Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities-Update-Notice, 43158-43198 [06-6615]

Agencies

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

[Federal Register Volume 71, Number 146 (Monday, July 31, 2006)]
[Notices]
[Pages 43158-43198]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6615]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1530-N]
RIN 0938-AM46


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

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

ACTION: Notice.

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

SUMMARY: This notice updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2007. Annual updates to the PPS rates are required 
by section 1888(e) of the Social Security Act (the Act), as amended by 
the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (the BBRA), the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (the BIPA), and the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (the MMA), relating to 
Medicare payments and consolidated billing for SNFs.

DATES: Effective Date: This notice is effective on October 1, 2006.

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

SUPPLEMENTARY INFORMATION: 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 Prospective Payment System for Skilled Nursing 
Facilities
    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. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rate
    2. Rate Updates Using the Skilled Nursing Facility Market Basket 
Index
II. Annual Update of Payment Rates Under the Prospective Payment 
System for Skilled Nursing Facilities

[[Page 43159]]

    A. Federal Prospective Payment System
    1. Costs and Services Covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    B. Case-Mix Refinements
    C. Wage Index Adjustment to Federal Rates
    D. Updates to Federal Rates
    E. Relationship of RUG-III Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    F. Example of Computation of Adjusted PPS Rates and SNF Payment
III. The Skilled Nursing Facility Market Basket Index
    A. Use of the Skilled Nursing Facility Market Basket Percentage
    B. Market Basket Forecast Error Adjustment
    C. Federal Rate Update Factor
IV. Consolidated Billing
V. Application of the SNF PPS to SNF Services Furnished by Swing-Bed 
Hospitals
VI. Other Issues
VII. Collection of Information Requirements
VIII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Accounting Statement
    D. Alternatives Considered
    E. Conclusion
    IX. Waiver of Proposed Rulemaking
    Addendum FY 2007 CBSA Wage Index Tables

Abbreviations

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

ADL Activity of Daily Living
AIDS Acquired Immune Deficiency Syndrome
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. 106-554
BLS Bureau of Labor Statistics
CAH Critical Access Hospital
CBSA Core-Based Statistical Area
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
CPT (Physicians') Current Procedural Terminology
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
DRG Diagnosis Related Group
ECI Employment Cost Index
FI Fiscal Intermediary
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
HIT Health Information Technology
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
NAICS North American Industrial Classification System
OIG Office of the Inspector General
OMB Office of Management and Budget
OMRA Other Medicare Required Assessment
PPI Producer Price Index
PPS Prospective Payment System
RAI Resident Assessment Instrument
RAP Resident Assessment Protocol
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Pub. L. 96-354
RHC Rural Health Clinic
RIA Regulatory Impact Analysis
RUG-III Resource Utilization Groups, Version III
RUG-53 Refined 53-Group RUG-III Case-Mix Classification System
SCHIP State Children's Health Insurance Program
SIC Standard Industrial Classification System
SNF Skilled Nursing Facility
STM Staff Time Measurement
UMRA Unfunded Mandates Reform Act, Pub. L. 104-4

I. Background

    Annual updates to the prospective payment system (PPS) rates for 
skilled nursing facilities (SNFs) are required by section 1888(e) of 
the Social Security Act (the Act), as added by section 4432 of the 
Balanced Budget Act of 1997 (BBA), and 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. Our most recent annual update occurred 
in a final rule (70 FR 45026, August 4, 2005) that set forth updates to 
the SNF PPS payment rates for fiscal year (FY) 2006. We subsequently 
published a correction notice (70 FR 57164, September 30, 2005) with 
respect to those payment rate updates.

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

    Section 4432 of the Balanced Budget Act of 1997 (BBA) amended 
section 1888 of the Act to provide for the implementation of a per diem 
PPS for SNFs, covering all costs (routine, ancillary, and capital-
related) of covered SNF services furnished to beneficiaries under Part 
A of the Medicare program, effective for cost reporting periods 
beginning on or after July 1, 1998. In this notice, we are updating the 
per diem payment rates for SNFs for FY 2007. Major elements of the SNF 
PPS include:
     Rates. As discussed in section I.F.1 of this notice, we 
established per diem Federal rates for urban and rural areas using 
allowable costs from FY 1995 cost reports. These rates also included an 
estimate of the cost of services that, before July 1, 1998, had been 
paid under Part B but furnished to Medicare beneficiaries in a SNF 
during a Part A covered stay. The rates are adjusted annually using a 
SNF market basket index, and also are adjusted by the hospital wage 
index to account for geographic variation in wages. We also apply a 
case-mix adjustment to account for the relative resource utilization of 
different patient types. This adjustment utilizes a refined, 53-group 
version of the Resource Utilization Groups, version III (RUG-III) case-
mix classification system, based on information obtained from the 
required resident assessments using the Minimum Data Set (MDS) 2.0. 
Additionally, as noted in the August 4, 2005 final rule (70 FR 45028), 
the payment rates have also been affected at various times by specific 
legislative provisions, including section 101 of the BBRA, sections 
311, 312, and 314 of the BIPA, and section 511 of the MMA.
     Transition. Under sections 1888(e)(1)(A) and (e)(11) of 
the Act, the SNF PPS included an initial, phased transition that 
blended a facility-specific rate (reflecting the individual facility's 
historical cost experience) with the Federal case-mix adjusted rate. 
The transition extended through the facility's first three cost 
reporting periods under the PPS, up to and including the one that began 
in FY 2001. Thus, the SNF PPS is no longer operating under the 
transition, as all facilities have been paid at the full Federal rate 
effective with cost reporting periods beginning in FY 2002. As we now 
base payments entirely on the adjusted Federal per diem rates, we no 
longer include adjustment factors related to facility-specific rates 
for the coming fiscal year.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the RUG-III classification is based, in part, on the beneficiary's need 
for skilled nursing care and therapy, we have attempted,

[[Page 43160]]

where possible, to coordinate claims review procedures with the output 
of beneficiary assessment and RUG-III classifying activities. This 
approach includes an administrative presumption that utilizes a 
beneficiary's initial classification in one of the upper 35 RUGs of the 
refined 53-group system to assist in making certain SNF level of care 
determinations, as discussed in greater detail in section II.E. of this 
notice.
     Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills to its fiscal intermediary for almost all of the services that 
its residents receive during the course of a covered PartaA stay. In 
addition, this provision places with the SNF the Medicare billing 
responsibility for physical, occupational, and speech-language therapy 
that the resident receives during a noncovered stay. The statute 
excludes a small list of services from the consolidated billing 
provision (primarily those of physicians and certain other types of 
practitioners), which remain separately billable under Part B when 
furnished to a SNF's Part-A resident. A more detailed discussion of 
this provision appears in section IV. of this notice.
     Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section V. of this notice.

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

    Section 1888(e)(4)(H) of the Act requires that we publish in the 
Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the FY.
    2. The case-mix classification system to be applied with respect to 
these services during the FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In the July 30, 1999 final rule (64 FR 41670), we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to modifications in the RUG-III classification 
structure (see section II.E of this notice for a discussion of the 
relationship between the case-mix classification system and SNF level 
of care determinations).
    This notice provides the annual updates to the Federal rates as 
mandated by the Act.

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

    There were several provisions in the BBRA that resulted in 
adjustments to the SNF PPS. We described these provisions in detail in 
the final rule that we published in the Federal Register on July 31, 
2000 (65 FR 46770). In particular, section 101(a) of the BBRA provided 
for a temporary 20 percent increase in the per diem adjusted payment 
rates for 15 specified RUG-III groups. In accordance with section 
101(c)(2) of the BBRA, this temporary payment adjustment expired on 
January 1, 2006, upon the implementation of case-mix refinements (see 
section I.F.1 of this notice). We included further information on BBRA 
provisions that affected the SNF PPS in Program Memorandums A-99-53 and 
A-99-61 (December 1999).
    Also, section 103 of the BBRA designated certain additional 
services for exclusion from the consolidated billing requirement, as 
discussed in section IV. of this notice. Further, for swing-bed 
hospitals with more than 49 (but less than 100) beds, section 408 of 
the BBRA provided for the repeal of certain statutory restrictions on 
length of stay and aggregate payment for patient days, effective with 
the end of the SNF PPS transition period described in section 
1888(e)(2)(E) of the Act. In the July 31, 2001 final rule (66 FR 
39562), we made conforming changes to the regulations at Sec.  
413.114(d), effective for services furnished in cost reporting periods 
beginning on or after July 1, 2002, to reflect section 408 of the BBRA.

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

    The BIPA also included several provisions that resulted in 
adjustments to the PPS for SNFs. We described these provisions in 
detail in the final rule that we published in the Federal Register on 
July 31, 2001 (66 FR 39562). In particular:
     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 (Change Request 
1509), issued January 16, 2001, which is available online at 
www.cms.hhs.gov/transmittals/downloads/a0109.pdf.
     Section 311 revised the statutory update formula for the 
SNF market basket, and also directed us to conduct a study of 
alternative case-mix classification systems for the SNF PPS.
     Section 312 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. The add-on is no longer in effect. This section also directed the 
General Accounting Office (GAO) to conduct an audit of SNF nursing 
staff ratios and submit a report to the Congress on whether the 
temporary increase in the nursing component should be continued. GAO 
issued this report (GAO-03-176) in November 2002.
     Section 313 repealed the consolidated billing requirement 
for services (other than physical, occupational, and speech-language 
therapy) furnished to SNF residents during noncovered stays, effective 
January 1, 2001. (A more detailed discussion of this provision appears 
in section IV. of this notice.)
     Section 314 corrected an anomaly involving three of the 
RUGs that the BBRA had designated to receive the temporary payment 
adjustment discussed above in section I.C. of this notice. (As noted 
previously, in accordance with section 101(c)(2) of the BBRA, this 
temporary payment adjustment expired upon the implementation of case-
mix refinements on January 1, 2006.)
     Section 315 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 the BIPA provisions 
in Program Memorandum A-01-08 (Change Request 1510), issued 
January 16, 2001, which is available online at www.cms.hhs.gov/
transmittals/downloads/a0108.pdf.

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

    The MMA included a provision that results in a further adjustment 
to the PPS for SNFs. Specifically, section 511 amended paragraph (12) 
of section 1888(e) of the Act to provide for a

[[Page 43161]]

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. This special AIDS 
add-on was to remain in effect until ``* * * such date as the Secretary 
certifies that there is an appropriate adjustment in the case mix * * 
*.'' The AIDS add-on is also discussed in Program Transmittal 
160 (Change Request 3291), issued on April 30, 2004, 
which is available online at www.cms.hhs.gov/transmittals/downloads/
r160cp.pdf. As discussed in the SNF PPS final rule for FY 2006 (70 FR 
45028, August 4, 2005), we did not address the certification of the 
AIDs add-on with the implementation of the case-mix refinements, thus 
allowing the temporary add-on payment created by section 511 of the MMA 
to continue in effect.
    For the limited number of SNF residents that qualify for the AIDS 
add-on, implementation of this provision results in a significant 
increase in payment. For example, using 2004 data, we identified 909 
SNF residents with a principal diagnosis code of 042 (``Human 
Immunodeficiency Virus (HIV) Infection''). The average payment per day 
for these residents was approximately $385. For FY 2007, an urban 
facility with a resident with AIDS in the SSA RUG would have a case-mix 
adjusted payment of almost $242.90 (see Table 4) before the application 
of the MMA adjustment. After an increase of 128 percent, this urban 
facility would receive a case-mix adjusted payment of approximately 
$553.81.
    In addition, section 410 of the MMA contained a provision that 
excluded from consolidated billing certain practitioner and other 
services furnished to SNF residents by rural health clinics (RHCs) and 
Federally Qualified Health Centers (FQHCs). (A more detailed discussion 
of this provision appears in section IV. of this notice.)

F. Skilled Nursing Facility Prospective Payment--General Overview

    We implemented the Medicare SNF PPS effective with cost reporting 
periods beginning on or after July 1, 1998. The SNF PPS is one that 
pays SNFs through prospective, case-mix adjusted per diem payment rates 
applicable to all covered SNF services. These payment rates cover all 
costs of furnishing covered skilled nursing services (routine, 
ancillary, and capital-related costs) other than costs associated with 
approved educational activities. Covered SNF services include post-
hospital services for which benefits are provided under Part A and all 
items and services that, before July 1, 1998, had been paid under Part 
B (other than physician and certain other services specifically 
excluded under the BBA) but furnished to Medicare beneficiaries in a 
SNF during a covered Part A stay. A complete discussion of these 
provisions appears in the May 12, 1998 interim final rule (63 FR 
26252).

1. Payment Provisions--Federal Rate

    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the PPS. We developed the Federal payment rates using allowable costs 
from hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of the PPS (the 15-month period beginning July 
1, 1998) using a SNF market basket index, and then standardized for the 
costs of facility differences in case-mix and for geographic variations 
in wages. Providers that received new provider exemptions from the 
routine cost limits were excluded from the database used to compute the 
Federal payment rates, as were 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 53 RUG-III groups. 
The original RUG-III case-mix classification system included 44 groups. 
However, under refinements that became effective on January 1, 2006, we 
added nine new groups--comprising a new Rehabilitation plus Extensive 
Services category--at the top of the RUG hierarchy. The May 12, 1998 
interim final rule (63 FR 26252) included a complete and detailed 
description of the original 44-group RUG-III case-mix classification 
system. A comprehensive description of the refined 53-group RUG-III 
case-mix classification system (RUG-53) appears in the proposed and 
final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 FR 45026, 
August 4, 2005).
    Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the 
Act, the Federal rates in this notice reflect an update to the rates 
that we published in the August 4, 2005 final rule for FY 2006 (70 FR 
45026) and the associated correction notice (70 FR 57164, September 30, 
2005), equal to the full change in the SNF market basket index. A more 
detailed discussion of the SNF market basket index and related issues 
appears in sections I.F.2. and III. of this notice.
2. Rate Updates Using the Skilled Nursing Facility Market Basket Index
    Section 1888(e)(5) of the Act requires us to establish a SNF market 
basket index that reflects changes over time in the prices of an 
appropriate mix of goods and services included in covered SNF services. 
We use the SNF market basket index to update the Federal rates on an 
annual basis. The final rule for FY 2002 (66 FR 39562, July 31, 2001) 
revised and rebased the market basket to reflect 1997 total cost data.
    In addition, as explained in the final rule for FY 2004 (66 FR 
46058, August 4, 2003) and in section III.B. of this notice, the annual 
update of the payment rates includes, as appropriate, an adjustment to 
account for market basket forecast error. This adjustment takes into 
account the forecast error from the most recently available fiscal year 
for which there is final data, and applies whenever the difference 
between the forecasted and actual change in the market basket exceeds a 
0.25 percentage point threshold. For FY 2005 (the most recently 
available fiscal year for which there is final data), the estimated 
increase in the market basket index was 2.8 percentage points, while 
the actual increase was 2.9 percentage points, resulting in only a 0.1 
percentage point difference. Accordingly, as the difference between the 
estimated and actual amount of change does not exceed the 0.25 
percentage point threshold, the payment rates for FY 2007 do not 
include a forecast error adjustment. Table 1 below

[[Page 43162]]

shows the forecasted and actual market basket amounts for FY 2005.

  Table 1.--FY 2005 Forecast Error Correction for CMS SNF Market Basket
------------------------------------------------------------------------
                                                               FY 2005
                                    Forecasted   Actual FY     forecast
              Index                  FY 2005        2005        error
                                    increase *  increase **   correction
                                                                 ***
------------------------------------------------------------------------
SNF..............................          2.8          2.9         0.1
------------------------------------------------------------------------
* Published in Federal Register; based on second quarter 2004 Global
  Insight Inc. forecast.
** Based on the second quarter 2006 Global Insight forecast.
*** The FY 2005 forecast error correction for the PPS Operating portion
  will be applied to the FY 2007 PPS update recommendations. Any
  forecast error less than 0.25 percentage points will not be reflected
  in the update recommendation.

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

A. Federal Prospective Payment System

    This notice sets forth a schedule of Federal prospective payment 
rates applicable to Medicare Part A SNF services beginning October 1, 
2006. The schedule incorporates per diem Federal rates that provide 
Part A payment for all costs of services furnished to a beneficiary in 
a SNF during a Medicare-covered stay.
1. Costs and Services Covered by the Federal Rates
    The Federal rates apply to all costs (routine, ancillary, and 
capital-related) of covered SNF services other than costs associated 
with approved educational activities as defined in Sec.  413.85. Under 
section 1888(e)(2) of the Act, covered SNF services include post-
hospital SNF services for which benefits are provided under Part A (the 
hospital insurance program), as well as all items and services (other 
than those services excluded by statute) that, before July 1, 1998, 
were paid under Part B (the supplementary medical insurance program) 
but furnished to Medicare beneficiaries in a SNF during a Part A 
covered stay. (These excluded service categories are discussed in 
greater detail in section V.B.2. of the May 12, 1998 interim final rule 
(63 FR 26295-97)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2007 rates reflect an update using the full amount of the 
latest market basket index. The FY 2007 market basket increase factor 
is 3.1 percent. A complete description of the multi-step process 
initially appeared 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(c)(2) of the BBRA, the previous, temporary increases 
in the per diem adjusted payment rates for certain designated RUGs, as 
specified in section 101(a) of the BBRA and section 314 of the BIPA, 
are no longer in effect due to the implementation of case-mix 
refinements as of January 1, 2006. However, the temporary 128 percent 
increase in the per diem adjusted payment rates for SNF residents with 
AIDS, enacted by section 511 of the MMA, remains in effect.
    We used the SNF market basket to adjust each per diem component of 
the Federal rates forward to reflect cost increases occurring between 
the midpoint of the Federal fiscal year beginning October 1 2005, and 
ending September 30, 2006, and the midpoint of the Federal fiscal year 
beginning October 1, 2006, and ending September 30, 2007, to which the 
payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) 
of the Act, we update the payment rates for FY 2007 by a factor equal 
to the full market basket index percentage increase. We further adjust 
the rates by a wage index budget neutrality factor, described later in 
this section. Tables 2 and 3 reflect the updated components of the 
unadjusted Federal rates for FY 2007.

                            Table 2.--FY 2007 Unadjusted Federal Rate Per Diem Urban
----------------------------------------------------------------------------------------------------------------
                                                                Nursing      Therapy    Therapy non-  Non-case-
                       Rate component                           case-mix     case-mix     case-mix       mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................................      $142.04      $106.99       $14.09       $72.49
----------------------------------------------------------------------------------------------------------------


                            Table 3.--FY 2007 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                                                Nursing      Therapy    Therapy non-  Non-case-
                       Rate component                           case-mix     case-mix     case-mix       mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................................      $135.70      $123.37       $15.05       $73.83
----------------------------------------------------------------------------------------------------------------

B. Case-Mix Refinements

    Under the BBA, each update of the SNF PPS payment rates must 
include the case-mix classification methodology applicable for the 
coming Federal fiscal year. As indicated in section I.F.1. of this 
notice, the payment rates set forth in this notice reflect the use of 
the refined 53-group RUG-III case-mix classification system (RUG-53) 
that we discussed in detail in the proposed and final rules for FY 2006 
(70 FR 29070, May 19, 2005, and 70 FR 45026, August 4, 2005). As noted 
in the FY 2006 final rule, we deferred RUG-53 implementation from the 
beginning of FY 2006 (October 1, 2005) until January 1, 2006, in order 
to allow for sufficient time to prepare for and ease the transition to 
the refinements (70 FR 45034).
    We list the case-mix adjusted payment rates separately for urban 
and

[[Page 43163]]

rural SNFs in Tables 4 and 5, with the corresponding case-mix values. 
These tables do not reflect the AIDS add-on enacted by section 511 of 
the MMA, which we apply only after making all other adjustments (wage 
and case-mix).
BILLING CODE 4120-01-P

[[Page 43164]]

[GRAPHIC] [TIFF OMITTED] TN31JY06.016


[[Page 43165]]


[GRAPHIC] [TIFF OMITTED] TN31JY06.017


[[Page 43166]]


[GRAPHIC] [TIFF OMITTED] TN31JY06.018

BILLING CODE 4120-01-C

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs. We are continuing that practice for FY 2007.
    We apply the wage index adjustment to the labor-related portion of 
the Federal rate, which is 75.839 percent of the total rate. This 
percentage reflects the labor-related relative importance for FY 2007. 
The labor-related relative importance for FY 2006 was 75.922, as shown 
in Table 11. We calculate the labor-related relative importance from 
the SNF market basket, and it approximates the labor-related portion of 
the total costs after taking into account historical and projected 
price changes between the base year and FY 2007. The price proxies that 
move the different cost categories in the market basket do not 
necessarily change at the same rate, and the relative importance 
captures these changes. Accordingly, the relative importance figure 
more closely reflects the cost share weights for FY 2007 than the base 
year weights from the SNF market basket.
    We calculate the labor-related relative importance for FY 2007 in 
four steps. First, we compute the FY 2007 price index level for the 
total market basket and each cost category of the market basket. 
Second, we calculate a ratio for each cost category by dividing the FY 
2007 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2007 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we sum the FY 2007 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, nonmedical professional fees, labor-intensive 
services, and a portion of capital-related expenses) to produce the FY 
2007 labor-related relative importance. Tables 6 and 7 show the Federal 
rates by labor-related and non-labor-related components.

[[Page 43167]]

[GRAPHIC] [TIFF OMITTED] TN31JY06.019


[[Page 43168]]


[GRAPHIC] [TIFF OMITTED] TN31JY06.020


[[Page 43169]]


[GRAPHIC] [TIFF OMITTED] TN31JY06.021

    Section 1888(e)(4)(G)(ii) of the Act also requires that we apply 
this wage index in a manner that does not result in aggregate payments 
that are greater or less than would otherwise be made in the absence of 
the wage adjustment. For FY 2007 (Federal rates effective October 1, 
2006), we are applying the most recent wage index using the hospital 
wage data, and applying an adjustment to fulfill the budget neutrality 
requirement. We meet this requirement by multiplying each of the 
components of the unadjusted Federal rates by a factor equal to the 
ratio of the volume weighted mean wage adjustment factor (using the 
wage index from the previous year) to the volume weighted mean wage 
adjustment factor, using the wage index for the FY beginning October 1, 
2006. We use the same volume weights in both the numerator and 
denominator, and derive them from the 1997 Medicare Provider Analysis 
and Review File (MEDPAR) data. We define the wage adjustment factor 
used in this calculation as the labor share of the rate component 
multiplied by the wage index plus the non-labor share. The budget 
neutrality factor for this year is 1.0013.
    The wage index applicable to FY 2007 appears in Table 8 and Table 9 
in the Addendum of this notice. As explained in the update notice for 
FY 2005 (69 FR 45786, July 30, 2004), the SNF PPS does not use the 
hospital area wage index's occupational mix adjustment, as this 
adjustment serves specifically to define the occupational categories 
more clearly in a hospital setting; moreover, the collection of the 
occupational wage data also excludes any wage data related to SNFs. 
Therefore, we believe that using the updated wage data exclusive of the 
occupational mix adjustment continues to be appropriate for SNF 
payments.
    In the SNF PPS final rule for FY 2006 (70 FR 45026), we adopted the 
changes discussed in the Office of Management and Budget (OMB) Bulletin 
No. 03-04 (June 6, 2003), which announced revised definitions for 
Metropolitan Statistical Areas (MSAs), and the

[[Page 43170]]

creation of Micropolitan Statistical Areas and Combined Statistical 
Areas. In adopting the OMB Core-Based Statistical Area (CBSA) 
geographic designations, we provided for a 1-year transition with a 
blended wage index for all providers. For FY 2006, the wage index for 
each provider consisted of a blend of 50 percent of the FY 2006 MSA-
based wage index and 50 percent of the FY 2006 CBSA-based wage index 
(both using FY 2002 hospital data). We referred to the blended wage 
index as the FY 2006 SNF PPS transition wage index. As discussed in the 
SNF PPS final rule for FY 2006 (70 FR 45041), in FY 2007 we will be 
using the full CBSA-based wage index values as presented in Tables 8 
and 9.
    Finally, we continue to use the same methodology discussed in the 
SNF PPS proposed rule for FY 2006 (70 FR 29095, May 19, 2005) and 
finalized in the SNF PPS final rule for FY 2006 (70 FR 45041, August 4, 
2005) to address those geographic areas where there were no hospitals 
and, thus, no hospital wage index data on which to base the calculation 
of the FY 2007 SNF PPS wage index. For FY 2007, those areas consist of 
rural Massachusetts, rural Puerto Rico and urban CBSA (25980) 
Hinesville-Fort Stewart, GA.

D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act as amended by 
section 311 of the BIPA, the payment rates listed here reflect an 
update equal to the full SNF market basket, which equals 3.1 percentage 
points. We will continue to disseminate the rates, wage index, and 
case-mix classification methodology through the Federal Register before 
the August 1 that precedes the start of each succeeding fiscal year.

E. Relationship of RUG-III Classification System to Existing Skilled 
Nursing Facility Level-of-Care Criteria

    As discussed in Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. This 
designation reflects an administrative presumption under the refined 
53-group RUG-III case-mix classification system (RUG-53) that 
beneficiaries who are correctly assigned to one of the upper 35 of the 
RUG-53 groups on the initial 5-day, Medicare-required assessment are 
automatically classified as meeting the SNF level of care definition up 
to and including the assessment reference date on the 5-day Medicare 
required assessment.
    A beneficiary assigned to any of the lower 18 groups is not 
automatically classified as either meeting or not meeting the 
definition, but instead receives an individual level of care 
determination using the existing administrative criteria. This 
presumption recognizes the strong likelihood that beneficiaries 
assigned to one of the upper 35 groups during the immediate post-
hospital period require a covered level of care, which would be 
significantly less likely for those beneficiaries assigned to one of 
the lower 18 groups.
    In this notice, we are continuing the designation of the upper 35 
groups for purposes of this administrative presumption, consisting of 
the following RUG-53 classifications: All groups within the 
Rehabilitation plus Extensive Services category; all groups within the 
Ultra High Rehabilitation category; all groups within the Very High 
Rehabilitation category; all groups within the High Rehabilitation 
category; all groups within the Medium Rehabilitation category; all 
groups within the Low Rehabilitation category; all groups within the 
Extensive Services category; all groups within the Special Care 
category; and, all groups within the Clinically Complex category.

F. Example of Computation of Adjusted PPS Rates and SNF Payment

    Using the XYZ SNF described in Table 10, the following shows the 
adjustments made to the Federal per diem rate to compute the provider's 
actual per diem PPS payment. SNF XYZ's 12-month cost reporting period 
begins October 1, 2006. SNF XYZ's total PPS payment would equal 
$28,709. The Labor and Non-labor columns are derived from Table 6.
[GRAPHIC] [TIFF OMITTED] TN31JY06.022

III. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires us to establish a SNF 
market basket index (input price index) that reflects changes over time 
in the prices of an appropriate mix of goods and services included in 
the SNF PPS. This notice incorporates the latest available projections 
of the SNF market basket index. Accordingly, we have developed a SNF 
market basket index that encompasses the most commonly used cost 
categories for SNF routine services,

[[Page 43171]]

ancillary services, and capital-related expenses.
    In constructing the SNF market basket, we used the methodology set 
forth in the SNF PPS final rule for FY 2002 (66 FR 39584, July 31, 
2001), when we last revised and rebased the SNF market basket. In that 
final rule, we included a complete discussion on the rebasing of the 
SNF market basket to FY 1997. There are 21 separate cost categories and 
respective price proxies. These cost categories appeared in Tables 
10.A, 10.B, and Appendix A, along with other relevant information, in 
the FY 2002 final rule. As discussed in that final rule, the SNF market 
basket primarily uses the Bureau of Labor Statistics'' (BLS) data as 
price proxies, which are grouped in one of the three BLS categories: 
Producer Price Indexes (PPI), Consumer Price Indexes (CPI), and 
Employment Cost Indexes (ECI).
    Beginning in April 2006, with the publication of March 2006 data, 
the BLS' ECI is using a different classification system, the North 
American Industrial Classification System (NAICS), instead of the 
Standard Industrial Classification System (SIC), which no longer 
exists. We have consistently used the ECI as the data source for wages 
and salaries and other price proxies in the SNF market basket and are 
not making any changes to the usage at this time. However, we welcome 
input on our continued use of the BLS ECI data in light of the BLS 
change to the NAICS-based ECI. Interested parties who would like to 
provide input on this issue are invited to do so by contacting Jeanette 
Kranacs or Bill Ullman (please refer to the section entitled FOR 
FURTHER INFORMATION CONTACT at the beginning of this document).
    Each year, we calculate a revised labor-related share based on the 
relative importance of labor-related cost categories in the input price 
index. Table 11 summarizes the updated labor-related share for FY-2007.
[GRAPHIC] [TIFF OMITTED] TN31JY06.023

A. Use of the Skilled Nursing Facility Market Basket Percentage

    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index, as 
described in the previous section, from the average of the prior fiscal 
year to the average of the current fiscal year. For the Federal rates 
established in this notice, we use the percentage increase in the SNF 
market basket index to compute the update factor for FY-2007. We use 
the Global Insight, Inc. (formerly DRI-WEFA), 2nd quarter 2006 
forecasted percentage increase in the FY 1997-based SNF market basket 
index for routine, ancillary, and capital-related expenses, described 
in the previous section, to compute the update factor in this notice. 
Finally, as discussed in section I.A. of this notice, we no longer 
compute update factors to adjust a facility-specific portion of the SNF 
PPS rates, because the initial transition period from facility-specific 
to full Federal rates that started with cost reporting periods 
beginning in July 1998 has expired.

B. Market Basket Forecast Error Adjustment

    As discussed in the June 10, 2003, supplemental proposed rule (68 
FR 34768) and finalized in the August 4, 2003, final rule (68 FR 
46067), the regulations at 42 CFR 413.337(d)(2) provide for an 
adjustment to account for market basket forecast error. The initial 
adjustment applied to the update of the FY 2003 rate for FY 2004, and 
took into account the cumulative forecast error for the period from FY 
2000 through FY 2002. Subsequent adjustments in succeeding FYs take 
into account the forecast error from the most recently available fiscal 
year for which there is final data, and apply whenever the difference 
between the forecasted and actual change in the market basket exceeds a 
0.25 percentage point threshold. As discussed previously in section 
I.F.2. of this notice, as the difference between the estimated and 
actual amounts of increase in the market basket index for FY 2005 (the 
most recently available fiscal year for which there is final data) do 
not exceed the 0.25 percentage point threshold, the payment rates for 
FY-2007 do not include a forecast error adjustment.

C. Federal Rate Update Factor

    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2007 Federal rates be at a level equal 
to the full market basket percentage change. Accordingly, to establish 
the update factor, we determined the total growth from the average 
market basket level for the period of October 1, 2005 through September 
30, 2006 to the average market basket level for the period of October 
1, 2006 through September 30, 2007. Using this process, the market 
basket update factor for FY 2007 SNF Federal rates is 3.1 percent. We 
used this revised update factor to compute the Federal portion of the 
SNF PPS rate shown in Tables 2 and 3.

IV. Consolidated Billing

    Section 4432(b) of the BBA established a consolidated billing

[[Page 43172]]

requirement that places with the SNF the Medicare billing 
responsibility for virtually all of the services that the SNF's 
residents receive, except for a small number of services that the 
statute specifically identifies as being excluded from this provision. 
As noted previously in section I. of this notice, subsequent 
legislation enacted a number of modifications in the consolidated 
billing provision. Specifically, section 103 of the BBRA amended this 
provision by further excluding a number of individual ``high-cost, low-
probability'' services, identified by the Healthcare Common Procedure 
Coding System (HCPCS) codes, within several broader categories 
(chemotherapy and its administration, radioisotope services, and 
customized prosthetic devices) that otherwise remained subject to the 
provision. We discuss this BBRA amendment in greater detail in the 
proposed and final rules for FY 2001 (65 FR 19231-19232, April 10, 
2000, and 65 FR 46790-46795, July 31, 2000), as well as in Program 
Memorandum AB-00-18 (Change Request 1070), issued March 2000, 
which is available online at www.cms.hhs.gov/transmittals/downloads/
ab001860.pdf. Section 313 of the BIPA further amended this provision by 
repealing its Part B aspect; that is, its applicability to services 
furnished to a resident during a SNF stay that Medicare does not cover. 
(However, physical, occupational, and speech-language therapy remain 
subject to consolidated billing, regardless of whether the resident who 
receives these services is in a covered Part A stay.) We discuss this 
BIPA amendment in greater detail in the proposed and final rules for FY 
2002 (66 FR 24020-24021, May 10, 2001, and 66 FR 39587-39588, July 31, 
2001). In addition, section 410 of the MMA amended this provision by 
excluding certain practitioner and other services furnished to SNF 
residents by RHCs and FQHCs. We discuss this MMA amendment in greater 
detail in the update notice for FY 2005 (69 FR 45818-45819, July 30, 
2004), as well as in Program Transmittal 390 (Change Request 
3575), issued December 10, 2004, which is available online 
atwww.cms.hhs.gov/transmittals/downloads/r390cp.pdf. To date, the 
Congress has enacted no further legislation affecting the consolidated 
billing provision.

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

    In accordance with section 1888(e)(7) of the Act as amended by 
section 203 of the BIPA, Part A pays CAHs on a reasonable cost basis 
for SNF services furnished under a swing-bed agreement, as previously 
indicated in sections I.A. and I.D. of this notice. However, effective 
with cost reporting periods beginning on or after July 1, 2002, the 
swing-bed services of non-CAH rural hospitals are paid under the SNF 
PPS. As explained in the final rule for FY 2002 (66 FR-39562, July 31, 
2001), we selected this effective date consistent with the statutory 
provision to integrate swing-bed rural hospitals into the SNF PPS by 
the end of the SNF transition period, June 30, 2002.
    Accordingly, all swing-bed rural hospitals have come under the SNF 
PPS as of June 30, 2003. Therefore, all rates and wage indexes outlined 
in earlier sections of this notice for the SNF PPS also apply to all 
swing-bed rural hospitals. A complete discussion of assessment 
schedules, the MDS and the transmission software (Raven-SB for Swing 
Beds) appears in the final rule for FY 2002 (66 FR-39562, July 31, 
2001). The latest changes in the MDS for swing-bed rural hospitals 
appear on our SNF PPS Web site, www.cms.hhs.gov/snfpps.

VI. Other Issues

    Both Medicare's payment structures and the actual delivery of post 
acute care have evolved significantly over the past decade. Before the 
BBA, SNFs and other post-acute settings such as inpatient 
rehabilitation facilities (IRFs) were paid on the basis of cost. Since 
that time, we have implemented various legislative mandates that 
established prospective payment systems in these settings. The PPS 
methodologies used in these settings rely on patient-level clinical 
information to provide pricing, support the provision of high quality 
services, and encourage the efficient delivery of care.
    CMS is exploring refinements to the existing provider-oriented 
``silos'' to create a more seamless system for payment and delivery of 
post-acute care (PAC) under Medicare. This new model could feature more 
consistent payments for the same type of care across different sites of 
service, Value Based Purchasing incentives, and collection of uniform 
clinical assessment information to support quality and discharge 
planning functions.
    Section 5008 of the Deficit Reduction Act of 2005 (DRA) provides a 
pathway to achieve the goals of the new model by providing for a 
demonstration on uniform assessment and data collection across 
different sites of service. This 3-year demonstration project is to be 
established by January 1, 2008. We are in the early stages of 
developing a standard, comprehensive assessment instrument to be 
completed at hospital discharge and ultimately integrated with PAC 
assessments. The demonstration will enable us to test the usefulness of 
this instrument, and analyze cost and outcomes across different PAC 
sites. The lessons learned from this demonstration will inform efforts 
to improve the post-acute payment systems. We intend for the instrument 
to cover the population admitted to all institutional PAC settings 
(SNFs, IRFs, and long-term care hospitals) as well as residential-based 
PAC (home health agencies, outpatient programs).
    We have evaluated the existing assessment instruments that managed 
care and other insurers use. These instruments will form the basis of 
our efforts to create a discharge assessment tool that can serve to: 
facilitate post-hospital placement decision making; enhance the safety 
and quality of care during patient transfers through transmission of 
core information to a receiving provider; and provide baseline 
information for longitudinal follow-up of health and function.
    In addition, we are developing the Nursing Home Value Based 
Purchasing Demonstration as part of a broad effort at CMS to eliminate 
wasteful Medicare spending and improve quality of care through Value 
Based Purchasing initiatives. We plan to invite State agencies to 
participate in a demonstration project where nursing homes would be 
eligible for additional payment based upon review of certain quality 
measures.
    In the April 25, 2006 Inpatient Prospective Payment Systems (IPPS) 
proposed rule (71 FR 23996), we discussed in detail the Health Care 
Information Transparency Initiative and our efforts to promote 
effective use of health information technology (HIT) as a means of 
improving health care quality and efficiency. Specifically, we 
discussed several potential options under the transparency initiative 
for making pricing and quality information more readily available to 
the public (71 FR 24120 through 24121), with the expectation that this 
will assist the patient--as the ultimate consumer of health care--in 
making cost-effective purchasing decisions. We solicited comments on 
ways the Department can encourage transparency in health care quality 
and pricing, whether through its leadership on voluntary initiatives or 
through regulatory requirements. We also sought comments on the 
Department's statutory authority to impose such requirements. In 
addition, we discussed the potential for HIT to facilitate improvements 
in the quality and efficiency of health care services (71

[[Page 43173]]

FR 24100 through 24101). We solicited comments on our statutory 
authority to encourage the adoption and use of HIT. The President's 
2007 Budget for Health and Human Services states that ``the 
Administration supports the adoption of health information technology 
(HIT) as a normal cost of doing business to ensure patients receive 
high quality care.'' We also sought comments on the appropriate role of 
HIT in potential value-based purchasing programs, beyond the intrinsic 
incentives of a PPS to provide efficient care, encourage the avoidance 
of unnecessary costs, and increase quality of care. In addition, we 
sought comments on promotion of the use of effective HIT through 
Medicare conditions of participation.
    Further, the Nursing Home Quality Initiative was launched in 2002 
with the cooperation of the major nursing home professional 
associations and the CMS Quality Improvement Organization (QIO) 
program. While this initiative has already achieved significant 
progress nationally in reducing the use of physical restraints and in 
reducing the number of residents in moderate or severe pain, more can 
be done.
    Accordingly, we plan to initiate a new Nursing Home Quality 
Campaign this fall, which will be conducted over the next two years 
(through 2008). The purpose of this new Quality Campaign will be to 
build upon the past successes of the Nursing Home Quality Initiative, 
and spread the knowledge of quality improvement in the nursing home 
setting more widely across the country. The ultimate objective of this 
new Nursing Home Quality Campaign is to make a real difference in the 
quality of life and efficiency of care delivery in nursing homes, by 
accelerating progress in identifying and treating pain and pressure 
ulcers, by virtually eliminating the use of physical restraints, and by 
transforming the nursing home work environment to attract and retain 
nursing and other staff. More information about the campaign, and free 
evidence-based improvement materials, can be found at: www.medqic.org.
    At this time, we do not offer specific proposals related to the 
preceding discussion. However, we believe that it is useful to 
encourage discussion of a broad range of ideas in order to assess the 
relative advantages and disadvantages of the various policies affecting 
PAC sites. We note that we are in the process of seeking input on these 
initiatives in various proposed Medicare payment rules being issued 
this year. In particular, we intend to consider both the health care 
information transparency initiative and the use of HIT as we refine and 
update all Medicare payment systems.

VII. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

VIII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this notice as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA, Pub. L. 96-354, September 16, 
1980), section 1102(b) of the Social Security Act (the Act), the 
Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 104-4), and 
Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This notice is a major rule, as defined in Title 5, United States Code, 
section 804(2), because we estimate the impact of the standard update 
will be to increase payments to SNFs by approximately $560 million.
    The update set forth in this notice applies to payments in FY 2007. 
Accordingly, the analysis that follows describes the impact of this one 
year only. In accordance with the requirements of the Act, we will 
publish a notice for each subsequent FY that will provide for an update 
to the payment rates and include an associated impact analysis.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most SNFs and most other providers and suppliers are small entities, 
either by their nonprofit status or by having revenues of $11.5 million 
or less in any 1 year. For purposes of the RFA, approximately 53 
percent of SNFs are considered small businesses according to the Small 
Business Administration's latest size standards, with total revenues of 
$11.5 million or less in any 1 year (for further information, see 65 FR 
69432, November 17, 2000). Individuals and States are not included in 
the definition of a small entity. In addition, approximately 29 percent 
of SNFs are nonprofit organizations.
    This notice updates the SNF PPS rates published in the final rule 
for FY 2006 (70 FR 45026, August 4, 2005) and the associated correction 
notice (70 FR 57164, September 30, 2005), thereby increasing aggregate 
payments by an estimated $560 million. As indicated in Table 12, the 
effect on facilities will be an aggregate positive impact of 3.1 
percent. We note that some individual providers may experience larger 
increases in payments than others due to the distributional impact of 
the FY 2007 wage indexes and the degree of Medicare utilization. While 
this notice is considered major, its overall impact is extremely small; 
that is, less than 3 percent of total SNF revenues from all payor 
sources. As the overall impact is positive on the industry as a whole, 
and on small entities specifically, it is not necessary to consider 
regulatory alternatives.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. Because the increase in 
SNF payment rates set forth in this notice also applies to rural 
hospital swing-bed services, we believe that this notice will have a 
positive fiscal impact on swing-bed rural hospitals.
    Section 202 of the UMRA also requires that agencies assess 
anticipated costs and benefits before issuing any rule that may result 
in an expenditure in any 1 year by State, local, or tribal governments, 
in the aggregate, or by the private sector, of $110 million or more. 
This notice will not have a substantial effect on the governments 
mentioned, or on private sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates regulations that impose 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism

[[Page 43174]]

implications. As stated above, this notice will have no substantial 
effect on State and local governments.

B. Anticipated Effects

    This notice sets forth updates of the SNF PPS rates contained in 
the final rule for FY 2006 (70 FR 45026, August 4, 2005) and the 
associated correction notice (70 FR 57164, September 30, 2005). Based 
on the above, we estimate the FY 2007 impact will be a net increase of 
$560 million in payments to SNF providers. The impact analysis of this 
notice represents the projected effects of the changes in the SNF PPS 
from FY 2006 to FY 2007. We estimate the effects by estimating payments 
while holding all other payment variables constant. We use the best 
data available, but we do not attempt to predict behavioral responses 
to these changes, and we do not make adjustments for future changes in 
such variables as days or case-mix.
    We note that certain events may combine to limit the scope or 
accuracy of our impact analysis, because such an analysis is future-
oriented and, thus, very susceptible to forecasting errors due to other 
changes in the forecasted impact time period. Some examples of such 
possible events are newly-legislated general Medicare program funding 
changes by the Congress, or changes specifically related to SNFs. In 
addition, changes to the Medicare program may continue to be made as a 
result of the BBA, the BBRA, the BIPA, the MMA, or new statutory 
provisions. Although these changes may not be specific to the SNF PPS, 
the nature of the Medicare program is such that the changes may 
interact, and the complexity of the interaction of these changes could 
make it difficult to predict accurately the full scope of the impact 
upon SNFs.
    In accordance with section 1888(e)(4)(E) of the Act, we update the 
payment rates for FY 2007 by a factor equal to the full market basket 
index percentage increase to determine the payment rates for FY 2007. 
The special AIDS add-on established by section 511 of the MMA remains 
in effect until ``* * *such date as the Secretary certifies that there 
is an appropriate adjustment in the case mix * * *.'' We have not 
provided a separate impact analysis for the MMA provision. Our latest 
estimates indicate that there are less than 2,000 beneficiaries who 
qualify for the AIDS add-on payment. The impact to Medicare is included 
in the ``total'' column of Table 12. In updating the rates for FY 2007, 
we made a number of standard annual revisions and clarifications 
mentioned elsewhere in this notice (for example, the update to the wage 
and market basket indexes used for adjusting the Federal rates). These 
revisions will increase payments to SNFs by approximately $560 million.
    The impacts are shown in Table 12. The breakdown of the various 
categories of data in the table follows.
    The first column shows the breakdown of all SNFs by urban or rural 
status, hospital-based or freestanding status, and census region.
    The first row of figures in the first column describes the 
estimated effects of the various changes on all facilities. The next 
six rows show the effects on facilities split by hospital-based, 
freestanding, urban, and rural categories. The urban and rural 
designations are based on the location of the facility under the CBSA 
designation. The next twenty-two rows show the effects on urban versus 
rural status by census region.
    The second column in the table shows the number of facilities in 
the impact database.
    The third column of the table shows the effect of the annual update 
to the wage index. This represents the effect of using the most recent 
wage data available. The total impact of this change is zero percent; 
however, there are distributional effects of the change. The impact of 
updating the wage data for the rural Outlying region increased by 3.2 
percent (reflecting the wage index increase for only one provider).
    The fourth column of the table shows the effect of moving from the 
FY 2006 transition-based wage index to using the new OMB geographic 
designations based on CBSAs. Duri