Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2006, 45026-45127 [05-15221]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 70, Number 149 (Thursday, August 4, 2005)]
[Rules and Regulations]
[Pages 45026-45127]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-15221]



[[Page 45025]]

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

Part III





Department of Health and Human Services





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



Centers for Medicare & Medicaid Services



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



42 CFR Parts 409, 411, 424, and 489



Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2006; Final Rule

Federal Register / Vol. 70, No. 149 / Thursday, August 4, 2005 / 
Rules and Regulations

[[Page 45026]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 411, 424, and 489

[CMS-1282-F]
RIN 0938-AN65


Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities for FY 2006

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

ACTION: Final rule.

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

SUMMARY: In this final rule we update the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2006. Annual updates to the PPS rates are required 
by section 1888(e) of the Social Security Act (the Act), as amended by 
the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA), and the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), relating to Medicare 
payments and consolidated billing for SNFs. This final rule also 
responds to public comments submitted on the proposed rule published on 
May 19, 2005 (70 FR 29070), and promulgates provisions set forth in 
that proposed rule, along with several additional technical revisions 
to the regulations.

DATES: Effective Date: This final rule becomes effective on October 1, 
2005.

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

SUPPLEMENTARY INFORMATION: To assist readers in referencing sections 
contained in this document, we are providing the following Table of 
Contents.

Table of Contents

I. Background
    A. Current System for Payment of SNF Services Under Part A of 
the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 (BBA) for 
Updating the SNF PPS
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (BBRA)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)
    E. The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA)
    F. General Overview of the SNF PPS
    1. Payment Provisions--Federal Rates
    2. Payment Provisions--Initial Transition Period
    G. Use of the SNF Market Basket Index
II. Summary of the Provisions of the FY 2006 Proposed Rule
III. Analysis of and Response to Public Comments on the FY 2006 
Proposed Rule
    A. General Comments on the FY 2006 Proposed Rule
    1. Public Comment Schedule for the FY 2006 Proposed Rule
    B. Update of Federal Payment Rates Under the SNF PPS
    1. Costs and Services Covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    C. Case-Mix Adjustment and Other Clinical Issues
    1. Proposed Refinements to the RUG-III Case-Mix Classification 
System
    2. Proposed Increases to the RUG-III Case-Mix Weight Values
    3. Implementation Issues
    4. Additional Clinical and Related Issues
    a. Proposed Changes to the MDS Coding Requirements (``Look-
Back'' Period, 5-day Grace Periods for PPS MDS Assessments, and 
Projection of Anticipated Therapy Services during the 5-day PPS 
Assessment (Section T))
    b. Long-Term Payment and Quality Incentive Proposals
    c. Proposal to Clarify ``Direct'' and ``Indirect'' Employment 
Relationships for Nurse Practitioners and Clinical Nurse Specialists
    d. Completion of Other Medicare Required Assessments (OMRAs)
    e. Concurrent Therapy
    5. Case-Mix Adjusted Federal Rates and Associated Indexes
    D. Wage Index Adjustment to Federal Rates
    1. Proposal to Incorporate the Revised OMB Definitions for 
Metropolitan Statistical Areas and Combined Statistical Areas
    2. Determining the Labor-Related Portion of the SNF PPS Rate
    3. Calculating the Budget Neutrality Factor
    E. Updates to the Federal Rates
    F. Relationship of Case-Mix Classification System to Existing 
SNF Level-of-Care Criteria
    1. Proposals on the 9 New Rehabilitation Plus Extensive Services 
Groups
    G. Example of Computation of Adjusted PPS Rates and SNF Payment
    H. SNF Market Basket Index
    1. Background
    2. Use of the SNF Market Basket Percentage
    3. Market Basket Forecast Error Adjustment
    4. Federal Rate Update Factor
    I. Consolidated Billing
    J. Application of the SNF PPS to SNF Services Furnished by 
Swing-Bed Hospitals
    K. Qualifying Three-Day Inpatient Hospital Stay Requirement
IV. Provisions of the Final Rule
V. Waiver of Proposed Rulemaking
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Accounting Statement
    D. Alternatives Considered Regulation Text
VIII. Addendum

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

ADL Activity of Daily Living
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
BEA (U.S. Department of Commerce) Bureau of Economic Analysis
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. 106-554
CAH Critical Access Hospital
CBSA Core-Based Statistical Area
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
CPT (Physicians') Current Procedural Terminology
DRG Diagnosis Related Group
FI Fiscal Intermediary
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
ICD-9-CM International Classification of Diseases, Ninth Edition, 
Clinical Modification
IFC Interim Final Rule With Comment Period
MDS Minimum Data Set
MEDPAR Medicare Provider Analysis and Review File
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NECMA New England County Metropolitan Area
OIG Office of Inspector General
OMRA Other Medicare Required Assessment
PMSA Primary Metropolitan Statistical Area
PPI Producer Price Index
PPS Prospective Payment System
PRM Provider Reimbursement Manual

[[Page 45027]]

RAI Resident Assessment Instrument
RAP Resident Assessment Protocol
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Pub. L. 96-354
RIA Regulatory Impact Analysis
RUG Resource Utilization Group
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
STM Staff Time Measurement
UMRA Unfunded Mandates Reform Act, Pub. L. 104-4

I. Background

    On May 19, 2005, we published a proposed rule in the Federal 
Register (70 FR 29070, hereafter referred to as the FY 2006 SNF PPS 
proposed rule), setting forth the proposed updates to the payment rates 
used under the prospective payment system (PPS) for skilled nursing 
facilities (SNFs), for FY 2006. Annual updates to the PPS rates are 
required by section 1888(e) of the Social Security Act (the Act), as 
amended by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (BBRA, Pub. L. 106-113), the Medicare, Medicaid, and SCHIP 
Benefits Improvement and rotection Act of 2000 (BIPA, Pub. L. 106-554), 
and the Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA, Pub. L. 100-173), relating to Medicare payments and 
consolidated billing for SNFs. In the FY 2006 SNF PPS proposed rule, we 
invited public comments on a number of proposed revisions and technical 
corrections to the regulations.

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

    Section 4432 of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-
33) amended section 1888 of the Act to provide for the implementation 
of a per diem PPS for SNFs, covering all costs (routine, ancillary, and 
capital-related) of covered SNF services furnished to beneficiaries 
under Part A of the Medicare program, effective for cost reporting 
periods beginning on or after July 1, 1998. We are updating the per 
diem payment rates for SNFs for FY 2006. Major elements of the SNF PPS 
include:
     Rates. Per diem Federal rates were established for urban 
and rural areas using allowable costs from FY 1995 cost reports. These 
rates also included an estimate of the cost of services that, before 
July 1, 1998, were paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay. The rates were 
adjusted annually using a SNF market basket index. Rates were case-mix 
adjusted using a classification system (Resource Utilization Groups, 
version III (RUG-III)) based on beneficiary assessments (using the 
Minimum Data Set (MDS) version 2.0) (In section III.C of this final 
rule, we discuss refinements to the case-mix classification system). 
The rates were also adjusted by the hospital wage index to account for 
geographic variation in wages. (In section III.D of this final rule, we 
discuss the wage index adjustment in detail.) Correction notices were 
published in the Federal Register on October 7, 2004 (69 FR 60158) and 
on December 30, 2004 (69 FR 78445) that announced corrections to 
several of the wage factors. Additionally, as noted in the July 30, 
2004 update notice (69 FR 45775), section 101 of BBRA and certain 
sections of BIPA also affect the payment rate.
     Transition. The SNF PPS included an initial 3-year, phased 
transition that blended a facility-specific payment rate with the 
Federal case-mix adjusted rate. For each cost reporting period after a 
facility migrated to the new system, the facility-specific portion of 
the blend decreased and the Federal portion increased in 25 percentage 
point increments. For most facilities, the facility-specific rate was 
based on allowable costs from FY 1995; however, since the last year of 
the transition was FY 2001, all facilities were paid at the full 
Federal rate by the following fiscal year (FY 2002). Therefore, as 
discussed in section I.F.2 of this final rule, we are no longer 
including adjustment factors related to facility-specific rates for the 
coming fiscal year.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the RUG-III classification is based, in part, on the beneficiary's need 
for skilled nursing care and therapy, we have attempted, where 
possible, to coordinate claims review procedures involving level of 
care determinations with the outputs of beneficiary assessment and RUG-
III classifying activities. We discuss this coordination in greater 
detail in section III.F of this final rule. Moreover, the Part A SNF 
benefit has not only level of care requirements, but also a set of 
technical, or ``posthospital'' requirements as well. In section III.K 
of this final rule, we discuss one aspect of the technical requirement 
for a qualifying prior inpatient hospital stay of at least 3 
consecutive days, on which we invited public comment in the FY 2006 SNF 
PPS proposed rule.
     Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
claims for almost all of the services that the resident receives during 
the course of a covered Part A stay. (In addition, this provision 
places with the SNF the Medicare billing responsibility for physical 
and occupational therapy, and speech-language pathology services that 
the resident receives during a noncovered stay.) The statute excludes 
from the consolidated billing provision a few services--primarily those 
of physicians and certain other types of practitioners--which remain 
separately billable to Part B by the outside entity that furnishes 
them. We discuss this provision in greater detail in section III.I of 
this final rule.
     Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section III.J of this final rule.
     Technical corrections. We are also taking this opportunity 
to make certain technical corrections in the text of the regulations, 
as discussed in greater detail in section IV. of this final rule.

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

    Section 1888(e)(4)(H) of the Act requires that we publish in the 
Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the FY.
    2. The case-mix classification system to be applied with respect to 
these services during the FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In the July 30, 1999 final rule (64 FR 41670), we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to modifications in the RUG-III classification 
structure (see section III.F of this final rule).
    Along with a number of other revisions discussed later in this 
preamble, this final rule provides the

[[Page 45028]]

annual updates to the Federal rates as mandated by the Act.

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

    There were several provisions in the BBRA that resulted in 
adjustments to the SNF PPS. These provisions were described in detail 
in the final rule that we published in the Federal Register on July 31, 
2000 (65 FR 46770). In particular, sections 101(a) and (b) of the BBRA 
provided for a temporary 20 percent increase in the per diem adjusted 
payment rates for 15 specified RUG-III groups (SE3, SE2, SE1, SSC, SSB, 
SSA, CC2, CC1, CB2, CB1, CA2, CA1, RHC, RMC, and RMB). Under section 
101(c) of the BBRA, this temporary increase remains in effect until the 
later of October 1, 2000, or the implementation of case-mix refinements 
in the PPS. (We discuss refinements to the case-mix classification 
system in section III.C of this final rule.) In addition, section 
101(d) of the BBRA included a 4 percent across-the-board increase in 
the adjusted Federal per diem payment rates each year for FYs 2001 and 
2002, exclusive of the 20 percent increase.
    We included further information on all of the provisions of the 
BBRA that affect the SNF PPS in Program Memoranda A-99-53 and A-99-61 
(December 1999), and Program Memorandus AB-00-18 (March 2000). In 
addition, for swing-bed hospitals with more than 49 (but less than 100) 
beds, section 408 of the BBRA provided for the repeal of certain 
statutory restrictions on length of stay and aggregate payment for 
patient days, effective with the end of the SNF PPS transition period 
described in section 1888(e)(2)(E) of the Act. In the July 31, 2001 
final rule (66 FR 39562), we made conforming changes to the regulations 
in Sec.  413.114(d), effective for services furnished in cost reporting 
periods beginning on or after July 1, 2002, to reflect section 408 of 
the BBRA.

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

    The BIPA included several provisions that resulted in adjustments 
to the PPS for SNFs. These provisions were described in detail in the 
final rule that we published in the Federal Register on July 31, 2001 
(66 FR 39562), as follows:
     Section 203 of the BIPA exempted critical access hospital 
(CAH) swing-beds from the SNF PPS; we included further information on 
this provision in Program Memorandum A-01-09 (January 16, 2001).
     Section 311 of the BIPA eliminated the 1 percent reduction 
in the SNF market basket that the statutory update formula had 
previously specified for FY 2001, and changed the 1 percent reduction 
specified for FYs 2002 and 2003 to a 0.5 percent reduction. This 
section also required us to conduct a study of alternative case-mix 
classification systems for the SNF PPS, and to submit a report to the 
Congress on the results of the study.
     Section 312 of the BIPA provided for a temporary 16.66 
percent increase in the nursing component of the case-mix adjusted 
Federal rate for services furnished on or after April 1, 2001, and 
before October 1, 2002. This section also required the Government 
Accountability Office (GAO) to conduct an audit of SNF nursing staff 
ratios and submit a report to the Congress on whether the temporary 
increase in the nursing component should be continued. GAO issued this 
report (GAO-03-176) in November 2002.
     Section 313 of the BIPA repealed the consolidated billing 
requirement for services (other than physical and occupational therapy, 
and speech-language pathology services) furnished to SNF residents 
during noncovered stays, effective January 1, 2001.
     Section 314 of the BIPA adjusted the payment rates for all 
of the 14 rehabilitation RUGs (RUC, RUB, RUA, RVC, RVB, RVA, RHC, RHB, 
RHA, RMC, RMB, RMA, RLB, and RLA), in order to correct an anomaly under 
which the existing payment rates for three particular rehabilitation 
RUGs--RHC, RMC, and RMB--were higher than the rates for some other, 
more intensive rehabilitation RUGs. Under the BIPA adjustment, the 
temporary increase that sections 101(a) and (b) of the BBRA had applied 
to the RHC, RMC, and RMB rehabilitation RUGs was revised from 20 
percent to 6.7 percent, and the BIPA adjustment also applied this 
temporary 6.7 percent increase to each of the other 11 rehabilitation 
RUGs. Under this provision, the temporary increase remained at 20 
percent for each of the 12 non-rehabilitation RUGs specified in section 
101(b) of the BBRA (SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, CB2, CB1, 
CA2, and CA1).
     Section 315 of the BIPA authorized us to establish a 
geographic reclassification procedure that is specific to SNFs, but 
only after collecting the data necessary to establish a SNF wage index 
that is based on wage data from nursing homes.
    We included further information on several of these provisions in 
Program Memorandum A-01-08 (January 16, 2001).

E. The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA)

    A provision of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) resulted in a further adjustment to the 
PPS for SNFs. Specifically, section 511 of the MMA amended paragraph 
(12) of section 1888(e) of the Act to provide for a temporary 128 
percent increase in the PPS per diem payment for any SNF resident with 
Acquired Immune Deficiency Syndrome (AIDS), effective with services 
furnished on or after October 1, 2004. As discussed in Transmittal No. 
160 (Change Request No. 3291, April 30, 2004, available online at 
https://www.cms.hhs.gov/manuals/transmittals/comm_date_dsc.asp), this 
add-on applies to claims with diagnosis code 042. Like the temporary 
add-on payments created by section 101(a) of the BBRA (as amended by 
section 314 of the BIPA), this special AIDS add-on was not intended to 
remain in effect indefinitely. As amended by section 511 of the MMA, 
section 1888(e)(12)(B) of the Act specifies that this temporary 
increase for patients with AIDS is to remain in effect only until ``* * 
* such date as the Secretary certifies that there is an appropriate 
adjustment in the case mix * * * to compensate for the increased costs 
associated with [such] residents * * *.'' As discussed in the FY 2006 
SNF PPS proposed rule (70 FR 29080), we are not addressing the issue of 
such certification at this time and, accordingly, the temporary add-on 
payments created by section 511 of the MMA will remain in effect during 
FY 2006.
    The law further provided that the 128 percent increase in payment 
under the AIDS add-on is to be ``* * * determined without regard to any 
increase'' under section 101 of the BBRA (as amended by section 314 of 
the BIPA). As explained in the MMA Conference report, this means that 
if a resident qualifies for the temporary 128 percent increase in 
payment under the special AIDS add-on, ``the BBRA temporary RUG add-on 
does not apply in this case * * *.'' (H.R. Conf. Rep. No. 108-391 at 
662).
    In addition, section 410 of the MMA contained a provision that 
affects the SNF consolidated billing requirement's treatment of certain 
services furnished as of January 1, 2005, by rural health clinics 
(RHCs) and Federally qualified health centers (FQHCs). This provision 
was discussed in Transmittal No. 390 (Change Request No. 3575), issued 
on December 10, 2004, which is available online at https://
www.cms.hhs.gov/

[[Page 45029]]

manuals/ transmittals/comm--date--dsc.asp.

F. General Overview of the SNF PPS

    We implemented the Medicare SNF PPS for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, we pay SNFs through 
prospective, case-mix adjusted per diem payment rates applicable to all 
covered SNF services. These payment rates cover all the costs of 
furnishing covered skilled nursing services (routine, ancillary, and 
capital-related costs) other than costs associated with approved 
educational activities. Covered SNF services include post-hospital 
services for which benefits are provided under Part A and all items and 
services that, before July 1, 1998, had been paid under Part B (other 
than physician and certain other services specifically excluded under 
the BBA) but furnished to Medicare beneficiaries in a SNF during a 
covered Part A stay. A complete discussion of these provisions appears 
in the May 12, 1998 interim final rule (63 FR 26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the PPS. We developed the Federal payment rates using allowable costs 
from hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of PPS (the 15-month period beginning July 1, 
1998) using a SNF market basket, and then standardized for the costs of 
facility differences in case-mix and for geographic variations in 
wages. The database used to compute the Federal payment rates excluded 
providers that received new provider exemptions from the routine cost 
limits, as well as costs related to payments for exceptions to the 
routine cost limits. In accordance with the formula prescribed in the 
BBA, we set the Federal rates at a level equal to the weighted mean of 
freestanding costs plus 50 percent of the difference between the 
freestanding mean and weighted mean of all SNF costs (hospital-based 
and freestanding) combined. We computed and applied separately the 
payment rates for facilities located in urban and rural areas. In 
addition, we adjusted the portion of the Federal rate attributable to 
wage-related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix, using a classification system that accounts for the 
relative resource utilization of different patient types. This 
classification system, Resource Utilization Groups, version III (RUG-
III), uses beneficiary assessment data from the Minimum Data Set (MDS) 
completed by SNFs to assign beneficiaries to one of 44 RUG-III groups. 
The May 12, 1998 interim final rule (63 FR 26252) included a complete 
and detailed description of the RUG-III classification system. A 
further discussion of the case-mix classification system, including the 
issue of case-mix refinements, appears in section III.C of this final 
rule.
    The Federal rates in this final rule reflect an update to the rates 
that we published for FY 2005 equal to the full change in the SNF 
market basket index. According to section 1888(e)(4)(E)(ii)(IV) of the 
Act, for FY 2006, we have adjusted the current rates by the full SNF 
market basket index.
2. Payment Provisions--Initial Transition Period
    The SNF PPS included an initial, phased transition from a facility-
specific rate (which reflected the individual facility's historical 
cost experience) to the Federal case-mix adjusted rate. The transition 
extended through the facility's first three cost reporting periods 
under the PPS, up to, and potentially including, the one that began in 
FY 2001. (Further, once section 102 of the BBRA took effect, a facility 
could elect to bypass the remainder of its transition period and go 
directly to being paid entirely under the Federal rates.) Accordingly, 
starting with cost reporting periods beginning in FY 2002, we base 
payments entirely on the Federal rates and, as mentioned previously in 
this final rule, we no longer include adjustment factors related to 
facility-specific rates for the coming fiscal year.

G. Use of the SNF Market Basket Index

    Section 1888(e)(5) of the Act requires us to establish a SNF market 
basket index that reflects changes over time in the prices of an 
appropriate mix of goods and services included in the covered SNF 
services. The SNF market basket index is used to update the Federal 
rates on an annual basis. The final rule published on July 31, 2001 (66 
FR 39562) revised and rebased the market basket to reflect 1997 total 
cost data. The SNF market basket index is discussed in greater detail 
in section III.H of this final rule.
    In addition, as explained in the FY 2004 final rule (68 FR 46058, 
August 4, 2003) and in section III.H of this final rule, the annual 
update of the payment rates includes, as appropriate, an adjustment to 
account for market basket forecast error. This adjustment takes into 
account the forecast error from the most recently available fiscal year 
for which there are final data, and is applied whenever the difference 
between the forecasted and actual change in the market basket exceeds a 
0.25 percentage point threshold. For FY 2004 (the most recently 
available fiscal year for which there are final data), the estimated 
increase in the market basket index was 3.0 percentage points, while 
the actual increase also was 3.0 percentage points. Therefore, the 
payment rates for FY 2006 do not include a forecast error adjustment, 
as there is no difference between the estimated and actual amounts of 
change. Table 1 below shows the forecasted and actual market basket 
amounts for FY 2004.

  Table 1.--FY 2004 Forecast Error Correction for CMS SNF Market Basket
------------------------------------------------------------------------
                                                              FY 2004
                                Forecasted    Actual  FY      forecast
            Index                 FY 2004        2004          error
                                 increase*    increase**   correction***
------------------------------------------------------------------------
SNF..........................          3.0           3.0           0.0
------------------------------------------------------------------------
* Published in August 4, 2003 Federal Register; based on second quarter
  2003 Global Insight/DRI-WEFA forecast.
** Based on the second quarter 2005 Global Insight/DRI-WEFA forecast.
*** The FY 2004 forecast error correction will be applied to the FY 2006
  PPS update. Any forecast error less than 0.25 percentage points is not
  reflected in the update.


[[Page 45030]]

II. Summary of the Provisions of the FY 2006 Proposed Rule

    The FY 2006 SNF PPS proposed rule included proposed updates to the 
FY 2006 Federal payment rates used under the SNF PPS. In accordance 
with section 1888(e)(4)(E)(ii)(IV) of the Act, the updates reflect the 
full SNF market basket percentage change for the fiscal year. We also 
proposed to introduce, as of January 1, 2006, a refined case-mix 
classification system that would add nine new Rehabilitation plus 
Extensive Services groups at the top of the existing RUG hierarchy. The 
FY 2006 SNF PPS proposed rule discussed and invited public comment on a 
number of other clinical issues as well, involving alternative ways to 
improve quality and efficiency and ensure accurate payments under the 
SNF PPS.
    We also proposed to incorporate OMB's revised definitions for 
Metropolitan Statistical Areas and its new definitions of Micropolitan 
Statistical Areas and Combined Statistical Areas, and we invited 
comments on the appropriateness of implementing this change through a 
transition period similar to that adopted under the inpatient hospital 
PPS (IPPS). Further, we invited public comments on additional HCPCS 
codes that could represent the type of ``high-cost, low probability'' 
services within certain designated service categories (that is, 
chemotherapy and its administration, radioisotope services, and 
customized prosthetic devices) that section 103 of the BBRA has 
authorized us to exclude from the SNF consolidated billing provision. 
We also invited comments on the apparent hospital practice of having 
patients spend time in observation status prior to a formal inpatient 
admission, and on the potential implications of this practice for the 
SNF benefit's qualifying 3-day hospital stay requirement.
    In addition to discussing these general issues in the FY 2006 SNF 
PPS proposed rule, we also proposed making the following specific 
revisions to the existing text of the regulations:
     In Sec.  424.3, we would make a technical correction to 
the definition of ``HCPCS''.
     In Sec.  424.20, we would revise paragraph (e)(2) to 
clarify the distinction between ``direct'' and ``indirect'' employment 
relationships in terms of the ability of nurse practitioners and 
clinical nurse specialists to perform SNF certifications and 
recertifications.
    More detailed information on each of these issues, to the extent 
that we received public comments on them, appears in the discussion 
contained in the following sections of this preamble.

III. Analysis of and Responses to Public Comments on the FY 2006 
Proposed Rule

    In response to the publication of the FY 2006 SNF PPS proposed 
rule, we received 149 timely items of correspondence from the public. 
We received numerous comments from various trade associations and major 
organizations. Comments also originated from nursing homes, hospitals, 
and other providers, suppliers, and practitioners, nursing home 
resident advocacy groups, health care consulting firms, and private 
citizens. The following discussion, arranged by subject area, includes 
a summary of the public comments that we received, and our responses to 
the comments appear under the appropriate heading.

A. General Comments on the FY 2006 SNF PPS Proposed Rule

1. Public Comment Schedule for the FY 2006 SNF PPS Proposed Rule
    Comment: A few commenters noted that the July 12, 2005, closing 
date for the public comment period fell less than 60 days after the 
proposed rule's May 19, 2005, publication date in the Federal Register, 
and expressed concern about abbreviating the comment period available 
for the proposed rule. They asserted that a timeframe of less than 60 
days was burdensome, and affected their ability to furnish 
comprehensive responses. They asked us to provide the full 60-day 
comment period in the future.
    Response: We note that in accordance with the requirements of 
section 1871(b)(1) of the Act, ``notice of the proposed regulation in 
the Federal Register'' was provided as of May 13, 2005. At that same 
time, the document was also posted on the CMS website. Accordingly, the 
contents of the proposed rule were, in fact, available to the public 
for the full 60-day comment period.

B. Update of Federal Payment Rates Under the SNF PPS

    This final rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2005. The schedule incorporates per diem Federal rates that 
provide Part A payment for all costs of services furnished to a 
beneficiary in a SNF during a Medicare-covered stay. In the proposed 
rule, we proposed case-mix refinements, including the introduction of 9 
new RUGs. As part of this process, we proposed to update and 
recalibrate the therapy and nursing case-mix indexes associated with 
all RUGs. We also proposed to increase both the nursing and therapy 
case-mix indexes and provide additional funding to the system in order 
to account for the variation in non-therapy ancillary costs.
    Comment: Several commenters expressed concern regarding the overall 
fiscal impact of the proposed changes and recommended that the 
aggregate expenditure levels be increased, either by further increasing 
the case-mix weights or by increasing the baseline expenditure levels. 
Other commenters stated that they had been unable to reconcile their 
independent analyses with the information contained in the proposed 
rule, and were concerned that the impact of the proposed rate structure 
would exceed the CMS projections. In other cases, commenters submitted 
technical questions on the accuracy of the methodology used in 
developing our proposals, and urged that these methodological issues be 
addressed for the final rule.
    Response: Throughout the comment period, we examined the data 
presented in the proposed rule, updated the analyses to reflect the 
most recent available data, and corrected minor technical errors. We 
received information from industry representatives and others, which 
helped us to verify the accuracy of the data used in the rate 
calculations, and then to ensure that the resulting rates correctly 
reflected the policies specified in the proposed rule. To accomplish 
these objectives, we made several adjustments to our models to better 
reflect the methodologies described in the proposed rule.
    For example, for our modeling in the proposed rule, we used a 
therapy case-mix index that originally had been created for use in our 
FY 2001 refinements proposal, and utilized the same therapy case-mix 
weights for the new groups as for the original rehabilitation groups; 
that is, the therapy case-mix weight for the ultra high rehabilitation 
and combined ultra high rehabilitation/extensive care RUG groups were 
the same. As part of our ongoing review, we also tested several 
adjustments to our model, including recalibration of the therapy case-
mix weights, using different sets of decision rules, to create separate 
therapy weights for the nine new groups. The purpose of this exercise 
was to test whether the adjusted model(s) better reflected the policy 
outlined in the proposed rule.
    Using the adjusted therapy case-mix weights, we repeated the 
payment simulation described in the proposed

[[Page 45031]]

rule. We then recalculated the payment adjustment needed to ensure 
parity when comparing the aggregate expenditure levels of the 44-group 
and 53-group RUG models. We found that, in recalibrating both the 
nursing and therapy case-mix weights, applying the payment adjustment 
solely to the nursing case-mix weights was no longer appropriate. Thus, 
we tested a second adjustment to the model that modified the payment 
simulation provision to apply the payment adjustment to both the 
nursing and therapy case-mix weights. We posted the analyses on our CMS 
web site.
    Industry representatives and others used these data to replicate 
these analyses, to suggest alternative methodologies, and to develop 
their formal comments on the proposed rule. Thus, the information 
exchange through the CMS website was productive, and was beneficial in 
terms of finalizing our analysis.
    Comment: A commenter questioned the methodology used to recalibrate 
the therapy case-mix weights, and also expressed concerns about the 
small staff time measurement (STM) sample size used to create separate 
therapy weights for each of the RUG-III groups.
    Response: As part of the ongoing analysis described above, we 
reviewed the methodology used to create the case-mix weights for the 
initial introduction of the SNF PPS in 1998, and the ABT recalibration 
that was published in our FY 2001 proposed rule. We found that, as 
mentioned by a commenter, we were relying on extremely small sample 
sizes for several of the combined rehabilitation and extensive care 
groups. In addition, we found several variations in the decision rules 
used in the two sets of analyses. We were able to adjust for these 
methodological differences by recreating the therapy case-mix indexes 
using the original decision rules.
    Once these methodological changes were made, we examined the model 
to determine the potential impact of using small sample sizes to 
establish therapy case-mix weights for all 23 rehabilitation groups; 
that is, 14 existing rehabilitation groups and 9 combined 
rehabilitation and extensive care groups. We concluded that we could 
not fully adjust for these small sample sizes when recalibrating the 
therapy case-mix weights, either as proposed or as noted on our 
website. Therefore, we have determined that retaining the same therapy 
case-mix weights that are being used in the 44-group RUG model would 
best reflect our policy objectives as stated in the proposed rule. 
These weights will be applied to the RUG groups based on the 
rehabilitation level. For example, a therapy case-mix weight of 2.25 
will be used for the RUC, RUB, RUA, RUX, and RUL groups.
    Once the case-mix weight structure was determined, we developed the 
final rates in accordance with the procedures outlined in the proposed 
rule. As we updated the nursing case-mix index only, we then applied 
the payment simulation to the nursing case-mix weights by adding 8.65 
percent to maintain parity between the 44-group and 53-group models. 
Then, a final adjustment of 8.51 percent was made to the nursing 
weights to reflect the variability in non-therapy ancillary 
utilization.
    In conducting these analyses, it was clear that relying on data 
collected before the introduction of the SNF PPS is not a permanent 
solution. We intend to revisit the structural development of the case-
mix weights as part of our upcoming STM study, in which we will survey 
SNFs and collect data to better reflect current practice patterns and 
resource use in the SNF PPS. In addition, we intend to investigate 
alternative methods of updating the payment system as part of our 
ongoing program monitoring and evaluation activities.
1. Costs and Services Covered by the Federal Rates
    The Federal rates apply to all costs (routine, ancillary, and 
capital-related costs) of covered SNF services other than costs 
associated with approved educational activities as defined in Sec.  
413.85. Under section 1888(e)(2) of the Act, covered SNF services 
include post-hospital SNF services for which benefits are provided 
under Part A (the hospital insurance program), as well as all items and 
services (other than those services excluded by statute) that, before 
July 1, 1998, were paid under Part B (the supplementary medical 
insurance program) but furnished to Medicare beneficiaries in a SNF 
during a Part A covered stay. (These excluded service categories are 
discussed in greater detail in section V.B.2 of the May 12, 1998 
interim final rule (63 FR 26295 through 26297)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2006 rates reflect an update using the full amount of the 
latest market basket index. The FY 2006 market basket increase factor 
is 3.1 percent. A complete description of the multi-step process was 
initially delineated in the May 12, 1998 interim final rule (63 FR 
26252), and was further revised in subsequent rules. We note that in 
accordance with section 101(a) of the BBRA and section 314 of the BIPA, 
the existing, temporary increase in the per diem adjusted payment rates 
of 20 percent for certain specified clinically complex RUGs (and 6.7 
percent for rehabilitation RUGs) remains in effect until January 1, 
2006, when the refined RUG-53 classification system is implemented.
    We used the SNF market basket to adjust each per diem component of 
the Federal rates forward to reflect price increases occurring between 
the midpoint of the Federal fiscal year beginning October 1, 2004, and 
ending September 30, 2005, and the midpoint of the Federal fiscal year 
beginning October 1, 2005, and ending September 30, 2006, to which the 
payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) 
of the Act, the payment rates for FY 2005 are updated by a factor equal 
to the full market basket index percentage increase to determine the 
payment rates for FY 2006. The rates are further adjusted by a wage 
index budget neutrality factor, described later in this section. The 
unadjusted rates are the same under both the 44-group RUG-III 
classification system and the refined RUG-53 classification system. 
Tables 2 and 3 below reflect the updated components of the unadjusted 
Federal rates for FY 2006.

                            Table 2.--FY 2006 Unadjusted Federal Rate Per Diem--Urban
----------------------------------------------------------------------------------------------------------------
                                                     Nursing--case-  Therapy--case-  Therapy--non-
                   Rate component                          mix             mix          case-mix    Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount....................................       $137.59         $103.64          $13.65        $70.22
----------------------------------------------------------------------------------------------------------------


[[Page 45032]]


                            Table 3.--FY 2006 Unadjusted Federal Rate Per Diem--Rural
----------------------------------------------------------------------------------------------------------------
                                                     Nursing--case-  Therapy--case-  Therapy--non-
                   Rate component                          mix             mix          case-mix    Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount....................................       $131.45         $119.51          $14.58        $71.52
----------------------------------------------------------------------------------------------------------------

C. Case-Mix Adjustment and Other Clinical Issues

1. Proposed Refinements to the RUG-III Case-Mix Classification System
    Under the BBA, we must publish the SNF PPS case-mix classification 
methodology applicable for the next Federal fiscal year before August 1 
of each year. In the FY 2006 SNF PPS proposed rule, we proposed to 
implement refinements in the existing 44-group RUG-III case-mix 
classification system that would add 9 new Rehabilitation plus 
Extensive Services groups at the top of the existing hierarchy. A full 
discussion of our proposal can be found in this year's proposed rule 
for FY 2006 (70 FR 29075-81). The following is a discussion of the 
comments that we received on this issue.
    Comment: A number of commenters viewed the introduction of the 
proposed refinements in a positive light, both as a means to address 
the needs of a specific heavy-care population and as a way to remove 
the uncertainty over the past several years surrounding the pending 
expiration of the BBRA's temporary add-on payments, which had made it 
difficult for SNFs to predict with any certainty what their payments 
would be from one year to the next. Other commenters questioned why we 
introduced RUG refinements through the regulatory process before 
finalizing a long term research project and submitting a report to the 
Congress on the results of that research. Several commenters suggested 
that it would be more appropriate to wait until the upcoming STM study 
is completed, so that we could take advantage of more recent data on 
practice patterns and resource use. Still others were concerned that 
the proposed refinements do not go far enough to reimburse SNFs 
adequately for non-therapy ancillaries, and questioned why we proposed 
a series of incremental changes to the existing RUG-III system rather 
than developing a comprehensive replacement to the current SNF PPS.
    Response: The RUG refinements and the SNF PPS report to the 
Congress on alternative systems have often been viewed as two 
components of a single project. However, while there is a definite 
relationship, the RUG refinements and the SNF PPS report to the 
Congress are, and should be viewed as, end products of two separate 
Congressional mandates.
    The BBRA legislation authorized temporary payment adjustments that 
were intended to serve as short term, interim adjustments to the 
payment rates and RUG-III case-mix classification system as published 
in our July 30, 1999 final rule (64 FR 41644). In fact, while the 
legislation included a contingency plan to maintain the temporary 
payments until refinements to better account for ``medically complex'' 
patients were introduced, the Congress clearly envisioned that these 
temporary payments would expire on October 1, 2000. Given this short 
time frame, it seems clear that the ``refinements'' could be expected 
to be modest in scope. We believe the rulemaking process was the most 
appropriate vehicle for introducing any refinement policy changes, as 
it affords all stakeholders the opportunity to comment before any 
policy recommendations are finalized.
    In contrast, section 311(e) of the BIPA directed us to conduct a 
study of the different systems for categorizing patients in Medicare 
SNFs, and to issue a report with any appropriate recommendations to the 
Congress. Based upon the broad language describing the purpose of this 
study, and the multi-year timeframe provided for conducting it, we 
believe that the Congress clearly intended for this study to address 
more comprehensive changes, by evaluating a number of different 
classification systems and considering the full range of patient types. 
The results of this broader research will be discussed in a report that 
will be released to the Congress once it has been completed.
    However, we believe the need for ongoing evaluation and change 
should not preclude the more immediate introduction of incremental 
adjustments and improvements to the SNF PPS. We intend to use the 
report to Congress to outline a series of next steps, including the 
need for a new STM study, that support our ongoing efforts to enhance 
the accuracy and efficiency of the SNF PPS.
    We note that many of the concerns advanced by the commenters are 
similar to the ones that some commenters expressed in response to the 
SNF PPS proposed rule for FY 2004 (68 FR 26758, May 16, 2003), when we 
last invited public comments on the issue of case-mix refinements. 
However, as we subsequently observed in the final rule for FY 2004, 
other commenters were at that same time urging us ``* * * to move 
quickly to identify and implement short-term incremental improvements 
to provide more appropriate reimbursement for patients with heavy non-
therapy ancillary needs'' (68 FR 46041, August 4, 2003). As discussed 
in this year's FY 2006 proposed rule, we believe the refinements that 
we have developed offer an effective means of enabling the SNF PPS to 
make more accurate payments for non-therapy ancillary services (thus 
ensuring continued access to quality care for the very vulnerable 
heavy-care population), while at the same time avoiding the drawbacks 
in terms of added complexity that were inherent in previous proposals 
to address this issue (70 FR 29079). Accordingly, we are implementing 
the case-mix refinements as set forth in the proposed rule.
    Comment: Commenters suggested we expand the proposed RUG-53 
classification system by, for instance, creating an additional 
Rehabilitation RUG between Medium and High and the expansion of the 
Extensive Services category to include criteria such as cardiac 
respiratory conditions that require monitoring and the administration 
of aerosol medications.
    Response: During future analysis, most notably our upcoming STM 
study, we will evaluate whether the RUG categories should be further 
modified.
    In addition, we have discovered that in the FY 2006 SNF PPS 
proposed rule, we inadvertently misidentified some RUG classification 
categories corresponding to Rehab High, Rehab Medium, and Rehab Low in 
Table 3a (``Crosswalk Between Existing RUG-III Rehabilitation Groups 
and the Proposed Extensive Plus Rehabilitation Groups''). Accordingly, 
in this final rule, we are reprinting the retitled and corrected Table 
3a, as set forth below.

[[Page 45033]]



  Table 3a.--Crosswalk Between Existing RUG-III Rehabilitation Groups and the New Rehabilitation Plus Extensive
                                                 Services Groups
----------------------------------------------------------------------------------------------------------------
                                                                              New rehabilitation plus extensive
                                         Current  rehabilitation groups                services groups
----------------------------------------------------------------------------------------------------------------
Rehab Ultra.........................   RUC--ADL 16-18.............   RUX--ADL 16-18.
                                       RUB--ADL 9-15..............   RUL--ADL 7-15.
                                       RUA--ADL 4-8...............
Rehab Very High.....................   RVC--ADL 16-18.............   RVX--ADL 16-18.
                                       RVB--ADL 9-15..............   RVL--ADL 7-15.
                                       RVA--ADL 4-8...............
Rehab High..........................   RHC--ADL 13-18.............   RHX--ADL 13-18.
                                       RHB--ADL 8-12..............   RHL--ADL 7-12.
                                       RHA--ADL 4-7...............
Rehab Medium........................   RMC--ADL 15-18.............   RMX--ADL 15-18.
                                       RMB--ADL 8-14..............   RML--ADL 7-14.
                                       RMA--ADL 4-7...............
Rehab Low...........................   RLB--ADL 14-18.............   RLX--ADL 7-18.
                                       RLA--ADL 4-13..............
----------------------------------------------------------------------------------------------------------------

2. Proposed Increases to the RUG-III Case-Mix Weight Values
    To help address the high degree of variability in the use of non-
therapy ancillary services that we have identified both within and 
across groups, in the FY 2006 SNF PPS proposed rule, we proposed to 
increase the case-mix weights for all 53 RUGs (that is, the 44 existing 
RUG-III groups, as well as the proposed 9 new Rehabilitation plus 
Extensive Services groups). Specifically, we proposed to apply an 
increase of 8.4 percent to the component of the case-mix weights that 
includes both nursing and non-therapy ancillary costs (producing a 3 
percent increase in aggregate spending), and to do so in a manner that 
would integrate the increase into base line spending levels and 
continue it in future years (70 FR 29079). (As noted previously in 
section III.B, the proposed 8.4 percent increase to the nursing 
component of the case-mix weights is now 8.51 percent in this final 
rule.) The following is a discussion of the comments that we received 
on this issue.
    Comment: A number of commenters were concerned about the adequacy 
of payment for non-therapy ancillary services, and questioned whether 
the proposed increase in the nursing case-mix weights fully addresses 
the issue. Several commenters recommended that the case-mix weights 
should be adjusted by more than the 8.4 percent presented in the 
proposed rule. Others suggested that, rather than adjusting the case-
mix weights by a factor comparable to outlier pools (that is, 3 percent 
of aggregate spending) established for other prospective payment 
systems, we implement a SNF outlier pool that could more specifically 
target high-cost cases. A few commenters also recommended that we adopt 
a payment adjustment for hospital-based SNFs, either as part of an 
outlier policy or as an adjustment to the base rates that would address 
not only the different levels of non-therapy ancillary utilization 
between hospital-based and freestanding facilities, but the overall 
cost structure differences related to differences in patient 
characteristics and care needs. In addition, several commenters 
recommended creating a variable per diem payment mechanism similar to 
the mechanism used for inpatient psychiatric hospitals, where higher 
payments could be made for the early (and presumably more costly) days 
of a SNF stay. Finally, a few commenters expressed concern that the 
effect of the refinements would be to redirect dollars away from 
beneficiaries needing complex medical services.
    Response: As discussed here and in our proposed rule, the 
variability in non-therapy ancillary utilization increased the 
difficulty of any refinement to the RUG-III system without increasing 
the system complexity to such a degree that it would become both 
burdensome and confusing to the facility staff responsible for 
administering the system. In evaluating potential options, we 
recognized that this across-the-board increase in the nursing component 
is only an incremental improvement, but it is a change that did not 
give rise to the concerns about undue complexity noted above.
    Moreover, while the introduction of these refinements fulfills our 
obligations under section 101 of the BBRA, we note it is just the first 
of an ongoing series of analyses aimed at enhancing the SNF PPS payment 
structure. For example, we are already examining the potential for an 
outlier program to further enhance program accuracy and beneficiary 
access to care.
    The introduction of this incremental change is part of this ongoing 
process that will also include update activities such as the upcoming 
STM study and investigation of potential alternatives to the RUG system 
itself. However, the commitment to long term analysis and refinement 
should not preclude the introduction of more immediate methodological 
and policy updates.
    While most commenters viewed the adoption of the nine new groups as 
beneficial, a few commenters were concerned that money was being 
redirected away from the complex medical RUGs. We are confident that 
the introduction of these refinements benefits heavy-care 
beneficiaries. However, as shown in Table 12 of this final rule, 
changes in the FY 2006 rate structure reflect an interrelationship 
between many factors, including the elimination of the BBRA add-ons, 
changes in the wage index, and the introduction of the refinements.
    Comment: Some commenters suggested that the underfunding in the 
Medicaid system should be addressed at the same time as the Medicare 
RUGs refinement, and expressed concern about the impact that Medicare 
payment rate reductions would have in combination with changes in State 
Medicaid payments.
    Response: While Medicare and Medicaid are independent programs that 
are subject to different ratesetting and budgetary mechanisms, we 
recognize their interrelationship, particularly for those States that 
utilize variations of Medicare's RUG case-mix classification system. We 
further recognize that Medicaid needs to establish rates that 
accurately reflect the cost of Medicaid services. In order to

[[Page 45034]]

assist in realizing that objective, we plan to use our upcoming STM 
study to look at the entire RUG payment system, including facilities 
that are predominately Medicaid-based. Additionally, the Pay for 
Performance quality initiatives discussed in the FY 2006 proposed rule 
could apply to both covered Part A and noncovered (Part B) stays of 
dual-eligibles.
3. Implementation Issues
    In order to enable nursing homes and Medicare contractors to have 
sufficient lead time to prepare for the changes associated with 
implementing the RUG-III case-mix refinements, in the FY 2006 SNF PPS 
proposed rule we proposed an effective date for the refinements of 
January 1, 2006, rather than the start of the fiscal year on October 1, 
2005. (Under the terms of section 101(c) of the BBRA, the temporary 
add-on payments enacted by sections 101(a) and (b) of the BBRA for 
certain designated RUG-III groups would expire on the date that these 
refinements take effect.) The following is a discussion of the comments 
that we received on this issue.
    Comment: Generally, commenters were supportive of the delay in 
implementing the case-mix refinements. However, some commenters were 
concerned that the January 2006 date does not provide adequate 
preparation time, especially for the software vendors and facilities 
that will need to update their MDS data systems. They pointed out the 
need for adequate lead time to ensure a smooth transition. In addition, 
a few commenters wanted to know which date would determine when the new 
RUG classification would need to be reported on the claim (for example 
the Assessment Reference Date (ARD, item A3a), the Minimum Data Set 
(MDS) completion date (item R2b), the service date, or the admission 
date), as well as whether the MDS edits will provide a 44-group RUG for 
corrected MDSs. Finally, a few commenters noted that the RAVEN software 
would need to be updated prior to any changes to the existing RUG-III 
classification system.
    Response: We agree that software vendors and SNFs must have enough 
time to design, test, and implement the system changes needed to 
support these refinements. For this reason, we have scheduled a 
software vendor conference call on August 4, 2005 to review the data 
specifications, and respond to questions on the changes. Further 
information on this vendor teleconference is posted on our Quality 
Improvement Evaluation System (QIES) website at the following address: 
https://www.qtso.com/vendor.html. We will also make available the new 
software specifications at https://www.cms.hhs.gov/medicaid/mds20/
mdssoftw.asp and vendors should implement the appropriate software by 
November 22, 2005. This timeline provides the vendors over 3 months to 
update their programs for SNFs. We also plan to release training 
materials and billing instructions in sufficient time so that SNFs will 
be able to transition to the refined RUG model.
    As stated in the proposed rule, we will begin to apply the RUG 
case-mix refinement on January 1, 2006. Even though payments are 
determined by the MDS, the CMS claims processing systems operate on a 
date of service basis. Thus, the new rates need to go into effect as of 
January 1, 2006, rather than by the ARD date. This procedure is 
consistent with the billing procedures used at the start of each rate 
year. Providers are always instructed to prepare separate bills for 
services prior to and on or after October 1. This ensures that the 
claim is paid using the correct rate.
    We believe that by scheduling implementation for January 1, 2006, 
rather than October 1, 2005 (the beginning of FY 2006), we are allowing 
ample time for providers to adjust to the refined RUG case-mix 
classification system and to train and educate their staff. This date 
also allows vendors sufficient time to update their programs to meet 
our requirements. Finally, by providing a date certain, all systems 
(State, CMS, FI, providers) can be configured uniformly, thus limiting 
potential billing errors.
    The provider shall bill the appropriate RUG category based on the 
calendar date of service. For days of service before January 1, 2006, 
the provider shall record the 44-group RUG on the claim. For days of 
service beginning on January 1, 2006, the provider shall record the 53-
group RUG on the claim.
    If for some unforeseen reason, a software vendor is not able to 
update its program by mid-November, the State system ``Final Validation 
Report'' to the provider will list both the 44-group RUG and the 53-
group RUG for SNF PPS assessments with ARDs of 11/22/2005 through 1/13/
2006. These are the potential transition assessments that could be used 
for days of service both before January 1, 2006 and for days of service 
in 2006. For example, a 60-day SNF PPS MDS can be completed as early as 
day 50 of the beneficiary's SNF Part A stay. If the resident's 50th day 
of the stay is November 22, 2005 and the provider chooses this date as 
the ARD for the 60-day PPS MDS, the 44-group RUG would be billed from 
day 61 (December 3, 2005) to day 89 (December 31, 2005) and the 53-
group RUG would be billed for day 90 (January 1, 2006).
    For assessments with ARDs before November 22, 2005, only the 44-
group RUG is appropriate for billing and the ``Final Validation 
Report'' will only report the 44-group RUG when the facility submits an 
incorrect 44-group RUG on the assessment. For assessments with ARDs 
after January 13, 2006, only the 53-group RUG is appropriate for 
billing and the ``Final Validation Report'' will only report the 53-
group RUG when the facility submits an incorrect 53-group RUG on the 
assessment. For assessments with ARDs from November 22, 2005 through 
January 13, 2006, the MDS may be submitted with either the 44-group RUG 
or the 53-group RUG.
    Correction assessments (Modifications or Significant Correction 
Assessments) will be processed in the same manner as other assessments. 
The RUG grouper (44-group vs. 53-group RUG) that will be calculated and 
accepted will be determined by the ARD of the Modification or 
Significant Correction Assessment.
    We believe that these steps provide adequate support, and will 
proceed with the implementation of the refinements effective January 1, 
2006.
4. Additional Clinical and Related Issues
    In addition to the proposed case-mix refinements, the FY 2006 SNF 
PPS proposed rule discussed and invited public comment on a number of 
other clinical and related issues involving alternative ways to improve 
quality and efficiency and continue to ensure accurate payments under 
the SNF PPS.
a. Proposed Changes to the MDS Coding Requirements (``Look Back'' 
Period, 5-Day Grace Periods for PPS MDS Assessments, and Projection of 
Anticipated Therapy Services During the 5-Day PPS Assessment (Section