Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2008, 25526-25600 [07-2180]

Agencies

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

[Federal Register Volume 72, Number 86 (Friday, May 4, 2007)]
[Proposed Rules]
[Pages 25526-25600]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-2180]



[[Page 25525]]

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

Part IV





Department of Health and Human Services





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



Centers for Medicare & Medicaid Services



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



42 CFR Part 413



Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2008; Proposed Rule

Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Proposed 
Rules

[[Page 25526]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 413

[CMS-1545-P]
RIN 0938-AO64


Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities for FY 2008

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would update the payment rates used under 
the prospective payment system (PPS) for skilled nursing facilities 
(SNFs), for fiscal year (FY) 2008. In addition, this proposed rule 
would revise and rebase the SNF market basket, and would modify the 
threshold for the adjustment to account for market basket forecast 
error.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 29, 2007.

ADDRESSES: In commenting, please refer to file code CMS-1545-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1545-P, P.O. Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1545-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-9994 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Ellen Berry, (410) 786-4528 (for 
information related to the case-mix classification methodology). Mollie 
Knight, (410) 786-7948 (for information related to the SNF market 
basket and labor-related share). 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:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1545-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.
    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 System--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
    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. Revising and Rebasing the Skilled Nursing Facility Market Basket 
Index
    A. Background
    B. Rebasing and Revising the Skilled Nursing Facility Market 
Basket
    C. Price Proxies Used to Measure Cost Category Growth

[[Page 25527]]

    1. Wages and Salaries
    2. Employee Benefits
    3. All Other Expenses
    4. Capital-Related
    D. Proposed Market Basket Estimate for the FY 2008 SNF Update
V. Consolidated Billing
VI. Application of the SNF PPS to SNF Services Furnished by Swing-
Bed Hospitals
VII. Provisions of the Proposed Rule
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Accounting Statement
    D. Alternatives Considered
    E. Conclusion
Addendum: FY 2008 CBSA Wage Index Tables (Tables 8 & 9)

Abbreviations

    In addition, because of the many terms to which we refer by 
abbreviation in this proposed rule, 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
MEDPAC Medicare Payment Advisory Commission
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, Public Law 104-4

I. Background

    [If you choose to comment on issues in this section, please include 
the caption ``BACKGROUND'' at the beginning of your comments.]
    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 an update notice (71 FR 43158, July 31, 2006) that set forth updates 
to the SNF PPS payment rates for fiscal year (FY) 2007. We subsequently 
published a correction notice (71 FR 57519, September 29, 2006) 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 proposed rule, we propose 
to update the per diem payment rates for SNFs for FY 2008. Major 
elements of the SNF PPS include:
     Rates. As discussed in section I.F.1 of this proposed 
rule, 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. We adjust the rates annually using a 
SNF market basket index, and we adjust them by the hospital inpatient 
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 at various times have also reflected 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, three-phase 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

[[Page 25528]]

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 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 
proposed rule.
     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 Part A stay. While 
section 313 of the BIPA repealed the Part B aspect of the consolidated 
billing requirement, SNFs maintain responsibility for submitting 
consolidated Medicare bills to the fiscal intermediary for physical, 
occupational, and speech-language therapy that residents receive 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 V. of this proposed 
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 VI. of this proposed rule.

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 annually 
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 proposed rule for a discussion of 
the relationship between the case-mix classification system and SNF 
level of care determinations).
    Along with a number of other revisions proposed later in this 
preamble, this proposed rule 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 proposed rule). 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 proposed rule. 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 SNF PPS. 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 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 of the BIPA 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. 
In 2006, we submitted a report to the Congress on this study, which is 
available online at www.cms.hhs.gov/SNFPPS/Downloads/RC_2006_PC-PPSSNF.pdf.
     Section 312 of the BIPA provided for a temporary increase 
of 16.66 percent 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. The report (GAO-03-176), which GAO issued in November 2002, 
is available online at www.gao.gov/new.items/d03176.pdf.
     Section 313 of the BIPA 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 V. of this proposed rule.)
     Section 314 of the BIPA 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 proposed 
rule. (As noted previously, in accordance with section 101(c)(2) of the

[[Page 25529]]

BBRA, this temporary payment adjustment expired upon the implementation 
of case-mix refinements on January 1, 2006.)
     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. At this time, this has 
proven to be infeasible due to the volatility of existing SNF wage data 
and the significant amount of resources that would be required to 
improve the quality of that data.
    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 SNF PPS. Specifically, section 511 of the MMA amended section 
1888(e)(12) of the Act to provide for a temporary increase of 128 
percent 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 2005 data, we identified 1276 
SNF residents with a principal diagnosis code of 042 (``Human 
Immunodeficiency Virus (HIV) Infection''). For FY 2008, an urban 
facility with a resident with AIDS in RUG group ``SSA'' would have a 
case-mix adjusted payment of almost $250.91 (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 $572.07.
    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 V. of this proposed rule.)

F. Skilled Nursing Facility Prospective Payment System--General 
Overview

    We implemented the Medicare SNF PPS effective with cost reporting 
periods beginning on or after July 1, 1998. This PPS 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 were 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. In compiling the database used to compute the Federal payment 
rates, we excluded those 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. Using the formula 
that the BBA prescribed, 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. The RUG-III 
classification system 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) 
appeared 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 proposed rule reflect an update to the 
rates that we published in the July 31, 2006 final rule for FY 2007 (71 
FR 43158) and the associated correction notice (71 FR 57519, September 
29, 2006), 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 proposed rule.
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. For FY 2008, we propose to revise and rebase the market 
basket to reflect 2004 total cost data as detailed in section III.A. 
The proposed

[[Page 25530]]

FY 2008 market basket increase is 3.3 percent. (However, we note that 
both the President's budget and the recommendations of the Medicare 
Payment Advisory Commission (MedPAC) include a proposal for a zero 
percent update in the SNF market basket for FY 2008, and that the 
provisions outlined in this proposed rule would need to reflect any 
legislation that the Congress enacts to adopt this proposal.)
    As explained in the final rule for FY 2004 (66 FR 46058, August 4, 
2003), the annual update of the payment rates includes, as appropriate, 
an adjustment to account for market basket forecast error. When we 
initially proposed the forecast error adjustment (68 FR 34768, June 10, 
2003), we noted that significant previous forecast errors had resulted 
from wages and benefits for SNF workers increasing more rapidly than 
expected. In the SNF PPS final rule for FY 2004, we then proceeded to 
correct for those forecast errors with a one-time, cumulative 
adjustment relating to the FYs 2000 through 2002 updates, resulting in 
a 3.26 percentage point addition to the market basket update. We also 
provided for subsequent adjustments in succeeding fiscal years whenever 
the difference between the forecasted and actual market basket 
increases exceeds a specified threshold, which we indicated at the time 
would likely be 0.25 percentage point.
    However, we believe that it is now appropriate to draw a 
distinction between the kind of exceptional, unanticipated major 
increases in wages and benefits that initially gave rise to this policy 
and the much smaller variances between forecasted and actual change 
that more typically occur from year to year, in recognition that a 
certain level of imprecision is inherently associated with measuring 
statistics. In general, the SNF market basket is expected to reasonably 
project inflationary price pressures. Further, according to MedPAC 
analysis, we note that freestanding SNFs (which represent more than 80 
percent of all SNFs) have received Medicare payments that exceeded 
costs by 10.8 percent or more since 2001, and Medicare margins are 
projected to be 11 percent in 2007. Moreover, following the initial, 
cumulative 3.26 percent forecast error adjustment relating to FYs 2000 
through 2002 updates, the differences between the forecasted and actual 
increases in the market basket for each of the subsequent fiscal years 
have been far smaller in magnitude (0.3 percentage point or less) than 
the ones that originally had prompted the adoption of this policy.
    Accordingly, we believe it would be appropriate at this point to 
recalibrate the specified threshold for triggering a forecast error 
adjustment, in a manner that distinguishes between the major forecast 
errors that gave rise to this policy initially and the far more typical 
minor variances that have consistently occurred in each of the 
succeeding years. As indicated in our original proposal for a forecast 
error adjustment, we believe that establishing a minimum threshold for 
making such adjustments reflects the concept that there is generally a 
minimal amount of imprecision that is inherently associated with 
measuring statistics, and that any such threshold should be 
sufficiently high to screen out small variations that may arise from 
this imprecision. At this point, however, we are concerned that the 
existing 0.25 percentage point threshold may not be high enough to 
accomplish this and to focus instead on the more significant 
variations--those of a magnitude that would indicate a failure to 
reflect accurately the actual historical price changes faced by SNFs--
which the forecast error adjustment was originally created to address.
    We believe that a threshold of 0.5 percentage point represents an 
amount that is sufficiently high to screen out the expected minor 
variances in a projected statistical methodology, while at the same 
time appropriately serving to trigger an adjustment in those instances 
where it is clear that the historical price changes are not being 
adequately reflected. Therefore, this proposed rule would raise the 
threshold for triggering a forecast error adjustment under the SNF PPS 
from the current 0.25 percentage point to 0.5 percentage point, 
effective with FY 2008.
    We are also considering a higher threshold for the forecast error 
adjustment, up to 1.0 percentage point. This would be consistent with 
the relative magnitude of forecast error that is addressed by the 
inpatient hospital capital PPS forecast error adjustment. Both the SNF 
and inpatient hospital capital PPS forecast error adjustments currently 
utilize a 0.25 percent threshold. However, the inpatient hospital 
capital PPS's average annual forecasted market basket update from FY 
1996 through FY 2006 (the period of historical data used for forecast 
error adjustments to date) was approximately 0.9 percent. In contrast, 
the SNF PPS's average annual forecasted market basket update from FY 
2000 through FY 2006 (the period of historical data used for forecast 
error adjustments to date) was approximately 3.1 percent. Thus, the 
0.25 percentage point threshold addressed forecast errors equaling 28 
percent or more of the average annual forecasted market basket update 
under the inpatient hospital capital PPS, compared with 8 percent of 
the average annual forecasted market basket update under the SNF PPS. 
Utilizing a 1 percentage point forecast error adjustment threshold 
under the SNF PPS would address forecast errors equaling 32 percent or 
more of the average annual forecasted market basket update, which is 
more consistent with the relative magnitude of forecast error for which 
adjustment is made under the inpatient hospital capital PPS.
    While this rule proposes applying the new threshold in FY 2008, we 
are also considering delaying implementation of this change to FY 2009. 
We specifically invite comments on increasing the forecast error 
adjustment threshold and making the proposal effective in FY 2009.
    As the difference between the estimated and actual amount of change 
falls below the proposed 0.5 percentage point threshold, no forecast 
error adjustment is appropriate in FY 2008. For FY 2006 (the most 
recently available fiscal year for which there is final data), the 
estimated increase in the market basket index was 3.1 percentage 
points, while the actual increase was 3.4 percentage points, resulting 
in a 0.3 percentage point difference. Table 1 below shows the 
forecasted and actual market basket amount for FY 2006.

  Table 1.--Difference between the Forecasted and Actual Market Basket
                          Increases for FY 2006
------------------------------------------------------------------------
                   Forecasted Actual   Actual FY 2006        FY 2006
      Index        FY 2006 increase*     increase**        difference
------------------------------------------------------------------------
            SNF                3.1                3.4              0.3
------------------------------------------------------------------------
*Published in Federal Register; based on second quarter 2005 Global
  Insight Inc. forecast (97 index).
**Based on the first quarter 2007 Global Insight forecast (97 index).


[[Page 25531]]

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

    [If you choose to comment on issues in this section, please include 
the caption ``Annual Update'' at the beginning of your comments.]

A. Federal Prospective Payment System

    This proposed rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2007. 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 proposed FY 2008 rates would reflect an update using the full 
amount of the latest market basket index. The FY 2008 market basket 
increase factor is 3.3 percent. A complete description of the multi-
step process initially appeared in the May 12, 1998 interim final rule 
(63 FR 26252), as 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 increase of 
128 percent 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, 2006, and 
ending September 30, 2007, and the midpoint of the Federal fiscal year 
beginning October 1, 2007, and ending September 30, 2008, 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 2008 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 2008.

                            Table 2.--FY 2008 Unadjusted Federal Rate Per Diem Urban
----------------------------------------------------------------------------------------------------------------
                                               Nursing--case-   Therapy--case-   Therapy--non-
               Rate component                       mix              mix            case-mix       Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................         $146.77          $110.55           $14.56           $74.90
----------------------------------------------------------------------------------------------------------------


                            Table 3.--FY 2008 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                               Nursing--case-   Therapy--case-   Therapy--non-
               Rate component                       mix              mix            case-mix       Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.............................         $140.22          $127.48           $15.55           $76.29
----------------------------------------------------------------------------------------------------------------

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 
proposed rule, the payment rates set forth herein reflect the use of 
the refined 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 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 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 4210-01-P

[[Page 25532]]

[GRAPHIC] [TIFF OMITTED] TP04MY07.043


[[Page 25533]]


[GRAPHIC] [TIFF OMITTED] TP04MY07.044


[[Page 25534]]


[GRAPHIC] [TIFF OMITTED] TP04MY07.045


[[Page 25535]]



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 propose to continue that practice for FY 2008, as 
we continue to believe that in the absence of SNF-specific wage data, 
using the hospital inpatient wage data is appropriate and reasonable 
for the SNF PPS. 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.
    We would apply the wage index adjustment to the labor-related 
portion of the Federal rate, which is 73.757 percent of the total rate. 
This percentage reflects the labor-related relative importance for FY 
2008, using the proposed revised and rebased FY 2004-based market 
basket. The labor-related relative importance for FY 2007 was 75.839, 
using the FY 1997-based market basket, 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 2008. 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 2008 than the base year weights 
from the SNF market basket.
    We calculate the labor-related relative importance for FY 2008 in 
four steps. First, we compute the FY 2008 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 
2008 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2008 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we add the FY 2008 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 
2008 labor-related relative importance. Tables 6 and 7 below show the 
Federal rates by labor-related and non-labor-related components.

BILLING CODE 4210-01-P

[[Page 25536]]

[GRAPHIC] [TIFF OMITTED] TP04MY07.046


[[Page 25537]]


[GRAPHIC] [TIFF OMITTED] TP04MY07.047


[[Page 25538]]


[GRAPHIC] [TIFF OMITTED] TP04MY07.048

BILLING CODE 4210-01-C
    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 2008 (Federal rates effective October 1, 
2007), we would apply the most recent wage index using the hospital 
inpatient wage data, and would also apply an adjustment to fulfill the 
budget neutrality requirement. We would 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 proposed budget neutrality factor for this year is 1.0003. The wage 
index applicable to FY 2008 appears in Tables 8 and 9 of this proposed 
rule.
    In the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 
2005), we adopted the changes discussed in the Office of Management and 
Budget (OMB) Bulletin No. 03-04 (June 6, 2003), available online at 
www.whitehouse.gov/omb/bulletins/b03-04.html, which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
addition, OMB published subsequent bulletins regarding CBSA changes, 
including changes in CBSA numbers and titles. We wish to clarify that 
this and all subsequent SNF PPS rules and notices are considered to 
incorporate the CBSA

[[Page 25539]]

changes published in the most recent OMB bulletin that applies to the 
hospital wage data used to determine the current SNF PPS wage index. 
The OMB bulletins may be accessed online at https://www.whitehouse.gov/omb/bulletins/.
    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), subsequent to the expiration of this 1-year 
transition on September 30, 2006, we used the full CBSA-based wage 
index values, as now presented in Tables 8 and 9 of this proposed rule.
    When adopting OMB's new labor market designations, we identified 
some geographic areas where there were no hospitals and, thus, no 
hospital wage index data on which to base the calculation of the SNF 
PPS wage index (70 FR 29095, May 19, 2005). As in the SNF PPS final 
rule for FY 2006 (70 FR 45041) and in the SNF PPS update notice for FY 
2007 (71 FR 43170, July 31, 2006), we now address two situations 
concerning the wage index.
    The first situation involves rural locations in Massachusetts and 
Puerto Rico. Under the CBSA labor market areas, there are no rural 
hospitals in those locations. Because there was no rural proxy for more 
recent rural data within those areas, we used the FY 2005 wage index 
value in both FY 2006 and FY 2007 for rural Massachusetts and rural 
Puerto Rico.
    Because we have used the same wage index value (from FY 2005) for 
these areas for the previous two fiscal years, we believe it is 
appropriate at this point to consider alternatives in our methodology 
to update the wage index for rural areas without hospital wage index 
data. We believe that the best imputed proxy would (1) use pre-floor, 
pre-reclassified hospital data, (2) use the most local data available, 
(3) be easy to evaluate, and (4) be easily updateable from year-to-
year. Although our current methodology uses local, rural pre-floor, 
pre-reclassified hospital wage data, this method is not updateable from 
year-to-year.
    Therefore, in cases where there is a rural area without hospital 
wage data, we propose using the average wage index from all contiguous 
CBSAs to represent a reasonable proxy for the rural area. This approach 
uses pre-floor, pre-reclassified hospital wage data, is easy to 
evaluate, is updateable from year-to-year, and uses the most local data 
available.
    In determining an imputed rural wage index, we interpret the term 
``contiguous'' to mean sharing a border. For example, in the case of 
Massachusetts, the entire rural area consists of Dukes and Nantucket 
counties. We have determined that the borders of Dukes and Nantucket 
counties are ``contiguous'' with Barnstable and Bristol counties. Under 
the proposed methodology, the wage indexes for the counties of 
Barnstable (CBSA 12700, Barnstable Town, MA-(1.2539)) and Bristol (CBSA 
39300, Providence-New Bedford-Fall River, RI-MA-(1.0783)) are averaged, 
resulting in an imputed rural wage index of 1.1665 for rural 
Massachusetts for FY 2008. While we believe that this policy could be 
readily applied to other rural areas that lack hospital wage data 
(possibly due to hospitals converting to a different provider type, 
such as a CAH, that does not submit the appropriate wage data), should 
a similar situation arise in the future, we may re-examine this policy. 
However, we do not believe that this policy is appropriate for Puerto 
Rico. There are sufficient economic differences between hospitals in 
the United States and those in Puerto Rico (including the payment of 
hospitals in Puerto Rico using blended Federal/Commonwealth-specific 
rates) to warrant establishing a separate and distinct policy 
specifically for Puerto Rico. Consequently, any alternative methodology 
for imputing a wage index for rural Puerto Rico would need to take into 
account those differences. Our policy of imputing a rural wage index 
based on the wage index(es) of CBSAs contiguous to the rural area in 
question does not recognize the unique circumstances of Puerto Rico. 
While we have not yet identified an alternative methodology for 
imputing a wage index for rural Puerto Rico, we will continue to 
evaluate the feasibility of using existing hospital wage data and, 
possibly, wage data from other sources. Accordingly, we propose to 
continue using the most recent wage index previously available for 
rural Puerto Rico; that is, a wage index of 0.4047.
    The second situation involved the urban CBSA (25980) Hinesville-
Fort Stewart, GA. Again, under CBSA designations there are no urban 
hospitals within that CBSA. For FY 2006 and FY 2007, we used all of the 
urban areas within the State to serve as a reasonable proxy for the 
urban area without specific hospital wage index data in determining the 
SNF PPS wage index.
    We propose to continue this approach for urban areas without 
specific hospital wage index data. Therefore, the wage index for urban 
CBSA (25980) Hinesville-Fort Stewart, GA is calculated as the average 
wage index of all urban areas in Georgia.
    We solicit comments on these approaches to calculating the wage 
index values for areas without hospitals for FY 2008 and subsequent 
years.

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 proposed payment rates in this proposed 
rule reflect an update equal to the full SNF market basket, estimated 
at 3.3 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 
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 proposed rule, we are continuing the designation of the 
upper 35 groups for purposes of this administrative presumption, 
consisting

[[Page 25540]]

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 SNF XYZ described in Table 10 below, 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 total PPS payment 
would equal $29,656. The Labor and Non-labor columns are derived from 
Table 6 of this proposed rule.

                              Table 10.--RUG-53 SNF XYZ: Located in Cedar Rapids, IA (Urban CBSA 16300) Wage Index: 0.8853
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  Medicare
                    RUG group                        Labor      Wage index   Adj. labor   Non-labor    Adj. rate   Percent adj      days       Payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVX.............................................      $336.93       0.8853      $298.28      $119.88      $418.16      $418.16           14    $5,854.00
RLX.............................................       232.12       0.8853       205.50        82.59       288.09       288.09           30     8,643.00
RHA.............................................       233.65       0.8853       206.85        83.13       289.98       289.98           16     4,640.00
CC2.............................................       198.05       0.8853       175.33        70.47       245.80      *560.43           10     5,604.00
IA2.............................................       132.02       0.8853       116.88        46.97       163.85       163.85           30     4,915.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  ...........  ...........  ...........  ...........  ...........  ...........          100   29,656.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Reflects a 128 percent adjustment from section 511 of the MMA.

III. The Skilled Nursing Facility Market Basket Index

    [If you choose to comment on issues in this section, please include 
the caption ``Market Basket Index'' at the beginning of your comments.]
    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 proposed rule incorporates the latest available 
projections of the SNF market basket index. We will incorporate into 
the SNF final rule updated projections based on the latest available 
projections at that time. Accordingly, we have developed a SNF market 
basket index that encompasses the most commonly used cost categories 
for SNF routine services, ancillary services, and capital-related 
expenses. A discussion of our proposal to revise and rebase the SNF 
market basket appears in section IV. of this proposed rule.
    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 below summarizes the proposed updated labor-related 
share for FY 2008, which is based on the proposed rebased and revised 
SNF market basket.

    Table 11.--Labor-Related Relative Importance, FY 2007 and FY 2008
------------------------------------------------------------------------
                                         Relative           Relative
                                       importance,        importance,
                                      labor-related,     labor-related,
                                     FY 2007  (1997-    FY 2008  (2004-
                                    based index)  0:2     based index)
                                         forecast        07:41 forecast
------------------------------------------------------------------------
Wages and salaries................             54.231             53.628
Employee benefits.................             11.903             12.299
Nonmedical professional fees......              2.721              1.442
Labor-intensive services..........              4.035              3.746
Capital-related (.391)............              2.949              2.642
    Total.........................             75.839            73.757
------------------------------------------------------------------------
Source: Global Insight, Inc., formerly DRI-WEFA.

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 proposed rule, we use the percentage increase in 
the SNF market basket index to compute the update factor for FY 2008. 
We use the Global Insight, Inc. (formerly DRI-WEFA), 1st quarter 2007 
forecasted percentage increase in the FY 2004-based SNF market basket 
index for routine, ancillary, and capital-related expenses, described 
in the previous section, to compute the update factor in this proposed 
rule. Finally, as discussed in section I.A. of this proposed rule, we 
no longer compute update factors to adjust a facility-specific portion 
of the SNF PPS rates, because the initial three-phase 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) currently provide for 
an adjustment to account for market basket forecast error.

[[Page 25541]]

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 also 
discussed previously in section I.F.2. of this proposed rule, we are 
proposing to raise the 0.25 percentage point threshold for forecast 
error adjustments under the SNF PPS to 0.5 percentage point effective 
with FY 2008, and we invite comments on increasing the forecast error 
adjustment threshold and its effective date, as well as other aspects 
of this proposed rule. As also discussed in that section, the payment 
rates for FY 2008 do not include a forecast error adjustment, as the 
difference between the estimated and actual amounts of increase in the 
market basket index for FY 2006 (the most recently available fiscal 
year for which there is final data) does not exceed the proposed 0.5 
percentage point threshold.

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 2008 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, 2006 through September 
30, 2007 to the average market basket level for the period of October 
1, 2007 through September 30, 2008. Using this process, the proposed 
market basket update factor for FY 2008 SNF Federal rates is 3.3 
percent. We used this revised proposed update factor to compute the 
Federal portion of the SNF PPS rate shown in Tables 2 and 3.

IV. Revising and Rebasing the Skilled Nursing Facility Market Basket 
Index

    [If you choose to comment on issues in this section, please include 
the caption ``Revising and Rebasing'' at the beginning of your 
comments.]

A. Background

    Section 1888(e)(5)(A) of the Social Security Act requires the 
Secretary to establish a market basket index that reflects the changes 
over time in the prices of an appropriate mix of goods and services 
included in the SNF PPS. Effective for cost reporting periods beginning 
on or after July 1, 1998, we revised and rebased our 1977 routine costs 
input price index and adopted a total expenses SNF input price index 
using FY 1992 as the base year. In 2001 we rebased and revised the 
market basket to a base year of FY 1997. This year, in 2007, we propose 
to revise and rebase the SNF market basket to a base year of FY 2004.
    The term ``market basket'' technically describes the mix of goods 
and services needed to produce SNF care, and is also commonly used to 
denote the input price index that includes both weights (mix o