Medicare Program; Revision of the Procedures for Requesting Exceptions to Cost Limits for Skilled Nursing Facilities and Elimination of Reclassifications

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1883-F]

RIN 0938-AI80

Medicare Program; Revision of the Procedures for Requesting

Exceptions to Cost Limits for Skilled Nursing Facilities and

Elimination of Reclassifications

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

ACTION: Final rule.

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SUMMARY: This final rule revises the procedures for granting exceptions

to the cost limits for skilled nursing facilities (SNFs) and retains

the current procedures for exceptions to the cost limits for home

health agencies (HHAs). It also removes the provision allowing

reclassification for all providers.

EFFECTIVE DATE: This final rule is effective September 7, 1999.

FOR FURTHER INFORMATION CONTACT: Steve Raitzyk, (410) 786-4599.

SUPPLEMENTARY INFORMATION:

I. Background

Section 223 of the Social Security Amendments of 1972 (Pub. L. 92-

603) amended section 1861(v)(1)(A) of the Social Security Act (the Act)

to authorize the Secretary to establish ``* * * limits on the direct

and indirect overall incurred costs or incurred costs of specific items

or services or groups of items or services * * *'' as a presumptive

estimate of reasonable costs. Under section 1861(v)(1)(A), if a

provider's cost exceeds its Medicare cost limit, it is deemed to be

unreasonable for the efficient delivery of needed health care services.

The Congress, however, in the House Committee report ``H.R. Rep. No.

92-231, 92nd Congress, 1st Session 5071 (1971),'' stated that providers

could obtain relief from the effect of the cost limits based on

evidence of the need for an exception.

We published a final rule on June 1, 1979 (44 FR 31802) to

implement the legislation. The provisions are presently in 42 CFR

413.30 and concern principles of reasonable cost reimbursement.

Section 413.30 describes the general principles and procedures for

establishing cost limits and the process by which providers may appeal

the applicability of these cost limits. Under Sec. 413.30(c), a

provider may seek relief from the effects of applying cost limits,

either by requesting an exemption from its limit as a new provider of

inpatient services, by requesting a reclassification of its provider

status, or by requesting an exception to the cost limit.

On August 11, 1998, we published a proposed rule concerning

procedures for requesting exceptions to cost limits in the Federal

Register (63 FR 42797). We proposed to revise the approval process for

granting exceptions to the cost limits for skilled nursing facilities

(SNFs) and to remove the provision for obtaining a reclassification for

all providers. In that proposed rule, we traced the development of cost

limits since 1972.

In the proposed rule, we stated that we may find it inappropriate

to apply particular limits to a class of providers because of provider

class characteristics, the data on which the limits are based, or the

method by which the limits are determined (63 FR 42800). We further

stated that we may explain our reasoning for exclusion in a notice

setting forth the limits for the appropriate cost reporting periods. We

explained that estimates of the costs necessary for efficient delivery

of health services may be based on cost reports or other data providing

indicators of current costs. Current and past period data would be

adjusted to arrive at estimated costs for the prospective periods to

which limits are being applied.

We described the process of establishing cost limits and the basis

on which they were calculated. We also explained that the servicing

intermediary would have to notify each SNF or HHA of its cost limit at

least 30 days before the applicable cost reporting period. Each

intermediary cost limit notification would have to contain the

following:

The provider's classification and calculation of the

applicable limit.

A statement that, if the provider believes it has been

incorrectly classified, it is the provider's responsibility to furnish

to the intermediary evidence that demonstrates the classification is

incorrect.

A statement that the provider may be entitled to an

exemption from, or an

[[Page 42611]]

exception to, the cost limits under the provisions of Sec. 413.30.

II. Provisions of the Proposed Rule

A. Provider Reclassification

In the proposed rule, we noted that under current Sec. 413.30(d), a

provider may obtain a reclassification of its provider status if it can

show that its classification is at variance with the criteria specified

in establishing the limits. We noted that when cost limits were first

developed, we manually arrayed the data collected from the providers'

cost reports and classified them by type (hospital-based or

freestanding) and location (metropolitan area or nonmetropolitan area).

We stated there were instances when providers were misclassified. Thus,

we allowed providers to file reclassification requests if they could

show that the data we used for the classification were incorrect.

We noted that HHAs and SNFs now file specific cost reports, and

metropolitan and nonmetropolitan area designations have become linked,

through automation, to the county and State where each provider is

located. As a result, a SNF or HHA cannot be misclassified.

Reclassifications for hospitals, now filed with the Medicare Geographic

Review Board, are governed under the provisions of subpart L (The

Medicare Geographic Classification Review Board) of part 412

(Prospective Payment System for Inpatient Hospital Services). Hospitals

no longer apply for reclassifications under Sec. 413.30. Therefore, we

proposed to remove Sec. 413.30(d) to discontinue the use of

reclassifications.

B. Exceptions to Cost Limits

In the preamble to the June 1979 final rule (44 FR 31806), we

clarified the difference between an exemption and an exception. If a

provider receives an exemption, it is not affected at all by the cost

limits and it is paid under the standard rules for reasonable cost or

customary charges. If a provider receives an exception, it is paid on

the basis of the cost limit, plus an incremental sum for the reasonable

costs warranted by the circumstances that justified the exception.

Our current regulation at Sec. 413.30(f) (Sec. 413.30(c) in this

final rule) allows a provider that is subject to cost limits to request

an exception to the cost limits if its costs exceed, or are expected to

exceed, the limits as a result of one of the following unusual

situations: Atypical services; extraordinary circumstances; providers

in areas with fluctuating populations; medical and paramedical

education costs; and unusual labor costs. A SNF may request an

exception for cost reporting periods occurring before July 1, 1998.

We stated that an adjustment is made only to the extent that the

costs are reasonable, attributable to the circumstance specified,

separately identified by the provider, and verified by the

intermediary. The provider must file a request for an exception to the

cost limits no later than 180 days from the date of the intermediary's

notice of program pay. The intermediary reviews the request with all

supporting documentation. The intermediary also makes and submits to us

a recommendation on the provider's request. We make a final

determination and respond to the intermediary within 180 days from the

date of the intermediary's recommendation. If we do not respond within

180 days, it is considered good cause for the granting of an extension

of the time limit to apply for a Provider Reimbursement Review Board

review.

In July 1994, we published manual instructions (HCFA Pub. 15-1,

Transmittal No. 378) that give SNFs detailed instructions for

requesting exceptions to the SNF cost limits. Under this transmittal,

in section 2531.1, intermediaries are required to submit their

recommendations on a SNF's exception request within 90 days of receipt.

We stated that we notify the intermediary of our final determination on

the exception within 90 days of the date the request is received. We

further stated that our current regulation at Sec. 413.30(c) allows us

180 days to make our final determination.

We explained that after reviewing SNF exception requests submitted

by intermediaries under the rules in Transmittal 378, we identified six

intermediaries that were proficiently adjudicating SNF exceptions

within the required time frame. The resulting increase in

administrative efficiency has benefited SNFs, fiscal intermediaries,

and the Medicare program.

We proposed in the August 1998 rule to revise Sec. 413.30(c) to

give all intermediaries the authority to make final determinations on

SNF exception requests. We stated that this would result in an increase

in administrative efficiency benefiting all SNFs who file SNF exception

requests and fiscal intermediaries that process those exception

requests.

We also stated our intent to work with the Blue Cross Association

to perform additional training for all fiscal intermediaries and to

designate a single contact person to handle all inquiries from fiscal

intermediaries regarding exception requests.

Under our proposed Sec. 413.30(c), if the intermediary determines

that the SNF did not provide adequate documentation from which a proper

determination can be made, the intermediary would notify the SNF that

the request is denied. The intermediary would also notify the SNF that

it has 45 days from the date on the intermediary's denial letter to

submit a new exception request with the complete documentation, that we

continue to allow the SNF to request a review by the Provider

Reimbursement Review Board (PRRB), and that the time we need to review

the request (through the intermediary) is considered good cause for

extending the time limit for a PRRB review. Otherwise, the denial is

our final determination.

We stated, in accordance with section 4432 of the Balanced Budget

Act of 1997 (Pub. L. 105-33), that effective with cost reporting

periods beginning on or after July 1, 1998, there will be a 3-year

transition period to the prospective payment system. During the

transition period, SNFs will be paid a blended payment that is based

partially on a facility-specific rate and a prospective payment rate.

The base period for the facility-specific rate is cost reporting

periods beginning during the period October 1, 1994 through September

30, 1995. Exceptions for SNFs will no longer be available for cost

reporting periods beginning on or after July 1, 1998.

The procedures for HHA exception requests would remain unchanged

and are set forth in this final rule at Sec. 413.30(c)(1). We note that

we will not make exception payments to an HHA that is subject to the

per-beneficiary limit described in a final rule with comment period

that we published on March 31, 1998 (63 FR 15718).

C. Technical Changes

We proposed to remove paragraph (h) of Sec. 413.30, pertaining to

hospital cost report adjustments, because it is obsolete, and we also

proposed to make minor editorial changes to other portions of

Sec. 413.30.

III. Analysis of and Responses to Comments

We received comments on the proposed rule from an organization

representing nursing homes and from a consulting company. The comments

and our responses to those comments are as follows:

Comment: The commenter expressed concerns that fiscal

intermediaries have a mounting workload due to the implementation of

the SNF prospective payment system, and that this

[[Page 42612]]

regulation will create additional workload responsibilities for fiscal

intermediaries.

Response: Fiscal intermediaries have been processing SNF exception

requests since July 1994, under Transmittal No. 378 of HCFA Pub. 15-1.

An intermediary processes an exception within 90 days of receipt from

the SNF and sends its recommendation to our staff who also makes a

final determination within 90 days. This final regulation will allow an

intermediary to implement its recommendation without having to submit

it to us for a final determination. Not only is there no additional

workload required of an intermediary, this regulation will actually

reduce the intermediary's workload by not having to submit the

exception to us and wait for our response. We have designated Joseph

Menning as the contact person available to assist the intermediaries

with any questions or problems and we will monitor the performance of

the intermediaries. He may be reached by telephone at (410) 786-4594,

or by e-mail at [email protected], or by mail at: HCFA, 7500 Security

Boulevard, Room C5-06-05, Baltimore, MD 21244.

Comment: One commenter requested that we establish a separate

arbitration board to hear SNF claims relating to disagreements about

exception decisions made by a fiscal intermediary.

Response: If errors in either computations or the application of

exception methodologies are detected by the SNF, the SNF should notify

the fiscal intermediary and the intermediary will review the SNF's

claim. If there is still a disagreement, the SNF can ask that its

intermediary contact the HCFA-designated exceptions contact person in

an effort to resolve the disagreement between the SNF and the

intermediary. If the SNF still disagrees with the intermediary's

determination, it can request a review by the PRRB.

Comment: A commenter claimed that there are inconsistencies in the

methodology and calculation of SNF exceptions among intermediaries and

that some intermediaries consistently miss responding to a SNF's

exception request within the required 90-day timeframe.

Response: We have trained all intermediaries to follow the

instructions in Transmittal No. 378 of HCFA Pub. 15-1. We are not aware

of any inconsistent applications of exceptions policies among

intermediaries. We monitor the performance of intermediaries on various

pay issues, including exceptions, under the Contractor Performance

Evaluation Program (CPEP). Also, if the intermediary misses the 90-day

timeframe to respond to a SNF's exception request, this failure to

respond is considered good cause for an extension of the time limit for

the SNF to apply for a review by the PRRB.

Comment: One commenter expressed the view that many intermediaries

know very little about SNF operations or regulatory compliance issues

and this makes it difficult for them to make a proper decision on

exceptions issues such as the ``low occupancy'' adjustment.

Response: All intermediaries employ personnel who deal with

operational and regulatory compliance issues. We know of no

intermediaries that have had problems in this area. If a fiscal

intermediary or SNF encounters a problem concerning any exceptions

policy, including operational and regulatory compliance issues, it may

contact the HCFA-designated contact person for assistance. Also, a SNF

that encounters a problem may contact the HCFA-designated exceptions

contact.

Comment: The same commenter indicated that in its estimation, many

intermediaries ignore low occupancy arguments and calculations made by

SNFs and either make arbitrary partial adjustments or 100 percent low

occupancy adjustments.

Response: We have instructed fiscal intermediaries to submit all

alternate proposals to the low occupancy adjustment to us for a

determination. We have received many alternate proposals to the low

occupancy adjustment submitted by fiscal intermediaries on behalf of

SNFs and their representatives. We issued program instructions to the

fiscal intermediaries based on these proposals.

IV. Provisions of the Final Rule

Based on our review and analysis of comments, we are adopting the

proposed rule as final. We are making, however, a technical

clarification to the proposed Sec. 413.30(d) to indicate that SNF

exemptions apply only to cost reporting periods beginning before July

1, 1998. We are revising the approval process for granting exceptions

to the cost limits for SNFs (Sec. 413.30(c)) and retaining the current

procedures for exceptions to the cost limits for HHAs

(Sec. 413.30(c)(1)). We are also removing the current provision

allowing reclassification for all providers (Sec. 413.30(d)).

V. Regulatory Impact Statement

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

through 612), we prepare a regulatory flexibility analysis unless we

certify that a rule will not have a significant economic impact on a

substantial number of small entities. For purposes of the RFA, all SNFs

and HHAs are considered to be small entities. Individuals and States

are not included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare a

regulatory impact analysis if a rule may have a significant impact on

the operations of a substantial number of small rural hospitals. This

analysis must conform to the provisions of section 604 of the RFA. For

purposes of section 1102(b) of the Act, we define a small rural

hospital as a hospital that is located outside of a Metropolitan

Statistical Area and has fewer than 50 beds.

This rule to eliminate reclassifications for HHAs and SNFs has no

effect on them since they currently do not need to be reclassified.

Hospitals can obtain any needed reclassifications and exceptions under

subpart L of part 412. The change in the method of processing requests

for exceptions to cost limits has no economic impact on either the

providers or the Medicare program.

For these reasons, we are not preparing an analysis for either the

RFA or section 1102(b) of the Act because we have determined, and we

certify, that this rule will not have a significant economic impact on

a substantial number of small entities or a significant impact on the

operations of a substantial number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,

Reporting and recordkeeping requirements.

For the reasons set out in the preamble, 42 CFR, part 413, is

amended as follows:

PART 413--[AMENDED]

1. The authority citation for part 413 is revised to read as

follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh).

2. Section 413.30 is revised to read as follows:

Sec. 413.30 Limitations on payable costs.

(a) Introduction--(1) Scope. This section implements section

1861(v)(1)(A) of the Act by setting forth the general rules under which

HCFA may establish limits on SNF and HHA costs recognized as reasonable

in determining Medicare program

[[Page 42613]]

payments. It also sets forth rules governing exemptions and exceptions

to limits established under this section that HCFA may make as

appropriate in considering special needs or situations.

(2) General principle. Payable SNF and HHA costs may not exceed the

costs HCFA estimates to be necessary for the efficient delivery of

needed health care services. HCFA may establish estimated cost limits

for direct or indirect overall costs or for costs of specific services

or groups of services. HCFA imposes these limits prospectively and may

calculate them on a per admission, per discharge, per diem, per visit,

or other basis.

(b) Procedure for establishing limits. (1) In establishing limits

under this section, HCFA may classify SNFs and HHAs by factors that

HCFA finds appropriate and practical, including the following:

(i) Type of services furnished.

(ii) Geographical area where services are furnished, allowing for

grouping of noncontiguous areas having similar demographic and economic

characteristics.

(iii) Size of institution.

(iv) Nature and mix of services furnished.

(v) Type and mix of patients treated.

(2) HCFA bases its estimates of the costs necessary for efficient

delivery of health services on cost reports or other data providing

indicators of current costs. HCFA adjusts current and past period data

to arrive at estimated costs for the prospective periods to which

limits are applied.

(3) Before the beginning of a cost period to which revised limits

will be applied, HCFA publishes a notice in the Federal Register,

establishing cost limits and explaining the basis on which they are

calculated.

(4) In establishing limits under paragraph (b)(1) of this section,

HCFA may find it inappropriate to apply particular limits to a class of

SNFs or HHAs due to the characteristics of the SNF or HHA class, the

data on which HCFA bases those limits, or the method by which HCFA

determines the limits. In these cases, HCFA may exclude that class of

SNFs or HHAs from the limits, explaining the basis of the exclusion in

the notice setting forth the limits for the appropriate cost reporting

periods.

(c) Requests regarding applicability of cost limits. For cost

reporting periods beginning before July 1, 1998, a SNF may request an

exception or exemption to the cost limits imposed under this section.

An HHA may request only an exception to the cost limits. The SNF or HHA

must make its request to its fiscal intermediary within 180 days of the

date on the intermediary's notice of program pay.

(1) Home health agencies. The intermediary makes a recommendation

on the HHA's request to HCFA, which makes the decision. HCFA responds

to the request within 180 days from the date HCFA receives the request

from the intermediary. The intermediary notifies the HHA of HCFA's

decision. The time required by HCFA to review the request is considered

good cause for the granting of an extension of the time limit for the

HHA to apply for a PRRB review, as specified in Sec. 405.1841 of this

chapter. HCFA's decision is subject to review under subpart R of part

405 of this chapter.

(2) Skilled nursing facilities. The intermediary makes the final

determination on the SNF's request and notifies the SNF of its

determination within 90 days from the date that the intermediary

receives the request from the SNF. If the intermediary determines that

the SNF did not provide adequate documentation from which a proper

determination can be made, the intermediary notifies the SNF that the

request is denied. The intermediary also notifies the SNF that it has

45 days from the date on the intermediary's denial letter to submit a

new exception request with the complete documentation and that

otherwise, the denial is the final determination. The time required by

the intermediary to review the request is considered good cause for the

granting of an extension of the time limit for the SNF to apply for a

PRRB review, as specified in Sec. 405.1841 of this chapter. The

intermediary's determination is subject to review under subpart R of

part 405 of this chapter.

(d) Exemptions. Exemptions from the limits imposed under this

section may be granted to a new SNF with cost reporting periods

beginning before July 1, 1998 as stated in Sec. 413.1(g)(1). A new SNF

is a provider of inpatient services that has operated as the type of

SNF (or the equivalent) for which it is certified for Medicare, under

present and previous ownership, for less than 3 full years. An

exemption granted under this paragraph expires at the end of the SNF's

first cost reporting period beginning at least 2 years after the

provider accepts its first inpatient.

(e) Exceptions. Limits established under this section may be

adjusted upward for a SNF or HHA under the circumstances specified in

paragraphs (e)(1) through (e)(5) of this section. An adjustment is made

only to the extent that the costs are reasonable, attributable to the

circumstances specified, separately identified by the SNF or HHA, and

verified by the intermediary.

(1) Atypical services. The SNF or HHA can show that the--

(i) Actual cost of services furnished by a SNF or HHA exceeds the

applicable limit because the services are atypical in nature and scope,

compared to the services generally furnished by SNFs or HHAs similarly

classified; and

(ii) Atypical services are furnished because of the special needs

of the patients treated and are necessary in the efficient delivery of

needed health care.

(2) Extraordinary circumstances. The SNF or HHA can show that it

incurred higher costs due to extraordinary circumstances beyond its

control. These circumstances include, but are not limited to, strikes,

fire, earthquake, flood, or other unusual occurrences with substantial

cost effects.

(3) Areas with fluctuating populations. The SNF or HHA meets the

following conditions:

(i) Is located in an area (for example, a resort area) that has a

population that varies significantly during the year.

(ii) Is furnishing services in an area for which the appropriate

health planning agency has determined does not have a surplus of beds

or services and has certified that the beds or services furnished by

the SNF or HHA are necessary.

(iii) Meets occupancy or capacity standards established by the

Secretary.

(4) Medical and paramedical education. The SNF or HHA can

demonstrate that, if compared to other SNFs or HHAs in its group, it

incurs increased costs for services covered by limits under this

section because of its operation of an approved education program

specified in Sec. 413.85.

(5) Unusual labor costs. The SNF or HHA has a percentage of labor

costs that varies more than 10 percent from that included in the

promulgation of the limits.

(f) Operational review. Any SNF or HHA that applies for an

exception to the limits established under paragraph (e) of this section

must agree to an operational review at the discretion of HCFA. The

findings from this review may be the basis for recommendations for

improvements in the efficiency and economy of the SNF's or the HHA's

operations. If recommendations are made, any future exceptions are

contingent on the SNF's or HHA's implementation of these

recommendations.

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance; and Program No. 93.774, Medicare--

Supplementary Medical Insurance Program)

[[Page 42614]]

Dated: January 19, 1999.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing Administration.

Dated: April 22, 1999.

Donna E. Shalala,

Secretary.

[FR Doc. 99-20015 Filed 8-4-99; 8:45 am]

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