the prospectively determined payment rate on reported

costs, adjusted for actual and projected cost increases by applying the

SNF market basket index. The methodology of applying this index is the

same as that described in our October 7, 1992 notice of SNF limits (57

FR 46177). Capital costs are not adjusted for inflation because

depreciation is fixed on a straight line basis, capital-related

interest is long term fixed rate debt and, where appropriate, return on

equity can fluctuate from year to year. We cannot predict the amount or

direction of fluctuations in equity.

Ancillary Services

For SNFs electing to receive payment under prospectively determined

payment rates, ancillary services are paid on the basis of reasonable

cost with retroactive adjustment based on an annual cost report.

II. Discussion of Proposed Regulations

We stated in the original manual transmittal discussed above that

we planned to pursue rulemaking to establish a framework in regulations

for payment to SNFs under prospectively determined payment rates.

Below, we describe proposed regulations that would be effective for

revising the prospectively determined payment rates for the Federal

fiscal year that begins at least 30 days after the publication of a

final rule. In the interim, we will continue to update the

prospectively determined payment rates through Chapter 28 of the

Provider Reimbursement Manual.

We are proposing to add a new Subpart I, Optional Prospectively

Determined Payment Rates for Certain Skilled Nursing Facilities, to 42

CFR part 413. This new subpart would set forth regulations that are

consistent with the statutory changes to section 1888 of the Act made

by provisions in Public Laws 99-272, 99-514, and 103-66.

A. General Provisions

We are proposing to add new Sec. 413.300 to introduce the contents

of Subpart I. This section would broadly list the conditions and

procedures for making prospectively determined payments to qualifying

SNFs. In new Sec. 413.302, we would provide definitions of the terms

``area wage level'', ``census region'', ``routine operating costs'',

``routine capital-related costs'', and ``urban'' and ``rural'' areas as

described above.

B. Eligibility Criteria

We are proposing to add new Sec. 413.304 to describe the

eligibility criteria specified in section 1888(d)(1) of the Act. SNFs

that furnished fewer than 1,500 Medicare covered inpatient days in a

cost reporting period as reported on the Medicare cost report would be

allowed the option of being paid on the basis of prospectively

determined payment rates during the next cost reporting period. If an

SNF's preceding Medicare cost reporting period was shorter than a full

calendar year, it must have had an average daily Medicare census (that

is, the total Medicare inpatient days divided by the total number of

inpatient days) for the period of not greater than 4.1 to qualify for

prospectively determined payment. This figure was determined by

dividing 1,499 (that is, the largest number of Medicare inpatient days

fewer than 1,500) by the number of days in a calendar year. If there is

no preceding cost reporting period for which an SNF was approved for

Medicare participation, we propose that the SNF would automatically

qualify for prospectively determined payment.

C. Approval Process

In the new Sec. 413.308, we would establish rules to govern the

process by which SNFs may request and be approved for payment under the

prospectively determined payment rate option. Under section 1888(d) of

the Act, we are required to establish the prospectively determined

payment rates at least 90 days prior to the beginning of each Federal

fiscal year (that is, by July 1 of each year). An SNF may request to

receive prospectively determined payments by notifying its fiscal

intermediary of its intention at least 30 days prior to the beginning

of the cost reporting period for which the request is made. The

intermediary would notify the SNF as to whether the SNF qualifies for

the option.

In most cases, a final count of Medicare inpatient days cannot be

made for a cost reporting period prior to the beginning of the next

cost reporting period. Therefore, the intermediary's initial

determination of provider eligibility would be a tentative approval or

disapproval. The final determination would be made once a count of the

total Medicare inpatient days in the preceding cost reporting period is

available. We would provide that the intermediary notify the SNF of the

final determination within 10 working days after the data necessary to

make the determination are available. If tentative approval was given

and the final determination is that the SNF does not qualify to be paid

on the basis of a prospectively determined payment rate, the

intermediary will adjust payments to reflect payment on a reasonable

cost basis.

For a newly certified SNF with no preceding cost reporting period,

the election must be made within 30 days of its notification of

approval to participate in Medicare.

The election by the SNF and any approval by the intermediary would

be effective for only one cost reporting period at a time. We would

also specify that once an election has been made and approved and the

cost reporting period has begun, the SNF may not revoke its election

for that period. Each SNF electing to receive a prospectively

determined payment rate would agree to accept that rate prior to the

start of the cost reporting period, regardless of what its final costs

for the period would be. Under this proposed rule, the provider has

traded the opportunity for any retroactive adjustments for the

opportunity to operate at a profit and the foreknowledge of a specified

rate. To allow a provider to reverse its election would entirely defeat

the purpose and the philosophy of a prospectively determined payment

program.

D. Basis of Payment

We propose to add new Sec. 413.310 to set forth the basis of

payment to be used for routine service costs, capital-related costs,

and return on equity (for services furnished before October 1, 1993),

as well as for ancillary service costs, as specified in sections 1888

(d)(2) and (d)(6) of the Act. We would specify the following:

Prospectively determined payment is in lieu of payment on

a reasonable cost basis for routine services.

The routine operating component of the prospectively

determined payment rate excluding capital cost, and excluding return on

equity (if applicable) may not exceed the amount of the provider's

routine service cost limit determined under Sec. 413.30 that is in

effect when the provider elects to be paid a prospectively determined

payment rate.

E. Methodology for Calculating Rates

We are proposing to add new Sec. 413.312 to establish the

methodology for determining the prospectively determined payment rates

as specified in sections 1888 (d)(2) and (d)(6) of the Act. Under these

sections of the Act, mean per diem routine operating costs, capital-

related costs, and, for proprietary SNFs, return on equity for services

furnished before October 1, 1993, are determined separately for SNFs

located in urban areas and those in rural areas for the nine census

regions. To reflect those statutory provisions, the basic methodology

discussed below would be established in regulations. This methodology

would be used to establish the prospectively determined payment rates

each year. The rates would be published in the Federal Register as

described in Sec. 413.320. Amendments to the regulations would be

proposed to implement changes to the basic methodology described in

Secs. 413.312 through 413.314.

The capital-related portion of the per diem rate would be

calculated from the SNF's capital costs as reported on the Medicare

cost report. The capital-related portion includes both direct and

indirect capital costs allocated to routine services. A per diem

capital amount would be determined by dividing each SNF's capital-

related costs by its inpatient days. A group mean would be computed and

the mean multiplied by 105 percent.

For services furnished before October 1, 1993, the return on equity

portion of the per diem rate would be calculated using the return on

equity from each proprietary SNF's cost report. The current allowable

return on equity is equal to 100 percent of the average rate of

interest of public debt obligations issued by the Federal Hospital

Insurance Trust Fund. For cost reporting periods beginning prior to

October 1, 1985, the allowable return on equity was equal to 150

percent of the average rate. Therefore, the return on equity data from

cost reports for periods beginning prior to October 1, 1985 must be

adjusted and is multiplied by 67 percent to reflect the decrease in the

rate of return on equity. (The 67 percent represents the ratio of 100

percent to 150 percent. When future updates of the prospectively

determined payment rates use later cost report data that include the

current allowable return on equity, this adjustment would no longer be

needed.) The per diem would then be determined by dividing the SNF's

adjusted return on equity by its inpatient days. A group mean would be

determined and each group mean multiplied by 105 percent to determine

that portion of the rate.

F. Determining Routine Per Diem Rate

In Sec. 413.314, we describe proposed methodology for determining

the routine per diem rate for an SNF. We explain that the per diem rate

would be composed of a routine operating portion, a capital-related

cost portion applicable to routine services, and, for proprietary SNFs,

a return on equity portion for services furnished before October 1,

1993. The labor-related costs of the routine operating portion would be

adjusted to reflect area wage differences. The total rate would be

adjusted by using a factor based on the projected increase in the

market basket index to reflect a different cost reporting period if an

SNF's cost reporting period is other than October 1 through September

30.

We would also provide that the prospectively determined payment

rate, excluding capital, and excluding return on equity (if applicable)

may not exceed the amount of an SNF's routine service cost limit that

is in effect when the provider elects to be paid a prospective payment

rate.

In developing the proposed prospectively determined payment rates,

we considered: a rate for freestanding facilities based on freestanding

SNF cost data and a rate for hospital-based facilities based on

hospital-based SNF cost data; and a single rate (for urban and rural

locations, respectively) based on combined freestanding and hospital-

based SNF cost data. The current and the proposed single prospectively

determined payment rates are based on combined freestanding and

hospital-based SNF cost data. We believe that the proposed methodology

of basing the prospectively determined payment rates on combined

freestanding and hospital-based SNF cost data is consistent with and

represents the most accurate reading of section 1888(d)(2)(B) of the

Act. We are especially interested in receiving public comments on the

proposed methodology.

G. Determining Payment Amount for Ancillary Services

In searching for a way to implement section 1888(d)(6) of the Act

and bring ancillary services under the prospectively determined payment

rate system, we considered a number of different payment methodologies.

We determined that only one methodology could clearly fit the

requirement for a method for determining payment rates prospectively

based on reasonable charges. This method would develop reasonable

charge payment screens applicable to ancillary services furnished by

all SNFs in a particular area. These payment screens would function

similarly to current Medicare reasonable charge based fee schedule

amounts. However, we have no data at this time upon which to base

payment screens that would provide an equitable level of payment, as

required under 1888(d)(6) of the Act.

We also considered the following alternative payment methodologies,

some of which may not be consistent with the reasonable charge

methodology intended by the statute, while others clearly are not based

on charges. However, we believe that it may be beneficial to discuss

and solicit comments on these methodologies in this proposed rule.

Currently, ancillary payments are determined by applying the

provider's cost-to-charge ratio to ancillary charges. One method we

considered was establishing an average total cost-to-charge ratio for

urban and rural areas within each census area. This ratio could be used

by all SNFs within the geographic area and could be applied to the

charges for all services. While this would be a simplified approach, we

do not believe that it would provide appropriate payment in all cases.

It would not account for the wide variation among SNFs in the kinds of

services furnished, or the wide variations in the providers' cost-to-

charge ratios. It could also discriminate against those SNFs furnishing

more resource-intensive ancillary services and could encourage

substituting low cost services for more costly services. Some of these

problems could be ameliorated by the use of a separate ratio for each

service. We did not review the data for this option because we do not

believe this payment methodology meets the statutory requirements.

We considered a method of paying for ancillary services on the

basis of estimated cost with no retroactive cost settlement. Payment

would be based on current charges converted to estimated cost, using

the cost-to-charge ratio from the cost report for the most recent 12-

month cost reporting period for which a Notice of Amount of Program

Reimbursement (NPR) has been issued. From that cost report, we would

obtain the cost-to-charge ratio (not to exceed 1.0) for each ancillary

cost center and multiply the ratio by the same cost center's ancillary

charges in the period for which the election to receive prospectively

determined payment is made. The average cost-to-charge ratio (not to

exceed 1.0) for the urban and rural area within each census region

would be used if, for any reason, there is no prior year period for

which an NPR has been issued. Capital cost would also be reflected in

the cost-to-charge ratio; therefore, no additional capital payment

would be made. This methodology would be used to determine payment

under both Part A and Part B of Medicare. All applicable coinsurance

and deductibles would continue to be applied.

While this approach does present some positive features, it could

be problematic. First, this method is not consistent with the statutory

requirement that ancillary services be paid on the basis of either

actual cost or reasonable charges. In addition, it is possible that

there would be a wide variation between estimated cost and actual cost.

However, as in a prior approach, we did not review the data for this

option because we do not believe this payment methodology meets the

statutory requirements.

We considered two methodologies for establishing a prospective per

diem rate for ancillary services. The rate would be based on historical

cost report data, as follows:

Develop a flat average per diem in the aggregate for all

ancillary services, by location; or

Develop an average by ancillary service equal to 105

percent of the appropriate group mean, by location.

While both of these approaches would have the advantage of being

easy to administer and informing the provider precisely how much it

would be paid, there are some problems with implementing an average per

diem cost based rate. First, neither approach meets the alternative

statutory methodology of payment for ancillary services on the basis of

reasonable charges. The first approach would also not recognize the

wide variations in the types of ancillary services provided by

different SNFs. Neither approach would take into consideration the fact

that, with respect to SNFs, ancillary services may be provided by

outside suppliers. Either approach could also act as a disincentive to

providing resource-intensive services, or in some cases, any ancillary

services. The historical data used in either approach do not take into

account any changes, especially increases, in patient acuity levels

that could impact on the utilization of current ancillary services.

We considered a facility specific prospectively determined per diem

payment for ancillary services subject to an adjustable limit. Both the

payment amount and the adjustable limit would be based on historical

cost data. Therefore, in addition to not meeting the mandate for an

alternate methodology of payment on the basis of reasonable charges,

the historical data do not account for changes in utilization of

ancillary services due to increases in patient acuity.

We considered one methodology even though it does not meet the

alternate prospective methodology of payment on the basis of reasonable

charges but does meet the requirement of 1861(v)(1)(A). That is,

similar to the current routine cost limit system, we would make

payments for ancillary services not to exceed 105 percent of the

appropriate group mean for SNFs by location. Since this payment could

not be prospectively determined, we did not consider incorporating this

methodology into this proposed notice.

Finally, we considered developing a case-mix adjusted per diem

payment for ancillary services. HCFA is currently studying the

feasibility of a case-mix type payment system for Medicare SNFs. The

data to develop a case-mix adjusted ancillary cost per diem are not

currently available.

In reviewing these various methodologies for payment of ancillary

costs, we are interested in a methodology that would be easy to apply

and that would result in payment commensurate with the services

provided. We also would prefer to adopt a methodology that recognizes

the wide variation in services among SNFs. We were unable to develop a

methodology based on available data that met these requirements. We

therefore are soliciting comments on any of the methodologies described

above or any additional methodologies not mentioned.

Until such time as a methodology can be developed, ancillary

services would continue to be paid on the basis of reasonable costs.

H. Publication of Rates

In new Sec. 413.320, we would provide that HCFA will update the

routine prospectively determined payment rates in a Federal Register

notice published no later than July 1 of each year. In the notices, we

would establish the rates for routine services under the prospectively

determined payment rate system.

I. Simplified Cost Report

All Medicare providers with low Medicare utilization have had, at

the intermediary's discretion, the option of filing less than a full

Medicare cost report. This option would continue to be available to

those SNFs that qualify for it.

In addition, in new Sec. 413.321, we would provide that a

simplified cost report would be filed by certain SNFs receiving a

prospectively determined rate. At this time, a simplified form is

available only for freestanding SNFs. The simplified form is not

applicable to hospital-based SNFs or SNFs that are a part of a health

care complex. Another simplified form to be used by those facilities

will be available in the future.

The new simplified cost report requires inputting only the cost

information necessary for determining prospective payment rates. The

report employs a simplified method of cost finding to be used in lieu

of the cost finding methods described in Sec. 413.24(d). This method is

specified in the instructions for Form-HCFA 2540S, contained in

sections 3000-3027.3 of Part 2 of the Provider Reimbursement Manual. We

are also proposing to change Sec. 413.24(d) to clarify that the cost

finding provisions of that regulation do not apply to those SNFs that

qualify for the simplified method of cost finding. In addition,

Sec. 413.24(h) would be revised to clarify that the waiver of full cost

reporting for low program utilization also applies to providers filing

a simplified cost report.

III. Impact Statement

Unless the Secretary certifies that a proposed rule would not have

a significant economic impact on a substantial number of small

entities, we generally prepare a regulatory flexibility analysis that

is consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612). For purposes of the RFA, we consider SNFs as small

entities.

Medicare payments to SNFs comprise only about 5.3 percent of total

SNF revenues and this rule would only have a small impact on those

revenues. Moreover, the purpose of this rule is to ease the compliance

burden for small entities, and we believe the rule would have a

positive impact on small entities.

Also, section 1102(b) of the Act requires the Secretary to prepare

a regulatory impact statement if a proposed rule may have a significant

economic impact on the operations of a substantial number of small

rural hospitals. Such an analysis must conform to the provisions of

section 603 of the RFA. With the exception of hospitals located in

certain rural counties adjacent to urban areas, for purposes of section

1102(b) of the Act, we define a small rural hospital as a hospital with

fewer than 50 beds.

We have determined, and the Secretary certifies, that this proposed

rule would not have a significant effect on the operations of a

substantial number of small entities or on small rural hospitals.

Therefore, we have not prepared a regulatory flexibility analysis or an

analysis of the effects of this rule on small rural hospitals.

In accordance with the provisions of Executive Order 12866 this

regulation was not reviewed by the Office of Management and Budget.

IV. Response to Comments

A. Public Comment

Because of the large number of items of correspondence we normally

receive on FR documents published for comment, we are not able to

acknowledge or respond to them individually. We will consider all

comments we receive by the date and time specified in the DATES section

of this preamble, and, if we proceed with a subsequent document, we

will respond to the comments in the preamble to that document.

B. Paperwork Reduction Act

Section 413.308 of this proposed rule contains information

collection requirements. As required by section 3504(h) of the

Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3511), we have

submitted a copy of this proposed rule to the Executive Office of

Management and Budget (EOMB) for its review of these information

collection requirements. Total public reporting burden for this

collection of information is estimated to be 1,200 hours during the

first 12-month period that the rule would be in effect. A notice will

be published in the Federal Register after approval is obtained.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the OMB

official whose name appears in the ADDRESSES section of this preamble.

List of Subjects in 42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,

Reporting and recordkeeping requirements.

For the reason set out in the preamble 42 CFR part 413 is proposed

to be amended as follows:

A. The title of part 413 is amended to read as follows:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR

END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED

PAYMENT RATES FOR SKILLED NURSING FACILITIES

B. Part 413 is amended as follows:

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

follows:

Authority: Secs. 1102, 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, 1395f(b), 1395g, 1395l (a), (i), and (n), 1395x(v),

1395hh, 1395rr, 1395tt, and 1395ww); sec. 104(c) of Public Law 100-

360 as amended by sec. 608(d)(3) of Public Law 100-485 (42 U.S.C.

1395ww (note)); sec. 101(c) of Public Law 101-234 (42 U.S.C. 1395ww

(note)); and sec. 13503 of Public Law 103-66 (42 U.S.C. 1395ww

(note)).

Subpart A--Introduction and General Rules

2. In Sec. 413.1, a new paragraph (g) is added to read as follows:

Sec. 413.1 Introduction.

* * * * *

(g) Prospectively determined payment rates for low Medicare volume

SNFs. Rules governing requests by SNFs for prospectively determined

payment rates under section 1888(d) of the Act are set forth in subpart

I of this part.

Subpart B--Accounting Records and Reports

3. In Sec. 413.24 the introductory text of paragraph (d), and

paragraph (h), are revised to read as follows:

Sec. 413.24 Adequate cost data and cost finding.

* * * * *

(d) Cost finding methods. After the close of the accounting period,

providers must use one of the following methods of cost finding to

determine the actual costs of services furnished during that period.

These provisions do not apply to SNFs that elect and qualify for

prospectively determined payment rates under subpart I of this part for

cost reporting periods beginning on or after October 1, 1986. For the

special rules that are applicable to those SNFs, see Sec. 413.321. For

cost reporting periods beginning after December 31, 1971, providers

using the departmental method of cost apportionment must use the step-

down method described in paragraph (d)(1) of this section or an ``other

method'' described in paragraph (d)(2) of this section. For cost

reporting periods beginning after December 31, 1971, providers using

the combination method of cost apportionment must use the modified cost

finding method described in paragraph (d)(3) of this section. Effective

for cost reporting periods beginning on or after October 1, 1980, HHAs

not based in hospitals or SNFs must use the step-down method described

in paragraph (d)(1) of this section. (HHAs based in hospitals or SNFs

must use the method applicable to the parent institution.) However, an

HHA not based in a hospital or SNF that received less than $35,000 in

Medicare payment for the immediately preceding cost reporting period,

and for whom this payment represented less than 50 percent of the total

operating cost of the agency, may use a simplified version of the step-

down method, as specified in instuctions for the cost report issued by

HCFA.

* * * * *

(h) Waiver of full or simplified cost reporting for low program

utilization--(1) If the provider has had low utilization of covered

services by Medicare beneficiaries (as determined by the intermediary)

and has received correspondingly low interim payments for the cost

reporting period, the intermediary may waive a full cost report or the

simplified cost report described in Sec. 413.321 if it decides that it

can determine, without a full or simplified report, the reasonable cost

of covered services provided during that period.

(2) If a full or simplified cost report is waived, the provider

must submit within the same time period required for full or simplified

cost reports:

(i) The cost reporting forms prescribed by HCFA for this situation;

and

(ii) Any other financial and statistical data the intermediary

requires.

4. A new subpart I is added to read as follows:

Subpart I--Prospectively Determined Payment Rates for Skilled Nursing

Facilities

Sec.

413.300 Basis and scope.

413.302 Definitions.

413.304 Eligibility for prospectively determined payment rates.

413.308 Rules governing election of prospectively determined

payment rates.

413.310 Basis of payment.

413.312 Methodology for calculating rates.

413.314 Determining payment amounts: Routine per diem rate.

413.316 Determining payment amounts: Ancillary services.

413.320 Publication of prospectively determined payment rates or

amounts.

413.321 Simplified cost reports for SNFs.

Subpart I--Prospectively Determined Payment Rates for Skilled

Nursing Facilities

Sec. 413.300 Basis and scope.

(a) Basis. This subpart implements section 1888(d) of the Act,

which provides for optional prospectively determined payment rates for

qualified SNFs.

(b) Scope. This subpart sets forth the eligibility criteria an SNF

must meet to qualify, the process governing election of prospectively

determined payment rates, and the basis and methodology for determining

prospectively determined payment rates.

Sec. 413.302 Definitions.

For purposes of this subpart--

Area wage level means the average wage per hour for all

classifications of employees as reported by health care facilities

within a specified area.

Census region means one of the nine census divisions, comprising

the fifty States and the District of Columbia, established by the

Bureau of the Census for statistical and reporting purposes.

Routine capital-related costs means the capital-related costs,

allowable for Medicare purposes (as described in subpart G of this

part), that are allocated to the SNF participating inpatient routine

service cost center as reported on the Medicare cost report.

Routine operating costs means the cost of regular room, dietary,

and nursing services, and minor medical and surgical supplies for which

a separate charge is not customarily made. It does not include the

costs of ancillary services, capital-related costs, or, where

appropriate, return on equity.

Rural area means any area outside an urban area in a census region.

Urban area means a Metropolitan Statistical Area (MSA) or New

England County Metropolitan Area (NECMA), as defined by the Office of

Management and Budget, or a New England county deemed to be an urban

area, as listed in Sec. 412.62(f)(ii)(B) of this chapter.

Sec. 413.304 Eligibility for prospectively determined payment rates.

(a) General rule. An SNF may receive a prospectively determined

payment rate for a cost reporting period only if it had fewer than

1,500 Medicare covered inpatient days as reported on a Medicare cost

report in its immediately preceding cost reporting period. This

criterion applies even if the SNF received a prospectively determined

payment rate during the preceding cost reporting period.

(b) Less than a full cost reporting period. If the cost reporting

period that precedes an SNF's request for prospectively determined

payment is not a full cost reporting period, the SNF may receive

prospectively determined payment rates only if the average daily

Medicare census for the period (Medicare inpatient days divided by the

total number of days in the cost reporting period) is not greater than

4.1.

(c) Newly-participating SNFs. An SNF may receive prospectively

determined payment rates for its first cost reporting period for which

it is approved to participate in Medicare.

Sec. 413.308 Rules governing election of prospectively determined

payment rates.

(a) Requirements. An SNF must notify its intermediary at least 30

calendar days before the beginning of the cost reporting period for

which it requests to receive such payment that it elects prospectively

determined payment rates. A separate request must be made for each cost

reporting period for which an SNF seeks prospective payment. A newly

participating SNF with no preceding cost reporting period must make its

election within 30 days of its notification of approval to participate

in Medicare.

(b) Intermediary notice. After evaluating an SNF's request for

prospectively determined payment rates, the intermediary notifies the

SNF in writing as to whether the SNF meets any of the eligibility

criteria described in Sec. 413.304. The intermediary must notify the

SNF of its determination within 10 working days after it receives all

the data necessary to make the determination. The intermediary's

determination is limited to one cost reporting period.

(c) Prohibition against revocation. An SNF may not revoke its

request after it has received final determination of eligibility from

the intermediary and the cost reporting period has begun.

Sec. 413.310 Basis of payment.

(a) Method of payment. Under the prospectively determined payment

rate system, a qualified SNF receives a per diem payment of a

predetermined rate for inpatient services furnished to Medicare

beneficiaries. Each SNF's routine per diem payment rate is determined

according to the methodology described in Sec. 413.312 and is based on

various components of SNF costs.

(b) Payment in full. The payment rate represents payment in full

for routine services as described in Sec. 413.314 (subject to

applicable coinsurance as described in subpart G of part 409 of this

title). Payment is made in lieu of payment on a reasonable cost basis

for routine services.

Sec. 413.312 Methodology for calculating rates.

(a) Data used--(1) To calculate the prospectively determined

payment rates, HCFA uses:

(i) The SNF cost data that were used to develop the applicable

routine service cost limits;

(ii) A wage index to adjust for area wage differences; and

(iii) The most recent projections of increases in the costs from

the SNF market basket index.

(2) In the annual schedule of rates published in the Federal

Register under the authority of Sec. 413.320, HCFA announces the wage

index and the annual percentage increases in the market basket used in

the calculation of the rates.

(b) Calculation of per diem rate--(1) Routine operating component

of rate--(i) Adjusting cost report data. The SNF market basket index is

used to adjust the routine operating cost from the SNF cost report to

reflect cost increases occurring between cost reporting periods

represented in the data collected and the midpoint of the initial cost

reporting period to which the payment rates apply.

(ii) Calculating a per diem cost. For each SNF, an adjusted routine

operating per diem cost is computed by dividing the adjusted routine

operating cost (see paragraph (b)(1)(i) of this section) by the SNF's

total patient days.

(iii) Adjusting for wage levels--(A) The SNF's adjusted per diem

routine operating cost calculated under paragraph (b)(1)(ii) of this

section is then divided into labor-related and nonlabor-related

portions.

(B) The labor-related portion is obtained by multiplying the SNF's

adjusted per diem routine operating cost by a percentage that

represents the labor-related portion of cost from the market basket.

This percentage is published when the revised rates are published as

described in Sec. 413.320.

(C) The labor-related portion of each SNF's per diem cost is

divided by the wage index applicable to the SNF's geographic location

to arrive at the adjusted labor-related portion of routine cost.

(iv) Group means. SNFs are grouped by urban or rural location by

census region. Separate means of adjusted labor-related and nonlabor

routine operating costs for each SNF group are established in

accordance with the SNF's region and urban or rural location. For each

group, the mean labor-related and mean nonlabor-related per diem

routine operating costs are multiplied by 105 percent.

(2) Computation of routine capital-related cost. (i) The SNF

routine capital-related cost for both direct and indirect capital costs

allocated to routine services, as reported on the Medicare cost report,

is obtained for each SNF in the data base.

(ii) For each SNF, the per diem capital-related cost is calculated

by dividing the SNF's routine capital costs by its inpatient days.

(iii) SNFs are grouped by urban and rural location by census

region, and mean per diem routine capital-related cost is determined

for each group.

(iv) Each group mean per diem capital-related cost is multiplied by

105 percent.

(3) Computation of return on owner's equity for services furnished

before October 1, 1993--(i) Each proprietary SNF's Medicare return on

equity is obtained from its cost report and the portion attributable to

the routine service cost is determined as described in Sec. 413.157.

(ii) For each proprietary SNF, per diem return on equity is

calculated by dividing the routine cost related return on equity

determined under paragraph (b)(3)(i) of this section by the SNF's total

Medicare inpatient days.

(iii) Separate group means are computed for per diem return on

equity of proprietary SNFs, based on regional and urban or rural

classification.

(iv) Each group mean is multiplied by 105 percent.

Sec. 413.314 Determining payment amounts: Routine per diem rate.

(a) General rule. An SNF that elects to be paid under the

prospectively determined payment rate system is paid a per diem rate

for inpatient routine services. This rate is adjusted to reflect area

wage differences and the cost reporting period beginning date (if

necessary) and is subject to the limitation described below.

(b) Per diem rate. The prospectively determined payment rate for

each urban and rural area in each census region is comprised of the

following:

(1) A routine operating component, which is divided into:

(i) A labor-related portion adjusted by the appropriate wage index;

and

(ii) A nonlabor-related portion.

(2) A routine capital-related cost portion.

(3) For proprietary SNFs only, a portion that is based on the

return on owner's equity related to routine cost, applicable only for

services furnished before October 1, 1993.

(c) Adjustment for cost reporting period. (1) If a facility has a

cost reporting period beginning after the beginning of the Federal

fiscal year, the intermediary increases the labor-related and nonlabor-

related portions of the prospective payment rate that would otherwise

apply to the SNF by an adjustment factor. Each factor represents the

projected increase in the market basket index for a specific 12-month

period. The factors are used to account for inflation in costs for cost

reporting periods beginning after October 1. Adjustment factors are

published in the annual notice of prospectively determined payment

rates described in Sec. 413.320.

(2) If a facility uses a cost reporting period that is not 12

months in duration, the intermediary must obtain a special adjustment

factor from HCFA for the specific period.

(d) Limitation of prospectively determined payment rate. The per

diem prospectively determined payment rate for an SNF, excluding

capital-related costs and excluding return on equity for services

furnished prior to October 1, 1993, may not exceed the individual SNF's

routine service cost limit. Under Sec. 413.30, the routine service cost

limit is the limit determined without regard to exemptions, exceptions,

or retroactive adjustments, and is the actual limit in effect when the

provider elects to be paid a prospectively determined payment rate.

Sec. 413.316 Determining payment amounts: Ancillary services.

Ancillary services are paid on the basis of reasonable cost in

accordance with section 1861(v)(1) of the Act and Sec. 413.53.

Sec. 413.320 Publication of prospectively determined payment rates or

amounts.

At least 90 days prior to the beginning of a Federal fiscal year to

which revised prospectively determined payment rates are to be applied,

HCFA publishes a notice in the Federal Register:

(a) Establishing the prospectively determined payment rates for

routine services; and

(b) Explaining the basis on which the prospectively determined

payment rates are calculated.

Sec. 413.321 Simplified cost report for SNFs.

SNFs electing to be paid under the prospectively determined payment

rate system may file a simplified cost report. The cost report contains

a simplified method of cost finding to be used in lieu of cost methods

described in Sec. 413.24(d). This method is specified in the

instructions for Form HCFA-2540S, contained in sections 3000-3027.3 of

part 2 of the Provider Reimbursement Manual. This form may not be used

by hospital-based SNFs or SNFs that are part of a health care complex.

Those SNFs must file a cost report that reflects the shared services

and administrative costs of the hospital and any other related

facilities in the health care complex.

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance).

Dated: March 29, 1994.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: May 24, 1994.

Donna E. Shalala,

Secretary.

[FR Doc. 94-13506 Filed 6-7-94; 8:45 am]

BILLING CODE 4120-01-P