Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2011, 42886-42942 [2010-17628]

Agencies

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

[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42886-42942]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17628]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2011; Notice

Federal Register / Vol. 75 , No. 140 / Thursday, July 22, 2010 / 
Notices

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1338-NC]
RIN 0938-AP87


Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities for FY 2011

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

ACTION: Notice with comment period.

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SUMMARY: This notice with comment period sets forth an update to the 
payment rates used under the prospective payment system for skilled 
nursing facilities for fiscal year 2011, and implements section 10325 
of the Patient Protection and Affordable Care Act.

DATES: Effective Date: The rate updates in this notice with comment 
period are effective on October 1, 2010.
    Comment Date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on September 20, 2010.

ADDRESSES: In commenting, please refer to file code CMS-1338-NC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address only: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-1338-NC, 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 to 
the following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1338-NC, 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 before the close of the comment period 
to either of the following addresses:
    a. Centers for Medicare & Medicaid Services, Department of Health 
and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue, SW., Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey 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.)
    b. Centers for Medicare & Medicaid Services, Department of Health 
and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    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 clinical 
issues).
Abby Ryan, (410) 786-4343 (for information related to the development 
of the payment rates and case-mix indexes).
Kia Sidbury, (410) 786-7816 (for information related to the wage 
index).
Bill Ullman, (410) 786-5667 (for information related to level of care 
determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION:
    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.regulations.gov. Follow the search instructions 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. The Patient Protection and Affordable Care Act (ACA)
    G. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rate
    2. FY 2011 Rate Updates Using the Skilled Nursing Facility 
Market Basket Index
II. FY 2011 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 Adjustments
    1. Background
    2. Parity Adjustment
    C. Wage Index Adjustment to Federal Rates
    D. Updates to Federal Rates
    E. Relationship of Case-Mix Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    F. Example of Computation of Adjusted PPS Rates and SNF Payment
III. The Skilled Nursing Facility Market Basket Index
    A. Use of the Skilled Nursing Facility Market Basket Percentage
    B. Market Basket Forecast Error Adjustment
    C. Federal Rate Update Factor
IV. Consolidated Billing
V. Application of the SNF PPS to SNF Services Furnished by Swing-Bed 
Hospitals
VI. Collection of Information Requirements
VII. Response to Comments
VIII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered
    D. Accounting Statement
    E. Conclusion

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IX. Waiver of Proposed Rulemaking
Addendum:
    FY 2011 CBSA-Based Wage Index Tables (Tables A & B)

Abbreviations

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

ACA Patient Protection and Affordable Care Act, Public Law 111-148
AIDS Acquired Immune Deficiency Syndrome
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Public Law 106-113
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Public Law 106-554
CAH Critical Access Hospital
CBSA Core-Based Statistical Area
CFR Code of Federal Regulations
CMI Case-Mix Index
CMS Centers for Medicare & Medicaid Services
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
HR-III Hybrid Resource Utilization Groups, Version 3
MDS Minimum Data Set
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MSA Metropolitan Statistical Area
OMB Office of Management and Budget
OMRA Other Medicare Required Assessment
PPS Prospective Payment System
RAI Resident Assessment Instrument
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Public Law 96-354
RHC Rural Health Clinic
RIA Regulatory Impact Analysis
RUG-III Resource Utilization Groups, Version 3
RUG-IV Resource Utilization Groups, Version 4
RUG-53 Refined 53-Group RUG-III Case-Mix Classification System
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
SOM State Operations Manual
STM Staff Time Measurement
STRIVE Staff Time and Resource Intensity Verification
UMRA Unfunded Mandates Reform Act, Public Law 104-4

I. Background

    Annual updates to the prospective payment system (PPS) rates for 
skilled nursing facilities (SNFs) are required by section 1888(e) of 
the Social Security Act (the Act), as added by section 4432 of the 
Balanced Budget Act of 1997 (BBA, Pub. L. 105-33, enacted on August 5, 
1997), and amended by the Medicare, Medicaid, and State Children's 
Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 
(BBRA, Pub. L. 106-113, enacted on November 29, 1999), the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA, Pub. L. 106-554, enacted December 21, 2000), and the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, 
Pub. L. 108-173, enacted on December 8, 2003). Our most recent annual 
update occurred in a final rule (74 FR 40288, August 11, 2009) that set 
forth updates to the SNF PPS payment rates for fiscal year (FY) 2010. 
We subsequently published a correction notice (74 FR 48865, September 
25, 2009) 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 BBA amended section 1888 of the Act to provide 
for the implementation of a per diem PPS for SNFs, covering all costs 
(routine, ancillary, and capital-related) of covered SNF services 
furnished to beneficiaries under Part A of the Medicare program, 
effective for cost reporting periods beginning on or after July 1, 
1998. In this notice, we update the per diem payment rates for SNFs for 
FY 2011. Major elements of the SNF PPS include:
     Rates. As discussed in section I.G.1. of this notice, we 
established per diem Federal rates for urban and rural areas using 
allowable costs from FY 1995 cost reports. These rates also included a 
``Part B add-on'' (an estimate of the cost of those services that, 
before July 1, 1998, were paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay). 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. As further 
discussed in section I.F, for FY 2011 this adjustment will utilize a 
``hybrid'' RUG-III system that incorporates the specific revisions 
relating to concurrent therapy and the look-back period that are 
components of the Resource Utilization Groups, version 4 (RUG-IV) case-
mix classification system, and will use information obtained from the 
required resident assessments using version 3.0 of the Minimum Data Set 
(MDS 3.0). (The resident assessment is approved under OMB 
0938-0739.) Additionally, as noted in the final rule for FY 2006 (70 FR 
45028, August 4, 2005), 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 FY.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the case-mix 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 existing 
resident assessment process and case-mix classification system. As 
further discussed in section II.E, in FY 2011, under the hybrid RUG-III 
system, this approach includes an administrative presumption that 
utilizes a beneficiary's initial classification in one of the upper 35 
RUGs of the 53-group RUG-III case-mix classification system (RUG-53) to 
assist in making certain SNF level of care determinations. 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 case-mix classification structure (see 
section II.E. of this notice for a more detailed discussion of the 
relationship between the case-mix classification system and SNF level 
of care determinations).
     Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills to its fiscal intermediary or Medicare

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Administrative Contractor for almost all of the services that its 
residents receive during the course of a covered Part A stay. In 
addition, this provision places with the SNF the Medicare billing 
responsibility for physical therapy, occupational therapy, and speech-
language pathology services that the resident receives during a 
noncovered stay. The statute excludes a small list of services from the 
consolidated billing provision (primarily those of physicians and 
certain other types of practitioners), which remain separately billable 
under Part B when furnished to a SNF's Part A resident. A more detailed 
discussion of this provision appears in section IV. of this notice.
     Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section V. of this notice.

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

    Section 1888(e)(4)(H) of the Act requires that we provide for 
publication annually in the Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the upcoming FY.
    2. The case-mix classification system to be applied with respect to 
these services during the upcoming FY.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    Along with other revisions discussed later in this preamble, this 
notice provides these required annual updates to the Federal rates.

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 SNF PPS final rule for FY 2001 (65 FR 46770, July 31, 2000). 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 groups in the original, 44-group Resource Utilization Groups, 
version 3 (RUG-III) case-mix classification system. In accordance with 
section 101(c)(2) of the BBRA, this temporary payment adjustment 
expired on January 1, 2006, upon the implementation of a refined, 53-
group version of the RUG-III system, RUG-53 (see section I.G.1. of this 
notice). We included further information on BBRA provisions that 
affected the SNF PPS in Program Memorandums A-99-53 and A-99-61 
(December 1999).
    Also, section 103 of the BBRA designated certain additional 
services for exclusion from the consolidated billing requirement, as 
discussed in section IV. of this notice. Further, for swing-bed 
hospitals with more than 49 (but less than 100) beds, section 408 of 
the BBRA provided for the repeal of certain statutory restrictions on 
length of stay and aggregate payment for patient days, effective with 
the end of the SNF PPS transition period described in section 
1888(e)(2)(E) of the Act. In the final rule for FY 2002 (66 FR 39562, 
July 31, 2001), 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 for FY 2002 (66 FR 39562, July 31, 2001). 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.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.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; accordingly, this 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 therapy, occupational 
therapy, and speech-language pathology services) furnished to SNF 
residents during noncovered stays, effective January 1, 2001. (A more 
detailed discussion of this provision appears in section IV. of this 
notice.)
     Section 314 of the BIPA corrected an anomaly involving 
three of the RUGs that section 101(a) of the BBRA had designated to 
receive the temporary payment adjustment discussed above in section 
I.C. of this notice. (As noted previously, in accordance with section 
101(c)(2) of the BBRA, this temporary payment adjustment expired upon 
the implementation of case-mix refinements on January 1, 2006.)
     Section 315 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. To date, this has proven 
to be unfeasible 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 https://www.cms.gov/transmittals/downloads/a0108.pdf.

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

    The MMA included a provision that resulted 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 residents 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 `` * * * the

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Secretary certifies that there is an appropriate adjustment in the case 
mix * * * to compensate for the increased costs associated with [such] 
residents * * * '' 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.gov/transmittals/downloads/r160cp.pdf. In the SNF PPS final rule for FY 
2010 (74 FR 40288, August 11, 2009), we did not address the 
certification of the AIDS add-on in that final rule's implementation of 
the case-mix refinements for RUG-IV, thus allowing the temporary add-on 
payment created by section 511 of the MMA to remain 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 FY 2008 data, we identified 
less than 3,300 SNF residents with a diagnosis code of 042 (Human 
Immunodeficiency Virus (HIV) Infection). For FY 2011, an urban facility 
with a resident with AIDS in hybrid RUG-III (HR-III) group ``SSB'' 
would have a case-mix adjusted payment of $318.73 (see Table 4B) 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 $726.70. Similarly, an urban facility with a resident 
with AIDS in RUG-IV group ``HC2'' would have a case-mix adjusted 
payment of $394.48 (see Table 4A) 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 $899.41.
    In addition, section 410 of the MMA contained a provision that 
excluded from consolidated billing certain services furnished to SNF 
residents by rural health clinics (RHCs) and Federally Qualified Health 
Centers (FQHCs). (Further information on this provision appears in 
section IV. of this notice.)

F. The Patient Protection and Affordable Care Act (ACA)

    Section 10325 of the ACA (Pub. L. 111-148, enacted on March 23, 
2010) includes a self-implementing provision involving the SNF PPS. 
Section 10325 postpones the implementation of the RUG-IV case-mix 
classification system published in the FY 2010 SNF PPS final rule (74 
FR 40288, August 11, 2009), requiring that the Secretary not implement 
the RUG-IV case-mix classification system before October 1, 2011. 
Notwithstanding this postponement of overall RUG-IV implementation, 
section 10325 further specifies that the Secretary is required to 
implement, effective October 1 2010, the changes related to concurrent 
therapy and the look-back period that were finalized as components of 
RUG-IV (see 74 FR 40315-19, 40322-24). Because these changes were 
already subject to notice and public comment and finalized in the FY 
2010 SNF PPS final rule, we believe that this ACA requirement is 
largely self-implementing and requires no substantive exercise of 
discretion by the Secretary. In addition, section 10325 of the ACA 
specifies that version 3.0 of the Minimum Data Set (MDS 3.0) shall 
proceed as planned, with an implementation date of October 1, 2010 (see 
74 FR 40342-43). The MDS is approved under OMB 0938-0872. The 
MDS 3.0 RAI Manual and MDS 3.0 Item Set are scheduled to be published 
on the CMS Web site, https://www.cms.gov, in October 2010.
    The statutory mandate to adopt RUG-IV's concurrent therapy and 
look-back revisions (along with MDS 3.0) prior to implementing the 
overall RUG-IV system itself will necessitate implementing those 
particular revisions within the framework of the existing RUG-53 case-
mix classification system. While there is currently an existing grouper 
(the software program that uses assessment data to assign each SNF 
resident to the appropriate RUG) that utilizes RUG-53 and the MDS 2.0, 
as well as a revised grouper that utilizes RUG-IV and the MDS 3.0, no 
grouper currently exists that incorporates the particular combination 
of features mandated by the statute: The use of the new RUG-IV 
revisions on concurrent therapy and the look-back period as well as the 
MDS 3.0, but within the overall context of the existing RUG-53 system. 
Moreover, attempting to develop and implement such a modified grouper 
within the short timeframe available before the ACA provision's October 
1, 2010 effective date would potentially cause significant disruption 
to providers, suppliers, and State agencies.
    Accordingly, as we continue to build the payment infrastructure 
needed to incorporate the combination of features mandated by section 
10325 of the ACA for FY 2011, we will apply, effective October 1, 2010, 
interim payment rates that reflect not only the use of MDS 3.0 but also 
the new RUG-IV system in its entirety as finalized in the FY 2010 SNF 
PPS final rule (74 FR 40288, August 11, 2009). As discussed above, the 
only grouper that currently exists that utilizes MDS 3.0 is the RUG-IV 
grouper. Once the necessary infrastructure is in place, we will then 
retroactively adjust claims to reflect a hybrid RUG-III (HR-III) system 
which incorporates RUG-IV's specific revisions on concurrent therapy 
and the look-back period within the framework of the existing RUG-53 
system, along with the use of MDS 3.0. Tables 4 and 5 set forth both 
the RUG-IV rates that will be used on an interim basis effective 
October 1, 2010 and the HR-III rates that will apply once we build the 
infrastructure necessary to support this system. The FY 2011 rates will 
be based on the rates that were finalized for FY 2010, as modified to 
reflect the market basket adjustment, the forecast error adjustment, 
the applicable case-mix adjustment, and the parity adjustment (as 
discussed below).
    We note that a parity adjustment was applied to the RUG-53 nursing 
case-mix weights when the RUG-III system was initially refined in 2006, 
in order to ensure that the implementation of the refinements would not 
cause any change in overall payment levels (70 FR 45031, August 4, 
2005). A detailed discussion of the parity adjustment in the specific 
context of the RUG-IV payment rates appears in the FY 2010 SNF PPS 
proposed rule (74 FR 22236-38, May 12, 2009) and final rule (74 FR 
40338-39, August 11, 2009). Consistent with our policy set forth in the 
FY 2006 SNF PPS final rule (70 FR 45031) when we transitioned from the 
RUG-III 44 group model to the RUG-53 model, and in the FY 2010 SNF PPS 
final rule (74 FR 40338-39) when we finalized the transition from RUG-
53 to RUG-IV, in calculating the rates under the HR-III model, we will 
apply a parity adjustment to the nursing case-mix weights under the HR-
III system to ensure parity between overall payments under the RUG-53 
model currently in effect and anticipated payments under the HR-III 
system required by the ACA. As discussed in section II.B.2 of this 
notice, we are calculating and applying this parity adjustment using 
the same methodology finalized in both the FY 2006 SNF PPS final rule 
and the FY 2010 SNF PPS final rule.
    Accordingly, as discussed above, effective October 1, 2010, on an 
interim basis, we will implement and pay claims under the RUG-IV system 
that was finalized in the FY 2010 SNF PPS final rule, until we build 
the payment infrastructure necessary to support the HR-III system 
required by the ACA. Once that infrastructure is in place, we will then 
retroactively adjust claims back to October 1, 2010 as necessary to 
implement the rates effective under HR-III. In this notice, we also 
invite public comment on our implementation of section 10325 of the 
ACA.

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    As discussed above, we will implement the MDS 3.0 (including the 
MDS 3.0 swing bed assessment (see 74 FR 40356-57)) effective October 1, 
2010 as specified in the FY 2010 SNF PPS final rule. We will also 
implement effective October 1, 2010, all other non-RUG-IV changes 
finalized in the FY 2010 SNF PPS final rule for implementation 
effective FY 2011, including without limitation revisions to certain 
therapy reporting and assessment procedures effective with the MDS 3.0 
(74 FR 40346-49) (that is, updated reporting procedures for short-stay 
patients, implementation of an optional, abbreviated start-of-therapy 
OMRA, a revised Assessment Reference Date (ARD) requirement for the 
end-of-therapy OMRA, and an abbreviated end-of-therapy OMRA).

G. Skilled Nursing Facility Prospective Payment--General Overview

    We implemented the Medicare SNF PPS effective with cost reporting 
periods beginning on or after July 1, 1998. This methodology uses 
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 and bad debts. Covered SNF services include post-hospital 
services for which benefits are provided under Part A, as well as those 
items and services (other than physician and certain other services 
specifically excluded under the BBA) which, before July 1, 1998, had 
been paid under Part B but furnished to Medicare beneficiaries in an 
SNF during a covered Part A stay. A comprehensive 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 (FY 1995) 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 an 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 an 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-IV 
classification system uses beneficiary assessment data from the MDS 3.0 
completed by SNFs to assign beneficiaries to one of 66 RUG-IV groups. 
The original RUG-III case-mix classification system used beneficiary 
assessment data from the MDS, version 2.0 (MDS 2.0) completed by SNFs 
to assign beneficiaries to one of 44 RUG-III groups. Then, under 
incremental 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-III hierarchy. The May 12, 
1998 interim final rule (63 FR 26252) included a detailed description 
of the original 44-group RUG-III case-mix classification system. A 
comprehensive description of the refined RUG-53 system appeared in the 
proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 
FR 45026, August 4, 2005), and a detailed description of the 66-group 
RUG-IV system appeared in the proposed and final rules for FY 2010 (74 
FR 22208, May 12, 2009, and 74 FR 40288, August 11, 2009).
    Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the 
Act, the Federal rates in this notice reflect an update to the rates 
that we published in the final rule for FY 2010 (74 FR 40288, August 
11, 2009) and the associated correction notice (74 FR 48865, September 
25, 2009), equal to the full change in the SNF market basket index, 
adjusted by the forecast error correction. A more detailed discussion 
of the SNF market basket index and related issues appears in sections 
I.F.2. and III. of this notice.
2. FY 2011 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 SNF PPS final rule for FY 2008 (72 FR 43425 
through 43430, August 3, 2007), we revised and rebased the market 
basket, which included updating the base year from FY 1997 to FY 2004. 
The proposed FY 2011 market basket increase is 2.3 percent, which is 
based on IHS Global Insight, Inc. second quarter 2010 forecast with 
historical data through first quarter 2010.
    In addition, as explained in the final rule for FY 2004 (66 FR 
46058, August 4, 2003) and in section III.B. of this notice, the annual 
update of the payment rates includes, as appropriate, an adjustment to 
account for market basket forecast error. As described in the final 
rule for FY 2008, the threshold percentage that serves to trigger an 
adjustment to account for market basket forecast error is 0.5 
percentage point effective for FY 2008 and subsequent years. This 
adjustment takes into account the forecast error from the most recently 
available FY for which there is final data, and applies whenever the 
difference between the forecasted and actual change in the market 
basket exceeds a 0.5 percentage point threshold. For FY 2009 (the most 
recently available FY for which there is final data), the estimated 
increase in the market basket index was 3.4 percentage points, while 
the actual increase was 2.8 percentage points, resulting in the actual 
increase being 0.6 percentage point lower than the estimated increase. 
Accordingly, as the difference between the estimated and actual amount 
of change exceeds the 0.5 percentage point threshold, the payment rates 
for FY 2011 include a negative 0.6 percentage point forecast error 
adjustment. As we stated in the final rule for FY 2004 that first 
promulgated the forecast error adjustment (68 FR 46058, August 4, 
2003), the adjustment will ``* * * reflect both upward and downward 
adjustments, as appropriate.'' Table 1 shows the forecasted and actual 
market basket amounts for FY 2009.

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II. FY 2011 Annual Update of Payment Rates Under the Prospective 
Payment System for Skilled Nursing Facilities

A. Federal Prospective Payment System

    This notice sets forth a schedule of Federal prospective payment 
rates applicable to Medicare Part A SNF services beginning October 1, 
2010. The schedule incorporates per diem Federal rates that provide 
Part A payment for almost 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
    In accordance with section 1888(e)(2)(B) of the Act, 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)(A)(i) of the Act, covered SNF services include post-hospital 
SNF services for which benefits are provided under Part A (the hospital 
insurance program), as well as all items and services (other than those 
services excluded by statute) that, before July 1, 1998, were paid 
under Part B (the supplementary medical insurance program) but 
furnished to Medicare beneficiaries in a SNF during a Part A covered 
stay. (These excluded service categories are discussed in greater 
detail in section V.B.2. of the May 12, 1998 interim final rule (63 FR 
26295 through 26297)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2011 rates reflect an update using the latest market basket 
index, and adjusting for the FY 2009 forecast error correction. The FY 
2011 market basket increase factor is 2.3 percent which, when combined 
with a negative 0.6 percentage point forecast error adjustment for FY 
2009, results in a net FY 2011 update of 1.7 percent. A complete 
description of the multi-step process used to calculate Federal rates 
initially appeared in the May 12, 1998 interim final rule (63 FR 
26252), as further revised in subsequent rules. As explained above in 
section I.C of this notice, under 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 FY beginning October 1, 2009, and ending 
September 30, 2010, and the midpoint of the Federal FY beginning 
October 1, 2010, and ending September 30, 2011, 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 2011 by a factor equal to the 
full market basket index percentage increase. As explained in section 
I.G.2 of this notice, we adjust the market basket index by the forecast 
error from the most recently available FY for which there is final data 
and apply this adjustment whenever the difference between the 
forecasted and actual change in the market basket exceeds a 0.5 
percentage point threshold. 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 
2011, prior to adjustment for case-mix.

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B. Case-Mix Adjustments

1. Background
    Section 1888(e)(4)(G)(i) of the Act requires the Secretary to make 
an adjustment to account for case-mix. The statute specifies that the 
adjustment is to reflect both a resident classification system that the 
Secretary establishes to account for the relative resource use of 
different patient types, as well as resident assessment and other data 
that the Secretary considers appropriate. In first implementing the SNF 
PPS (63 FR 26252, May 12, 1998), we developed the RUG-III case-mix 
classification system, which tied the amount of payment to resident 
resource use in combination with resident characteristic information. 
Staff time measurement (STM) studies conducted in 1990, 1995, and 1997 
provided information on resource use (time spent by staff members on 
residents) and resident characteristics that enabled us not only to 
establish RUG-III, but also to create case-mix indexes (CMIs).
    Although the establishment of the SNF PPS did not change Medicare's 
fundamental requirements for SNF coverage, there is a correlation 
between level of care and provider payment. One of the elements 
affecting the SNF PPS per diem rates is the case-mix adjustment derived 
from a classification system based on comprehensive resident 
assessments using the MDS. Case-mix classification is based, in part, 
on the beneficiary's need for skilled nursing care and therapy. The 
case-mix classification system uses clinical data from the MDS, and 
wage-adjusted staff time measurement data, to assign a case-mix group 
to each patient record that is then used to calculate a per diem 
payment under the SNF PPS. The original RUG-III grouper logic was based 
on clinical data collected in 1990, 1995, and 1997. As discussed in the 
SNF PPS proposed rule for FY 2010 (74 FR 22208, May 12, 2009), we 
subsequently conducted a multi-year data collection and analysis under 
the Staff Time and Resource Intensity Verification (STRIVE) project to 
update the case-mix classification system for FY 2011. The resulting 
RUG-IV case-mix classification system reflected the data collected in 
2006-2007 during the STRIVE project, and was finalized in the FY 2010 
SNF PPS final rule (74 FR 40288, August 11, 2009) to take effect in FY 
2011 concurrently with an updated new resident assessment instrument, 
the MDS 3.0, which collects the clinical data used for case-mix 
classification under RUG-IV.
    Under the BBA, each update of the SNF PPS payment rates must 
include the case-mix classification methodology applicable for the 
coming Federal FY. As indicated in section I.F of this notice, the 
payment rates set forth herein reflect the use of the HR-III case-mix 
classification system from October 1, 2010 through September 30, 2011. 
However, due to time constraints in preparing the HR-III grouper, the 
66-group RUG-IV case-mix classification system that we discussed in 
detail in the proposed and final rules for FY 2010 will be used 
beginning October 1, 2010. Once the HR-III Grouper is ready for 
implementation, payments will be retroactively adjusted to the October 
1, 2010 date.
2. Parity Adjustment
    Consistent with the policy finalized in the FY 2010 SNF PPS final 
rule (74 FR 40338-39), the updated RUG-IV rates set forth in Tables 4A 
and 5A reflect an upward adjustment to the nursing CMIs to achieve 
parity in overall payments between the existing RUG--53 model and the 
RUG-IV model. As explained in the FY 2010 SNF PPS final rule, we 
applied an upward adjustment of 59.4 percent to the RUG-IV nursing CMIs 
to achieve parity between the RUG-53 and RUG-IV models, based on an 
analysis using FY 2008 claims data. However, after the FY 2010 SNF PPS 
final rule was published, final FY 2009 claims data became available. 
As we stated in the FY 2010 SNF PPS final rule (74 FR 40339), in the 
absence of actual RUG-IV utilization data, we believe the most recent 
final claims data are the best source available to estimate RUG-IV 
utilization for FY 2011, as they are closest to the FY 2011 timeframe. 
Thus, we updated our analysis described in the FY 2010 SNF PPS proposed 
and final rules using final FY 2009 claims data to enhance the accuracy 
of our calculation of the adjustment necessary to achieve parity 
between the RUG-53 model and the RUG-IV model. Using the methodology 
finalized in the FY 2010 SNF PPS final rule with updated FY 2009 claims 
data, the adjustment to the RUG-IV nursing CMIs necessary to achieve 
parity is an upward adjustment of 61 percent.
    Consistent with this policy, and using the same methodology 
finalized in the FY 2006 SNF PPS final rule and the FY 2010 SNF PPS 
final rule, we have calculated and applied a parity adjustment to the 
HR-III nursing CMIs so that overall payments under the HR-III case-mix 
classification system maintain parity with overall payments under the 
existing RUG-53 model. We used FY 2009 claims data, the most recent 
final claims data available, to compare the distribution of payment 
days by RUG category in the RUG-53 model with anticipated payments by 
RUG category in the new HR-III model. Our projections of future 
utilization patterns under the HR-III system indicated that the HR-III 
system would

[[Page 42893]]

produce lower overall payments than under the RUG-53 model. Therefore, 
consistent with our policy in place when we transitioned to the RUG-53 
model in FY 2006, and our policy in FY 2010 when we finalized the 
transition from the RUG-53 model to the RUG-IV model, we are providing 
for an adjustment to the nursing CMIs under the HR-III system that 
would achieve ``parity'' between the RUG-53 and the HR-III models (that 
is, would not cause any change in overall payment levels). Based on our 
analysis of the FY 2009 claims data, the adjustment to the nursing CMIs 
under the HR-III model necessary to achieve ``parity'' is an upward 
adjustment of 34.2 percent. Our calculation of the parity adjustment 
uses the most recent data available to estimate HR-III utilization for 
FY 2011. In the absence of actual HR-III utilization data, we believe 
the most recent data are the best source available, as they are closest 
to the FY 2011 timeframe. As actual HR-III utilization becomes 
available, we intend to assess the effectiveness of the parity 
adjustment in maintaining budget neutrality and, if necessary, to 
recalibrate the adjustment in the future.
    We list the case-mix adjusted RUG-IV payment rates separately for 
urban and rural SNFs in Tables 4A and 5A, with the corresponding case-
mix values which reflect the parity adjustment discussed above. 
Similarly, the HR-III case-mix adjusted payment rates (reflecting the 
parity adjustment) are listed on Tables 4B and 5B. 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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C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs. We are maintaining that practice for FY 2011, as we 
continue to believe that in the absence of SNF-specific wage data, 
using the hospital inpatient wage index 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.
    Finally, we continue to use the same methodology discussed in the 
SNF PPS final rule for FY 2008 (72 FR 43423) to address those 
geographic areas in which there are no hospitals and, thus, no hospital 
wage index data on which to base the calculation of the FY 2011 SNF PPS 
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 use the average wage index from all contiguous Core-
Based Statistical Areas (CBSAs) as a reasonable proxy. This methodology 
is used to construct the wage index for rural Massachusetts. However, 
we do not apply this methodology to rural Puerto Rico due to the 
distinct economic circumstances that exist there, but instead continue 
using the most recent wage index previously available for that area. 
For urban areas without specific hospital wage index data, we use the 
average wage indexes of all of the urban areas

[[Page 42901]]

within the State to serve as a reasonable proxy for the wage index of 
that urban CBSA. The only urban area without wage index data available 
is CBSA 25980, Hinesville-Fort Stewart, GA.
    To calculate the SNF PPS wage index adjustment, we apply the wage 
index adjustment to the labor-related portion of the Federal rate, 
which is 69.311 percent of the total rate. This percentage reflects the 
labor-related relative importance for FY 2011, using the revised and 
rebased FY 2004-based market basket. The labor-related relative 
importance for FY 2010 was 69.840, as shown in Table 9. 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 2011. 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 2011 than the base year weights from the SNF market 
basket.
    We calculate the labor-related relative importance for FY 2011 in 
four steps. First, we compute the FY 2011 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 
2011 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2011 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 2004) weight. Finally, we add the FY 2011 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, non-medical professional fees, labor-intensive 
services, and a portion of capital-related expenses) to produce the FY 
2011 labor-related relative importance. Tables 6A and 7A below show the 
Federal rates for RUG-IV by labor-related and non-labor-related 
components. Similarly, Tables 6B and 7B show the Federal rates for HR-
III.
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BILLING CODE 4120-01-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 2011 (Federal rates effective October 1, 
2010), we 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 budget neutrality 
factor equal to the ratio of the weighted average wage adjustment 
factor for FY 2010 to the weighted average wage adjustment factor for 
FY 2011. For this calculation, we use the same 2009 claims utilization 
data for both the numerator and denominator of this ratio. 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 of the rate component. The budget neutrality factor for this year 
is 0.9997. The wage index applicable to FY 2011 is set forth in Tables 
A and B, which appear in the Addendum of this notice.
    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. As indicated in 
the FY 2008 SNF PPS final rule (72 FR 43423, August 3, 2007), 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 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 A and B in the Addendum of 
this notice.

D. Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act, as amended by 
section 311 of the BIPA, the payment rates in this notice reflect an 
update equal to the full SNF market basket, estimated at 2.3 percentage 
points. In addition, as discussed in sections I.G.2

[[Page 42910]]

and III. of this notice, the annual update includes a negative 0.6 
percentage point adjustment to account for market basket forecast 
error, for a net update of 1.7 percent for FY 2011. We 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 FY.

E. Relationship of RUG-IV and HR-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. As set forth 
in the FY 2010 SNF PPS final rule (74 FR 40341, August 11, 2009), this 
designation reflects an administrative presumption under the 66-group 
RUG-IV system that beneficiaries who are correctly assigned to one of 
the upper 52 RUG-IV 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 14 RUG-IV 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 52 RUG-IV groups during the immediate 
post-hospital period require a covered level of care, which would be 
less likely for those beneficiaries assigned to one of the lower 14 
RUG-IV groups.
    In this notice, we designate the upper 52 RUG-IV groups for 
purposes of this administrative presumption, consisting of all groups 
encompassed by the following RUG-IV categories:
     Rehabilitation plus Extensive Services;
     Ultra High Rehabilitation;
     Very High Rehabilitation;
     High Rehabilitation;
     Medium Rehabilitation;
     Low Rehabilitation;
     Extensive Services;
     Special Care High;
     Special Care Low; and,
     Clinically Complex.
    By contrast, under the HR-III system discussed in section I.F of 
this notice, we will revert to the 53-group classification structure of 
the previous, RUG-53 case-mix classification system. Under that 
structure, as discussed in section III.B.5 of the FY 2010 SNF PPS final 
rule (74 FR 40304, August 11, 2009), the administrative level-of-care 
presumption applies to the upper 35 groups (as encompassed by the 
Rehabilitation plus Extensive Services, Ultra High Rehabilitation, Very 
High Rehabilitation, High Rehabilitation, Medium Rehabilitation, Low 
Rehabilitation, Extensive Services, Special Care, and Clinically 
Complex categories), while it does not apply to the lower 18 groups.

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

    Using the hypothetical SNF XYZ described in Tables 8A and 8B below, 
the following shows the adjustments made to the Federal per diem rate 
to compute the provider's actual per diem PPS payment, for RUG-IV and 
HR-III, respectively. SNF XYZ's 12-month cost reporting period begins 
October 1, 2010. SNF XYZ's total PPS payment would equal $41,979 for 
RUG-IV and $36,517 for HR-III, respectively. We derive the Labor and 
Non-labor columns from Table 6A for RUG-IV and Table 6B for HR-III.

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III. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires us to establish a SNF 
market basket index (input price index), that reflects changes over 
time in the prices of an appropriate mix of goods and services included 
in the SNF PPS. This notice incorporates the latest available 
projections of the SNF market basket index. Accordingly, we have 
developed a SNF market basket index that encompasses the most commonly 
used cost categories for SNF routine services, ancillary services, and 
capital-related expenses.
    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 9 below summarizes the updated labor-related share for FY 
2011.

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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 from 
the average of the previous FY to the average of the current FY. For 
the Federal rates established in this notice, we use the percentage 
increase in the SNF market basket index to compute the update factor 
for FY 2011. This is based on the IHS Global Insight, Inc. (formerly 
DRI-WEFA) second quarter 2010 forecast (with historical data through 
the first quarter 2010) of the FY 2011 percentage increase in the FY 
2004-based SNF market basket index for routine, ancillary, and capital-
related expenses, to compute the update factor in this notice. Finally, 
as discussed in section I.A. of this notice, we no longer compute 
update factors to adjust a facility-specific portion of the SNF PPS 
rates, because the initial 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 46057-
59), the regulations at Sec.  413.337(d)(2) provide for an adjustment 
to account for market basket forecast error. The initial adjustment 
applied to the update of the FY 2003 rate for FY 2004, and took into 
account the cumulative forecast error for the period from FY 2000 
through FY 2002, resulting in an increase of 3.26 percent. Subsequent 
adjustments in succeeding FYs take into account the forecast error from 
the most recently available FY for which there is final data, and apply 
whenever the difference between the forecasted and actual change in the 
market basket exceeds a specified threshold. We originally used a 0.25 
percentage point threshold for this purpose; however, for the reasons 
specified in the FY 2008 SNF PPS final rule (72 FR 43425, August 3, 
2007), we adopted a 0.5 percentage point threshold effective with FY 
2008. As discussed previously in section I.G.2. of this notice, as the 
difference between the estimated and actual amounts of increase in the 
market basket index for FY 2009 (the most recently available FY for 
which there is final data) exceeds the 0.5 percentage point threshold, 
the payment rates for FY 2011 include a forecast error adjustment.

C. Federal Rate Update Factor

    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2011 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, 2009 through September 
30, 2010 to the average market basket level for the period of October 
1, 2010 through September 30, 2011. Using this process, the market 
basket update factor for FY 2011 SNF PPS Federal rates is 2.3 percent, 
adjusted by the negative 0.6 percentage point forecast error 
adjustment, for a net update of 1.7 percent for FY 2011. We used this 
update factor to compute the SNF PPS rate shown in Tables 2 and 3.

IV. Consolidated Billing

    Section 4432(b) of the BBA established a consolidated billing 
requirement that places the Medicare billing responsibility for 
virtually all of the services that the SNF's residents receive with the 
SNF, except for a small number of services that the statute 
specifically identifies as being excluded from this provision. As noted 
previously in section I. of this notice, subsequent legislation enacted 
a number of modifications in the consolidated billing provision.
    Specifically, section 103 of the BBRA amended this provision by 
further excluding a number of individual ``high-cost, low-probability'' 
services, identified by the Healthcare Common