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-F]

RIN 0938-AD02

Medicare Program; Optional Payment System for Low Medicare Volume

Skilled Nursing Facilities

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

ACTION: Final rule.

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SUMMARY: This final rule allows 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 are 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 rule also specifies that the

return on equity provision for proprietary SNFs is eliminated for

services furnished on or after October 1, 1993.

EFFECTIVE DATE: These regulations are effective on August 21, 1995.

FOR FURTHER INFORMATION CONTACT: David Goldberg--Simplified Cost

Reporting, (410) 966-4512; Robert Kuhl--All Other Issues, (410) 966-

4597.

SUPPLEMENTARY INFORMATION:

I. Background

The Social Security Act (the Act) authorizes the Secretary to set

limits on the allowable costs incurred by a skilled nursing facility

(SNF) in furnishing care to Medicare beneficiaries. The limits are

based on estimates of the costs necessary for the efficient delivery of

needed health services. Section 1888 of the Act sets forth the

statutory provisions that specifically deal with SNF payments.

Implementing regulations appear at 42 CFR 413.30.

Section 1888(d) of the Act (as added by the Consolidated Omnibus

Budget Reconciliation Act of 1985 (Public Law 99-272)) requires the

establishment of prospectively determined payment rates for routine

services furnished by low Medicare volume SNFs choosing to be paid on a

prospective basis. The rates paid to proprietary SNFs choosing this

method of payment included a component for return on equity related to

routine service costs, which was subsequently eliminated for services

furnished on or after October 1, 1993 (see below).

Specifically, section 1888(d) of the Act--

Specifies that SNFs with 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.

Requires that the amount of payment under the SNF

prospectively determined payment rate system be determined on a per

diem basis. However, that amount 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 under prospectively

determined payment rates.

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.

Requires the Secretary 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.

Requires the Secretary to provide for a simplified cost

report to be filed by SNFs being paid under prospectively determined

payment rates.

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.

Section 13503(c) of the Omnibus Budget Reconciliation Act of 1993

(OBRA '93) (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

an SNF under section 1888(d) of the Act for services furnished during

cost reporting periods beginning during fiscal years (FYs) 1994 and

1995, except as necessary to take into account the elimination of the

return on equity provision.

In order to provide the public with information on the optional

prospectively determined payment rate system for SNF routine services

as soon as possible, and to implement the prospectively determined

rates provided for under section 1888(d) of the Act, as amended, we

initially issued guidelines in sections 2820 through 2822 of Chapter 28

of the Provider Reimbursement Manual (HCFA Pub. 15-1) in August 1986.

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. As described below, the guidelines in the Provider

Reimbursement Manual closely adhere to the requirements of section

1888(d) of the Act. In calculating the prospectively determined payment

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

data available at that time.

In the guidelines issued under Chapter 28 of the Provider

Reimbursement Manual--

We stipulated that an SNF may choose to be paid a

prospectively determined payment rate for general inpatient routine

services if the facility met the statutory criteria that, in its

immediately preceding cost reporting period, it had fewer than 1,500

[[Page 37591]]

Medicare patient days and it made a timely election.

For prospectively determined payment rate purposes, we

grouped SNFs by census region, and by urban area or rural area

designation within the region. 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.

We adjusted the labor portion of the prospectively

determined payment rate to account for area wage differences through

the application of an appropriate wage 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.

For SNFs electing to receive payment under prospectively

determined payment rates, we specified that ancillary services are paid

on the basis of reasonable cost with retroactive adjustment based on an

annual cost report.

II. Provisions of the Proposed Regulations

On June 8, 1994, we published in the Federal Register a proposed

rule (59 FR 29578) that generally would codify the statutory provisions

concerning prospectively determined payment rates for SNFs, as now

explained in chapter 28 of the Provider Reimbursement Manual. The

proposed rule also specified that the return on equity provision for

proprietary SNFs would be eliminated for services furnished on or after

October 1, 1993. The major provisions of the proposed regulations are

set forth below:

A. General Provisions

We proposed to add new Sec. 413.300 to introduce the

contents of Subpart I and to summarize the conditions and procedures

for making prospectively determined payments to qualifying SNFs. In

this section, we proposed to define the terms ``area wage level'',

``census region'', ``routine operating costs'', ``routine capital-

related costs'', and ``urban'' and ``rural'' areas, as we had defined

these terms in the manual.

B. Eligibility Criteria

In new Sec. 413.304, we proposed that 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 twelve months,

the SNF must have had an average daily Medicare census 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 cost reporting year. If there was no preceding cost

reporting period for which an SNF was approved for Medicare

participation, we proposed that the SNF would automatically qualify for

prospectively determined payment for the first cost reporting period.

C. Approval Process

In new Sec. 413.308, we proposed to 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 before the

beginning of each Federal fiscal year. We proposed that an SNF request

to receive prospectively determined payments by notifying its fiscal

intermediary of its intention at least 30 days before the beginning of

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

intermediary would tentatively notify the SNF of 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 before 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 proposed that the intermediary would notify the SNF of

the final determination within 10 working days after the data necessary

to make the determination are available. If tentative approval were

given and the final determination was that the SNF did not qualify to

be paid on the basis of the prospectively determined payment rate, the

intermediary would adjust payments to reflect payment on a reasonable

cost basis.

We proposed that for a newly participating 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 also

specified 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.

D. Basis of Payment

We proposed 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 specified the following:

--Prospectively determined payment would be in lieu of payment on a

reasonable cost basis for routine services.

--Prospectively determined payment would also be in lieu of payment for

routine capital costs.

--The routine operating component of the prospectively determined

payment rate, excluding capital cost and excluding return on equity (if

applicable), would 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 proposed 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.

F. Determining Routine Per Diem Rate

In Sec. 413.314, we described the proposed methodology for

determining the routine per diem rate for an SNF. We explained 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

[[Page 37592]]

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 also provided that the prospectively determined payment rate,

excluding capital costs 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.

We proposed basing the prospectively determined payment rates on

combined freestanding and hospital-based SNF cost data, and we

solicited public comments on the proposed methodology.

G. Determining Payment Amount for Ancillary Services

In Sec. 413.316, we proposed that ancillary services

continue to be paid on the basis of reasonable cost. We described in

detail in the proposed rule (59 FR 29582) a number of alternative

methodologies that we are considering as we continue to search for a

way to implement section 1888(d)(6) of the Act and bring ancillary

services under the prospectively determined payment rate system. We

solicited comments on those methodologies, and indicated that we would

consider other methodologies that commenters might suggest.

H. Publication of Rates

In new Sec. 413.320, we proposed that HCFA would 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. We indicated that this option would continue

to be available to those SNFs that qualify for it. In addition, in new

Sec. 413.321, we proposed 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. We are in the process of

developing a simplified form to be used by those facilities.

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). We also

proposed changing 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, we proposed to

revise Sec. 413.24(h) to clarify that the waiver of full cost reporting

for low program utilization also applies to providers filing a

simplified cost report.

III. Analysis of and Responses to Public Comments

We received three items of correspondence commenting on the June 8,

1994 proposed rule. Following are comments from these letters, and our

responses to them.

Comment: One commenter requested that, for purposes of determining

eligibility to receive a prospectively determined rate, the qualifying

number of Medicare days in the preceding year be increased from fewer

than 1,500 days to perhaps as many as 2,500 days. Another commenter

recommended that we recognize some level of fluctuation in volume and

allow a provider to continue receiving the prospective payment rate

even if the number of days fluctuates to 2,000 days in a subsequent

year, for no more than 2 years.

Response: Section 1888(d)(1) of the Act specifies that SNFs with

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. Absent

legislative change, we have no discretion to change this threshold.

Comment: With regard to our proposal that an SNF with no prior cost

reporting period would automatically qualify for being paid a

prospectively determined payment rate, one commenter requested that the

automatic qualification be a ``final'' determination of eligibility.

Response: Section 1888(d)(4) of the Act requires an SNF to notify

the Secretary of its intention to be paid a prospectively determined

payment rate for a cost reporting period no later than 30 days before

the beginning of that period. For a newly participating SNF, the

notification date is often the beginning date of the cost reporting

period. Thus, we believe it is equitable to allow an SNF 30 days after

its notification of approval to participate in Medicare to submit a

request to be paid a prospectively determined rate, as established

under Sec. 413.308(a) of this final rule. Accordingly, a final

determination of eligibility for that cost reporting period depends on

the SNF meeting this filing requirement.

Comment: One commenter suggested that once an SNF is paid a

prospectively determined payment rate, the prospective payment status

should continue until the SNF no longer qualifies or elects to revoke

this status.

Response: As stated above, section 1888(d)(4) of the Act requires

an SNF to notify the Secretary of its intention to be paid a

prospectively determined payment rate for a cost reporting period no

later than 30 days before the beginning of that period. The Secretary

is required to establish the prospective payment amounts for each

fiscal year based on the most recent data available for a 12-month

period. Accordingly, we believe that the intent of the statute is that

a separate request be made for each annual cost reporting period for

which an SNF wishes to receive a prospectively determined payment rate.

Therefore, we have not adopted this proposal.

Comment: One commenter stated that we should define the data source

for making a final determination regarding the number of Medicare days

in a cost reporting period. The commenter also asked that we clarify

when the 10 working-day window referred to in Sec. 413.308(b) begins.

Response: The settled cost report is the source for making the

final determination of the number of Medicare days. Under Sec. 413.308,

the intermediary notifies an SNF of its initial determination within 10

days of receiving all data necessary to make the determination. The 10-

day period for notification of a final determination begins with the

issuance of the Notice of Program Reimbursement. We do not believe we

need to include this information in the regulations.

Comment: One commenter indicated it is inequitable to combine

freestanding and hospital-based SNF data in computing the prospectively

determined payment rates. The commenter stated that freestanding SNFs

will be overpaid and that hospital-based SNFs will not receive adequate

payment.

Response: Section 1888(d) of the Act does not provide for different

payment rates for freestanding and hospital-based SNFS. We believe that

if the congressional intent had been for different rates, the statute

would have been worded in a manner similar to section 1888(a) of the

Act, which establishes the bases for determining

[[Page 37593]]

cost limits for freestanding and hospital-based SNFs in urban and rural

areas. If an SNF believes that it will not receive adequate payment

under this optional system, it is not required to elect this payment

system. Instead, it could continue to be reimbursed for its reasonable

costs up to its cost limit with the possibility of obtaining an

exception under the provisions of Sec. 413.30 for its costs in excess

of the limit.

Comment: Several commenters responded to our request for comments

on alternative methodologies for determining payment amounts for

ancillary services. One commenter stated that the best method for

computing an ancillary payment rate system would be by developing

reasonable charge payment screens, or, as an alternative, using an

average per diem rate weighted on the basis of ancillary services

provided. Another commenter urged the Secretary not to adopt a system

of reasonable charges for the purpose of paying for ancillary services

because such a system could not serve to reasonably cover the cost of

providing services. Two commenters urged the Secretary to continue

payment for ancillary services on a cost basis, until such time as

another method could be developed.

Response: While we agree that the reasonable charge payment screen

method would meet the statutory requirement for determining payment

rates on the basis of reasonable charges, the data to establish such

payment screens are unavailable. At the same time, we do not believe

that using an average per diem rate weighted on the basis of ancillary

services provided complies with the statutory requirement for

determining a rate for ancillary services based on reasonable charges.

We do not intend to adopt a reasonable charge system unless it can

provide an equitable level of reimbursement. To date, we have not been

able to develop a methodology that meets this requirement. Until we

develop an equitable system based on reasonable charges, payment for

ancillary services will continue on a cost basis. We have gathered data

for certain ancillary therapies and are in the process of evaluating

this information to determine if it would be appropriate for

establishing a rate for ancillary services based on reasonable charges.

IV. Provisions of the Final Regulations

After careful consideration of public comments, no substantive

changes have been made to the regulations. Thus, this final rule

basically adopts the provisions of the proposed rule, with several

minor clarifications that are discussed below.

In Sec. 413.304(a), (b), and (c), we have changed ``may'' receive

to ``is eligible to'' receive, in order to more clearly differentiate

between the eligibility criteria and the rules governing election to be

paid a prospectively determined payment rate under Sec. 413.308.

We have amended Sec. 413.308(b) by adding ``and the timely election

requirements under 413.308(a)'' to clarify that the SNF must meet

election, as well as eligibility, requirements. We have also changed

``determination'' to ``initial and final determinations'' for

clarification.

We have amended Sec. 413.308(c) by prohibiting an SNF from revoking

its request once the intermediary has given initial determination of

eligibility (as opposed to final determination, as stated in the

proposed rule (59 FR 29578)). The time needed to make a final

determination of the number of Medicare covered days in a cost

reporting period can extend for many months due to various factors.

Thus, we believe allowing an SNF to revoke its election until it

receives a final approval would not conform with the intent of the

statute.

We have added Sec. 413.308(d), which clarifies the intermediary's

authority to revoke the prospectively determined payment rate option if

the intermediary determines that the SNF did not meet the eligibility

criteria.

We have amended Sec. 413.310(b) by adding the term ``for routine

capital costs'' for clarification.

We have amended Sec. 413.314 by adding the term ``and qualifies for

such payment'' to clarify that in order to be paid a prospectively

determined rate, an SNF must not only elect to be paid prospectively,

but must qualify to do so.

V. Impact Statement

Unless we certify that a final rule will 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.

In our analysis of the impact of the June 8, 1994 proposed rule, we

noted that Medicare payments to SNFs comprise only about 5.3 percent of

total SNF revenues and this rule will 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 will have a positive

impact on small entities. We received no comments on these issues.

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

prepare a regulatory impact statement if a final rule has 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 Administrator certified, that this

final rule will 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.

VI. Collection of Information Requirements

Sections 413.308 and 413.321 of this document contain information

collection and recordkeeping requirements that are subject to review by

the Office of Management and Budget (OMB) under the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501 et seq.). When OMB approves these

provisions, we will publish a notice to that effect. The information

collection requirements in Sec. 413.321 concern the collection of

financial data of skilled nursing facilities needed to prepare the

applicable Medicare cost reports. The respondents who will provide the

information include an estimated 1,250 SNFs. Public reporting burden

for this collection of information is estimated to be 123,750 hours

during the first 12-month period that the rule will be in effect.

The information collection requirements in Sec. 413.308 concern

notification of election of prospectively determined payment rates by

each SNF to its intermediary for each cost reporting period and review

by the SNF of the intermediary's determination. The respondents who

will provide the information include the electing SNFs and their

intermediaries. Public reporting burden for these requirements is

estimated to be one half hour total for each request and review. The

total for 1,250 SNFs and their intermediaries would be approximately

625 hours.

[[Page 37594]]

List of Subjects in 42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,

Reporting and recordkeeping requirements.

42 CFR chapter IV is amended as set forth below:

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 instructions 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 9 census divisions, comprising the

50 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)(1)(ii)(B) of this chapter.

Sec. 413.304 Eligibility for prospectively determined payment rates.

(a) General rule. An SNF is eligible to receive a prospectively

determined payment rate for a cost reporting period if it had fewer

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

cost report in its immediately

[[Page 37595]]

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 is eligible to

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 is eligible to 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 prospectively determined

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 and the timely election requirements

under Sec. 413.308(a). The intermediary must notify the SNF of its

initial and final determinations within 10 working days after it

receives all the data necessary to make each 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 the initial determination of eligibility

from the intermediary and the cost reporting period has begun.

(d) Revocation by intermediary. If an SNF is given tentative

approval to receive a prospectively determined payment rate, and, after

the start of the applicable cost reporting period, the intermediary

determines that the SNF does not meet the eligibility criteria, the

intermediary must revoke the prospectively determined payment option.

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), and for routine capital costs. Payment is made in lieu of

payment on a reasonable cost basis for routine services and for routine

capital costs.

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, and qualifies for such

payment, is paid a per diem rate for inpatient routine services. This

rate is adjusted to reflect area wage differences and the cost

reporting period

[[Page 37596]]

beginning date (if necessary) and is subject to the limitation

specified in paragraph (d) of this section.

(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 before 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: June 30, 1995.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

[FR Doc. 95-17980 Filed 7-20-95; 8:45 am]

BILLING CODE 4120-01-P