Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2008, 43412-43463 [07-3784]

Agencies

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

[Federal Register Volume 72, Number 149 (Friday, August 3, 2007)]
[Rules and Regulations]
[Pages 43412-43463]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-3784]



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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 409



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

Federal Register / Vol. 72, No. 149 / Friday, August 3, 2007 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 409

[CMS-1545-F]
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: Final rule.

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SUMMARY: This final rule updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs) 
for fiscal year (FY) 2008. In addition, this final rule revises and 
rebases the SNF market basket, and modifies the threshold for the 
adjustment to account for market basket forecast error. This final rule 
also responds to public comments submitted on the proposed rule and 
makes a technical correction in the regulations text.

DATES: This final rule becomes effective on October 1, 2007.

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: 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 Skilled Nursing Facility 
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. Summary of the Provisions of the FY 2008 Proposed Rule
III. Analysis of and Response to Public Comments on the FY 2008 
Proposed Rule
    A. General Comments on the FY 2008 Proposed Rule
    B. Annual Update of Payment Rates Under the Prospective Payment 
System for Skilled Nursing Facilities
    1. Federal Prospective Payment System
    a. Costs and Services Covered by the Federal Rates
    b. Methodology Used for the Calculation of the Federal Rates
    2. Case-Mix Refinements
    3. Wage Index Adjustment to Federal Rates
    4. Updates to Federal Rates
    5. Relationship of RUG-III Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    6. Example of Computation of Adjusted PPS Rates and SNF Payment
    C. The Skilled Nursing Facility Market Basket Index
    1. Use of the Skilled Nursing Facility Market Basket Percentage
    2. Market Basket Forecast Error Adjustment
    3. Federal Rate Update Factor
    D. Revising and Rebasing the Skilled Nursing Facility Market 
Basket Index
    E. Consolidated Billing
    F. Application of the SNF PPS to SNF Services Furnished by 
Swing-Bed Hospitals
IV. Provisions of the Final Rule
V. Waiver of Proposed Rulemaking
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Accounting Statement
    D. Alternatives Considered
    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 final rule, we are listing these abbreviations and 
their corresponding terms in alphabetical order below:

AIDS Acquired Immune Deficiency Syndrome
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
CAH Critical Access Hospital
CBSA Core-Based Statistical Area
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
ECI Employment Cost Index
FLSA Fair Labor Standards Act, Pub. L. 75-718
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
GII Global Insight, Inc.
HCPCS Healthcare Common Procedure Coding System
MCR Medicare Cost Report
MDS Minimum Data Set
MEDPAC Medicare Payment Advisory Commission
MEDPAR Medicare Provider Analysis and Review File
MIEA Medicare Improvements and Extension Act of 2006, Pub. L. 109-
432
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
OMB Office of Management and Budget
PPI Producer Price Index
PPS Prospective Payment System
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
SNF Skilled Nursing Facility
STM Staff Time Measurement
UMRA Unfunded Mandates Reform Act, Pub. L. 104-4

I. Background

    On May 4, 2007, we published a proposed rule in the Federal 
Register (72 FR 25526, hereafter referred to as the FY 2008 proposed 
rule), setting forth the proposed updates to the payment rates used 
under the prospective payment system (PPS) for skilled nursing 
facilities (SNFs) for FY 2008. 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). 
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.

[[Page 43413]]

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 final rule, we are updating 
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 the FY 2008 
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 update 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 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 was discussed in greater detail in section II.E. of 
the FY 2008 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 appeared in section V. of the FY 2008 
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 can be found 
in section VI. of the FY 2008 proposed rule.
     Technical Correction. We are also taking this opportunity 
to make a technical correction in the text of the regulations, as 
discussed in greater detail in section IV of this final rule.

B. Requirements of the Balanced Budget Act of 1997 (BBA) for Updating 
the 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 the FY 2008 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 outlined later in this 
preamble, this final 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, with the implementation of case-mix refinements (see 
section I.F.1. of this final 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 V. of the FY 2008 proposed rule and in Program 
Memorandum AB-00-18 (Change Request 1070), issued March 2000, 
which is available online at https://www.cms.hhs.gov/transmittals/
downloads/AB001860.pdf. Further, for

[[Page 43414]]

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 https://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 https://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 Government Accountability Office (GAO) to conduct an 
audit of SNF nursing staff ratios and submit a report to the Congress 
on whether the temporary increase in the nursing component should be 
continued. The report (GAO-03-176), which GAO issued in November 2002, 
is available online at https://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 the FY 2008 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 final rule. 
(As noted previously, in accordance with section 101(c)(2) of the BBRA, 
this temporary payment adjustment expired with 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. As discussed in section 
III.B.3 of this final rule, this has proven not to be feasible due to 
the volatility of existing SNF wage data and the significant amount of 
resources that would be required to improve the quality of such 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 https://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 
https://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 fiscal year 2006 data, we 
identified 2,590 SNF residents with a principal or secondary 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 $250.65 (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 $571.48.
    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 the FY 2008 proposed rule, 
as well as in Program Transmittal 390 (Change Request 
3575), issued December 10, 2004, which is available online at 
https://www.cms.hhs.gov/transmittals/downloads/r390cp.pdf.)

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

[[Page 43415]]

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 final 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.C of the FY 2008 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. In the FY 2008 proposed rule, we proposed to revise and 
rebase the market basket to reflect 2004 Medicare-allowable cost data, 
as detailed in section III.A of that proposed rule. The proposed FY 
2008 market basket increase was 3.3 percent. (However, we also noted 
that both the President's budget and the recommendations of the 
Medicare Payment Advisory Commission (MedPAC) included a proposal for a 
zero percent update in the SNF market basket for FY 2008, and that the 
provisions outlined in the proposed rule would need to reflect any 
legislation that the Congress might enact to adopt this proposal.)
    In the FY 2008 proposed rule, we also proposed to revise the 
threshold percentage that serves to trigger an adjustment to account 
for market basket forecast error, which we discuss in greater detail in 
section III.C.2 of this final rule. 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
                        Index                          FY 2006 increase*      increase**      FY 2006 difference
----------------------------------------------------------------------------------------------------------------
SNF.................................................                3.1                 3.4                 0.3
----------------------------------------------------------------------------------------------------------------
*Published in Federal Register; based on the second quarter 2005 Global Insight Inc. forecast (97 index).
**Based on the second quarter 2007 Global Insight forecast (97 index).

II. Summary of the Provisions of the FY 2008 Proposed Rule

    The FY 2008 proposed rule included proposed updates to the Federal 
payment rates used under the SNF PPS. In accordance with section 
1888(e)(4)(E)(ii)(IV) of the Act, the updates reflect the full SNF 
market basket percentage change for the fiscal year. We also proposed 
to revise and rebase the SNF market basket (which would include 
updating the base year from FY 1997 to FY 2004), and to modify the 
threshold that serves to trigger an adjustment to account for market 
basket forecast error. In addition, we proposed to specify an area wage 
adjustment methodology for those geographic areas that lack hospital 
wage index data. Further, we invited public comments on additional 
HCPCS codes that could represent the type of ``high-cost, low 
probability'' services within certain designated service categories 
(that is, chemotherapy and its administration, radioisotope services, 
and customized prosthetic devices) that section 103 of the BBRA has 
authorized us to exclude from the SNF consolidated billing provision. 
More detailed information on each of these issues, to the extent that 
we received public comments on them, appears in the discussion 
contained in the following sections of this final rule.

III. Analysis of and Response to Public Comments on the FY 2008 
Proposed Rule

    In response to the publication of the May 4, 2007 proposed rule for 
FY 2008, we received 17 timely items of correspondence from the public. 
The comments originated primarily from various trade associations and 
major organizations, but also from individual providers, corporations, 
and government agencies.
    Brief summaries of each proposed provision, a summary of the public 
comments we received and our responses to the comments are set forth 
below.

A. General Comments on the FY 2008 Proposed Rule

    In addition to the comments that we received on the proposed rule's 
discussion of specific aspects of the SNF PPS (which we address later 
in this final rule), commenters also submitted the following, more 
general observations on the payment system.

[[Page 43416]]

    Comment: Some commenters asked us to consider modifications to the 
SNF PPS payment system that would better recognize the specialized care 
provided in hospital-based SNFs. A few commenters encouraged us to 
create a SNF outlier policy. Other commenters requested that we address 
perceived inadequacies in payment for non-therapy ancillary services, 
including those services relating to the provision of ventilator care 
in SNFs.
    Response: As noted previously in section I.F.1 of this final rule, 
the SNF PPS final rule for FY 2006 (70 FR 45034, August 4, 2005) 
introduced a refined case-mix classification system as of January 1, 
2006, which added nine new Rehabilitation plus Extensive Service groups 
to the RUG hierarchy to account more accurately for patients with both 
rehabilitation needs and extensive services. At that time, we described 
the FY 2006 refinements as a first step in updating the SNF PPS. We 
described our intent to perform a staff time measurement study, in 
which we would survey SNFs and collect data that better reflects 
current practice patterns and resource use. We are concerned that 
incentives of the SNF PPS and the public reporting of nursing home 
quality measures likely have altered industry practices, and have had a 
significant impact on the nursing resources required to treat different 
types of patients.
    The Staff Time and Resource Intensity Verification (STRIVE) project 
started onsite facility data collection in the spring of 2006, and will 
continue to collect data through the summer of 2007. When complete, the 
study will have collected data from approximately 200 facilities from 
approximately 15 States. While facilities were selected largely based 
on random sampling techniques, targeted sampling was also performed to 
ensure adequate representation of special populations, such as 
residents in hospital-based facilities. In addition to providing us 
with data to analyze and evaluate how current industry practices have 
affected the Federal classification system, the data will enable us to 
analyze non-therapy ancillary usage more thoroughly, assess the need 
for a SNF outlier policy, and gain a better understanding of the 
resource usage of residents in hospital-based SNFs. We plan to make 
available some preliminary analysis results in 2008, which should aid 
us in reviewing and addressing some of the concerns expressed by the 
commenters.

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

1. Federal Prospective Payment System
    This final 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.
a. 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)).
b. Methodology Used for the Calculation of the Federal Rates
    The FY 2008 rates 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 
adjusted 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
----------------------------------------------------------------------------------------------------------------
                                                                           Therapy-non-case-
         Rate component            Nursing-case-mix    Therapy-case-mix           mix            Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................            $146.62             $110.44              $14.54              $74.83
----------------------------------------------------------------------------------------------------------------


                            Table 3.--FY 2008 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                                                           Therapy-non-case-
         Rate component            Nursing-case-mix    Therapy-case-mix           mix            Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................            $140.08             $127.35              $15.54              $76.21
----------------------------------------------------------------------------------------------------------------


[[Page 43417]]

2. 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 previously in section I.F.1, 
the payment rates set forth in this final rule reflect the use of the 
refined RUG-53 classification system 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).

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3. 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 proposed and are finalizing 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.
    Comment: A few commenters requested that we develop a SNF-specific 
wage index and subsequently allow geographic reclassification.
    Response: The regulations that govern the SNF PPS currently do not 
provide a mechanism for allowing providers to seek geographic 
reclassification. Moreover, as we have explained on numerous occasions 
in the past (most recently, in the SNF PPS final rule for FY 2006, 70 
FR 45040-45041, August 4, 2005), while section 315 of the BIPA does 
authorize us to establish such a reclassification methodology under the 
SNF PPS, it additionally stipulates that such reclassification cannot 
be implemented until we have collected the data necessary to establish 
a SNF-specific wage index. This, in turn, has proven not to be feasible 
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'' (70 FR 45041). We continue to believe that these 
factors make it unlikely for such an approach to yield meaningful 
improvements in our ability to determine facility payments, or to 
justify the significant increase in administrative resources as well as 
burden on providers that this type of data collection would involve.
    We plan to monitor current research efforts on wage index issues 
nonetheless. Section 106(b)(1)(A) of the Medicare Improvements and 
Extension Act of 2006 (MIEA, Pub. L. 109-432) requires MedPAC to submit 
a report to the Congress on the wage index not later than June 30, 
2007. MIEA requires the report to include any alternatives the 
Commission recommends to the method to compute the wage index. MedPAC 
discusses this issue in its Report to the Congress entitled ``Promoting 
Greater Efficiency in Medicare'' (June 2007), which is available online 
at https://www.medpac.gov/documents/Jun07_EntireReport.pdf. The 
Secretary is required to consider MedPAC's recommendations and nine 
specific aspects of the wage index as part of making one or more 
proposals in the Hospital Inpatient PPS (IPPS) proposed rule for FY 
2009.
    Comment: One commenter suggested that CMS provide an adjustment to 
certain States due to the impact of the new Federal minimum wage on the 
wage index.
    Response: On May 25, 2007, the President signed the U.S. Troop 
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act, 2007 (Pub. L. 110-28) that, among other things, 
amended the Fair Labor Standards Act (FLSA, Pub. L. 75-718) to increase 
the Federal minimum wage in three steps: to $5.85 per hour effective 
July 24, 2007; to $6.55 per hour effective July 24, 2008; and to $7.25 
per hour effective July 24, 2009. Wage data reflecting the new Federal 
minimum wage will not be available for the FY 2008 SNF PPS. We plan to 
monitor current research efforts on all wage index issues, including 
the MIEA-required MedPAC report and the IPPS proposed rule for FY 2009.
    In this final rule, we apply the wage index adjustment to the 
labor-related portion of the Federal rate, which is 70.152 percent of 
the total rate. This percentage reflects the labor-related relative 
importance for FY 2008, using the 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 13. 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 show the Federal 
rates by labor-related and non-labor-related components.

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    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 apply the most recent wage index using the hospital inpatient 
wage data, and also apply 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, 
2007. 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 0.9993. The wage index applicable to 
FY 2008 appears in Tables 8 and 9 of this final rule, which are 
attached as an addendum.
    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 
https://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 clarified 
that this and all subsequent SNF PPS rules and notices are considered 
to incorporate the CBSA 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 are available 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, August 4, 2005), subsequent to the expiration 
of this 1-year transition on September 30, 2006, we use the full CBSA-
based wage index values, as presented in Tables 8 and 9 of this final 
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 proposed to address two 
situations concerning the wage index in the FY 2008 proposed rule.
    First, we proposed a minor change in the wage index for rural 
geographic areas that do not have hospitals and, therefore, lack 
hospital wage data on which to base an area wage adjustment. We 
proposed to use the average wage index from all contiguous CBSAs as a 
reasonable proxy for the rural area, consistent with the policy adopted 
in the CY 2007 Home Health final rule. We note that Massachusetts is 
the only State that this change would affect; we did not propose to 
apply this methodology to rural Puerto Rico due to the distinct 
economic circumstances that exist there, but instead proposed to 
continue using the most recent wage index (0.4047) previously available 
for that area.
    Comment: One commenter supported our proposal to use the average 
wage index from all contiguous CBSAs as a reasonable proxy for rural 
Massachusetts.
    Response: We agree that the use of the average wage index from all 
contiguous CBSAs is a reasonable proxy for rural Massachusetts, which 
is a rural geographic area that does not have hospitals and, therefore, 
lacks hospital wage data on which to base an area wage adjustment for 
use in the SNF PPS. We believe it is appropriate at this point to 
update our methodology. By using the average wage index from all 
contiguous CBSAs as a reasonable proxy for those rural areas without 
hospital wage data, we are able to meet our goals of using pre-floor, 
pre-reclassified hospital wage data that is easy to evaluate, 
updateable from year-to-year, and uses the most local data available. 
Therefore, we are adopting our proposed policy of using the average 
wage index from all contiguous CBSAs as a reasonable proxy for rural 
geographic areas that do not have hospitals and, therefore, lack 
hospital wage data on which to base an area wage adjustment. We note 
that, at this time, Massachusetts is the only State that this change 
would affect; we are not applying this methodology to rural Puerto Rico 
due to the distinct economic circumstances that exist there.
    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 the 
average wage indexes of 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 for that 
urban CBSA. In the FY 2008 proposed rule, we proposed to continue this 
approach for urban areas without specific hospital wage index data. 
Therefore, we would calculate the wage index for urban CBSA (25980) 
Hinesville-Fort Stewart, GA as the average wage index of all urban 
areas in Georgia. We received no comments on this particular aspect of 
the proposed rule, and we will continue to use the approach that we 
adopted in FYs 2006 and 2007.
    We are finalizing the wage index and associated policies as 
proposed for the SNF PPS for FY 2008. In addition, we note that we plan 
to evaluate any policies adopted in the FY 2008 IPPS final rule that 
affect the wage index, including how we treat certain New England 
hospitals under Sec.  601(g) of the Social Security Amendments of 1983 
(Pub. L. 98-21).
4. 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 in this final 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.
5. 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

[[Page 43424]]

classification system 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 final rule, we continue 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.
6. Example of Computation of Adjusted PPS Rates and SNF Payment
    Using the hypothetical example of SNF XYZ 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 total 
PPS payment would equal $29,758. The Labor and Non-labor columns are 
derived from Table 6.

                              Table 10.--RUG-53 SNF XYZ: Located in Cedar Rapids, IA (Urban CBSA 16300) Wage Index: 0.8852
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Wage       Adj.                           Percent    Medicare
                           RUG Group                              Labor      index      Labor    Non-Labor  Adj. Rate     Adj        Days      Payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVX...........................................................    $320.13     0.8852    $283.38    $136.21    $419.59    $419.59         14    $5,874.00
RLX...........................................................     220.55     0.8852     195.23      93.84     289.07     289.07         30     8,672.00
RHA...........................................................     222.00     0.8852     196.51      94.46     290.97     290.97         16     4,656.00
CC2...........................................................     188.18     0.8852     166.58      80.07     246.65    562.36*         10     5,624.00
IA2...........................................................     125.44     0.8852     111.04      53.37     164.41     164.41         30     4,932.00
                                                                .........  .........  .........  .........  .........  .........        100    29,758.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Reflects a 128 percent adjustment from section 511 of the MMA.

C. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires the establishment of 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. We are incorporating into this final rule updated 
projections based on the latest available projections at the time of 
publication. Accordingly, we have developed a 2004-based SNF market 
basket index that encompasses the most commonly used cost categories 
for SNF routine services, ancillary services, and capital-related 
expenses. A detailed discussion of our proposal to revise and rebase 
the SNF market basket appears in section IV. of the FY 2008 proposed 
rule (72 FR 25540-25554, May 4, 2007), and our response to the comments 
that we received on this proposal appears in section III.D of this 
final rule.
    Comment: Several commenters asked us to develop an adjustment to 
the SNF PPS that would prospectively adjust for forthcoming major 
program and policy changes, such as the increase in the Federal minimum 
wage, that affect Medicare reimbursement to affected providers. They 
state that the market basket update factor for the SNF PPS will not 
reflect the increase in costs associated with the Federally-mandated 
minimum wage increase.
    Response: We do not agree with the commenter's suggestion to make 
additional adjustments to the market basket update factor to account 
for the increase in the minimum wage. The update factor is based on the 
Global Insight, Inc. (GII) second quarter 2007 (2007q2) forecast with 
historical data through the first quarter of 2007 (2007q1) for this 
final rule. GII is a nationally recognized economic and financial 
forecasting firm that contracts with CMS to forecast the components of 
CMS's market baskets. Accordingly, the SNF market basket forecast 
already reflects inflationary pressures, including those associated 
with increases in the minimum wage.
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 final 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. (GII, formerly DRI-WEFA), 1st quarter 2007 
(2007q2) 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. 
Finally, as discussed previously in section I.A. of this final 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.
2. 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. 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.

[[Page 43425]]

    As discussed in section I.F.2. of the FY 2008 proposed rule (72 FR 
25530), in order to help distinguish between the significant 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 (which we view as an inherent aspect of this type of 
statistical measurement), we proposed 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. We invited comments on 
various aspects of this issue, including the proposed effective date. 
As also discussed in that section, the proposed payment rates for FY 
2008 did 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.
    Comment: Several commenters expressed concern about the proposal to 
raise the forecast error threshold percentage from 0.25 percentage 
point to 0.5 percentage point. Some commenters suggested maintaining 
the 0.25 percentage point threshold. Some commenters stated that we 
should delay the implementation of a higher threshold. Other commenters 
maintained that every forecast error, however small, should be 
corrected, and that the effect of using any threshold would build over 
time, resulting in increasing inaccuracies in the rates. One commenter 
added that the existence of any minimum threshold for triggering the 
adjustment forces SNFs to face inflation with inadequate payment 
levels. Another commenter did not support making adjustments on an 
automatic basis--particularly when coupled with automatic market basket 
increases--but agreed that such adjustments, when made, should focus on 
correcting major errors.
    Response: For FY 2004, CMS applied a one-time, cumulative forecast 
error correction of 3.26 percent (68 FR 46036). Since that time, the 
forecast errors have been relatively small and clustered near zero. We 
believe the forecast error correction should be applied only when the 
forecast error in any given year reflects a percentage such that the 
SNF PPS base payment rate does not adequately reflect the historical 
price changes faced by SNFs. We believe that a threshold of 0.5 percent 
represents an appropriate amount 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 more typical minor 
variances that are inherent in statistical measurements. The 0.5 
percentage point threshold for triggering a forecast error adjustment 
represents an amount that is sufficiently high to screen out these 
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, as was the case with the initial, 
cumulative 3.26 percent adjustment. We believe the existing 0.25 
percentage point threshold is too low for this purpose, as values that 
only slightly exceed it may still inappropriately capture the minor 
variations that are inherently associated with measuring statistics. 
Moreover, our experience suggests that the forecast errors are 
relatively small, and generally clustered around zero.
    MedPAC analysis suggests that freestanding SNFs (which represent 
more than 80 percent of all SNFs) have received Medicare payments that 
exceed costs by 10.8 percent or more since 2001, and margins are 
projected to be 11 percent in 2007. In the March 2007 MedPAC report, 
MedPAC stated that SNF payments appear more than adequate.
    We believe that raising the threshold from 0.25 percentage point to 
0.5 percentage point effective for the FY 2008 SNF PPS and subsequent 
years furthers our overarching Medicare integrity objective of paying 
the appropriate amount at the right time. By delaying the 
implementation, we would continue to pay for minor variations which 
would further delay accurate payment.
    Moreover, we continue to believe that the forecast error adjustment 
mechanism should appropriately be reserved for the type of major, 
unexpected change that initially gave rise to this policy, rather than 
the minor variances that are a routine and inherent aspect of this type 
of statistical measurement. We note that the objections to the proposed 
higher threshold primarily concerned its projected effect specifically 
on payment in the coming year rather than the appropriate role of a 
forecast error adjustment in general. However, we believe that delays 
in implementing changes are usually justified by establishing that 
immediate implementation would result in severe short-term hardship--
for example, due to inadequate lead time to prepare for an 
administratively complex change. We note that we delayed the effective 
date of case-mix refinements from October 1, 2005, until January 1, 
2006 for precisely that reason (see the FY 2006 final rule at 70 FR 
45034, August 4, 2005); however, no such conditions apply with regard 
to the revised forecast error adjustment threshold. Further, we believe 
that the industry's continued strong profit margins (in the 
neighborhood of 10 percent) should help to dampen any potential short-
term financial effects of immediate implementation. Therefore, we will 
use the 0.5 percentage point threshold to determine whether a forecast 
error adjustment is appropriate,