1. Introduction

   On July 30, 1999, the Health Care Financing Administration ("HCFA") issued a final rule implementing provisions of the Balanced Budget Act of 1997 ("BBA"), and responding to comments received from over 500 entities in response to the interim final rule issued on May 12, 1999. Specifically, the final rule implements Section 4432 of the BBA, which established a prospective payment system ("PPS") and consolidated billing requirements for skilled nursing facilities ("SNFs"). 64 Fed. Reg. 41,644 (final); 63 Fed. Reg. 26,252 (interim final).

   We note that the final rule is quite lengthy, and we therefore do not attempt to discuss every aspect of the rule in this memorandum. In addition, on the same day as the final rule, HCFA issued a Notice, publishing the updated payment rates for fiscal year ("FY") 2000 (i.e., October 1, 1999). 64 Fed. Reg. 41,684 (July 30, 1999). With limited exceptions where HCFA discussed the payment rates in the final rule, the Notice is not addressed in this memorandum.

   Instead, we seek to underscore what we believe to be the most important components of the PPS and consolidated billing for SNFs, as articulated by HCFA in the final rule. The primary purpose of this memorandum is to alert our clients to issues that could affect their businesses. Please let us know if you need additional information regarding any of these issues.

2. Background

   The PPS was designed to replace Medicare’s reasonable cost reimbursement methodology with per diem payment rates that reflect nearly all costs incurred by SNFs (i.e., routine, ancillary, and capital costs). Effective for cost reporting periods beginning on or after July 1, 1998, the PPS for SNFs may be described as the sum of four major components:

   Per Diem Payment Rates. Based on a statutory formula, federal rates were calculated by HCFA using allowable costs reported in FY 1995 Medicare cost reports. The rates also include an estimate of the cost of services that had been paid under Part B of the Medicare program, but provided during a Part A stay. The payment rates are adjusted for case-mix using a beneficiary classification system known as RUG-III (Resource Utilization Groups, Version III), which represents resources required for the care of a beneficiary as reported in the Minimum Data Set ("MDS"). The rates are further adjusted by a wage index to account for geographic variation in compensation. Lastly, the SNF market basket indices serve to update the rates on an annual basis.

   Three-Year Transition. SNFs transition to the full federal payment rate over the course of three cost reporting periods. During this time, SNFs receive a blended payment rate comprised of both a facility-specific rate based on costs incurred in FY 1995, and the federal rate. The ratio of facility-specific to federal rate decreases by 25 percent each cost reporting period.

   Coverage. Although the BBA did not alter Medicare coverage requirements, HCFA has attempted to adapt the PPS to the administrative coverage criteria, given that RUG-III is based in part on a resident’s need for skilled nursing and therapy services.

   Consolidated Billing. The BBA requires SNFs to be the sole entity responsible for billing Medicare for nearly all services provided in the SNF, under Parts A and B. SNFs must also use HCFA’s Common Procedure Coding System ("HCPCS") codes for all Part B bills.

3. Highlights/Key Components

As described below and more fully in the following sections, HCFA rejected nearly all modifications suggested by commenters, citing statutory constraints of the BBA and/or the Medicare statute generally. The preamble to the final rule incorporates, in some areas verbatim, HCFA’s interpretation of the SNF PPS and consolidated billing requirements as set forth in various informal policy statements, "question and answer" documents, revisions to HCFA manuals, and HCFA program memoranda issued over the past year. (fn1) HCFA also provided several noteworthy interpretations of various coverage and payment provisions. HCFA’s most significant responses and policy determinations are summarized below.

• Outliers: HCFA declined to develop an outlier mechanism, citing a lack of statutory authority.
• 1995 Base Year: HCFA declined to use a later base year for calculating payment rates on the same grounds.
• Nature Of A PPS: HCFA acknowledged that some payments will exceed the actual cost of treating the patient. At the same time, HCFA advised that the cost of care for other patients will exceed the corresponding payment. This is the nature of a PPS.
• Non-Therapy Ancillaries ("NTAs"): HCFA explained that these costs are adequately reflected in the payment rates. The agency declined a "carve-out" or cost pass-through as inconsistent with the statute, budget, and concept of a PPS.
• Future Updates For NTAs: HCFA will be "funding substantial research to examine the potential for refinements to the case-mix methodology, including an examination of medication therapy, medically complex patients, and other non-therapy ancillary services."
• Bad Debts: HCFA confirmed that SNFs are entitled to Medicare reimbursement for bad debts outside the PPS rates.
• Coverage: HCFA confirmed that the days between the end of therapy and the assessment reference date of the Other Medicare Required Assessment ("OMRA") are covered and payable at the applicable therapy RUG-III level to which the beneficiary was classified prior to ending therapy.
• SNF Coverage: HCFA created a rebuttable coverage presumption for the 5 day assessment reference period for beneficiaries that classify into one of the top 26 RUGs.
• Therapy Aides: HCFA provided that therapy aides must never "be responsible for the provision of group therapy."
• Therapy Students: According to HCFA, therapy rendered by students cannot be recorded as minutes of therapy on the MDS, rendering this time unreimbursable.
• OIG Proposal To Adjust Rates: Absent a Congressional mandate, HCFA will not proceed with a downward adjustment to the PPS payment rates for inappropriate "services or payments" during the base year, as suggested by the OIG and GAO.
• Change Of Ownership ("CHOW"): HCFA confirmed that payment is tied to a SNF’s Medicare provider number; thus, the payment methodology follows the surviving provider number after a CHOW.

• Consolidated Billing Delay: HCFA confirmed that it is delaying indefinitely implementation of consolidated billing requirements for those SNF residents who are in noncovered stays, and that it will provide at least 90 days advance notice in the Federal Register of the anticipated implementation date.
• Outpatient Hospital Service: HCFA clarified that an outpatient hospital service is not excluded from consolidated billing merely because it does not appear in the particular care plan of the individual beneficiary receiving the service.

1. HCFA’s Response To Comments On The PPS For SNFs And Consolidated Billing
   1. Federal Rates -- Outliers/NTAs

      As indicated above, HCFA will not be developing an outlier mechanism or altering the 1995 base year because it does not believe it has the requisite statutory authority. Instead, HCFA stated that it has, and will continue to, study the responsiveness of the payment rates to patients requiring numerous medications and other NTAs. Importantly, HCFA acknowledged that some PPS payments will exceed the cost of care for a particular patient, while others will fall short.

   2. Calculation Of The Federal Rates
      1. Rebasing

         HCFA stated that it is unlikely to periodically rebase the payment rates. According to HCFA, the BBA precludes this type of action and HCFA believes that as a matter of policy, case-mix adjustments to payment rates is the preferred method for capturing changes in the Medicare population and care delivery practices over time.

      2. New Provider Exemptions and Exceptions To RCLs; Length Of Cost Report

         Citing the BBA, HCFA stated that the costs of new providers exempted from the routine cost limits ("RCLs"), as well as costs of providers excepted from these limits, were properly excluded from the calculation of the federal rates. Further, HCFA claimed that its determination to exclude data from cost reports shorter than 10 months and longer than 13 was appropriate because it believes that this type of cost report -- aberrant in length -- could distort data.

      3. Medicare Provider Analysis And Review ("MEDPAR") Analog

         Several commenters questioned the methodological soundness of the MEDPAR analog. Given that an adequate national sample of MDS data does not exist, HCFA responded that the adjusted MEDPAR analog provides an appropriate estimate of case-mix. In any event, HCFA claimed that any shortcomings of the MEDPAR analog data served to increase the payment rates for the therapy component.

      4. Unsettled Cost Reports

         HCFA dismissed requests lodged by commenters to revise retroactively unsettled cost report data (which is now available) used in payment rate calculation. HCFA also noted that its adjustment to unsettled cost reports was "an actuarial adjustment required under the law."

         However, HCFA did decide to implement one methodological adjustment suggested by a commenter. Specifically, HCFA agreed to apply an adjustment to total Medicare routine costs before, as opposed to after, the application of the routine cost limits. This resulted in a slight increase in the payment rates. The unadjusted nursing case-mix component of federal rates will be increased by $0.32 for urban and $0.24 for rural providers; the unadjusted non-case-mix component of federal rates will be increased by $0.25 for urban and $0.21 for rural providers. These rate adjustments will be effective October 1, 1999.

      5. Hospital-Based SNFs

         While HCFA received a number of comments from hospital-based SNFs ("HB-SNFs") regarding their unique overhead costs, HCFA responded that the HB versus free-standing SNF ratio used for computing the federal rates is mandated by the BBA, and, therefore, cannot be modified administratively.

      6. Wage Index

         HCFA recognized comments regarding the propriety of the hospital wage index as applied to SNFs, as well as concerns that the index be appropriately updated to reflect changes in wages. HCFA responded that it will evaluate the wage and hourly data recently reported by SNFs and develop a SNF wage index if the data are accurate. However, it noted that new wage data of this type is often inaccurate and would require significant study and edits, including a rulemaking with comment period in order to properly develop a SNF wage index. In the interim, the most recent hospital wage index data will be utilized, adjusted as required under the BBA.

      7. Payment Add-On For Administrative/Implementation Costs

         Two commenters suggested a payment rate add-on to reflect the cost of completing resident assessments and other administrative costs associated with implementing the PPS. HCFA dismissed the significance of such expenses and cited, again, the Congressionally-mandated payment formula.

      8. Capital Costs

         HCFA rejected commenters’ request for a capital cost pass-through or add-on, citing the formula contained in the BBA and noting that the current payment rates will adequately reflect capital expenditures over time.

      9. Rural To Urban Reclassification Requests

         As a general matter, HCFA rejected commenters’ requests to allow rural SNFs to be reclassified as urban where they would be so classified under the statutory classification scheme for hospitals. HCFA noted that Congress has not authorized reclassifications of this type.

      10. Non-Labor Portion Of Rate For Alaska and Hawaii

          HCFA claimed it did not have statutory authority to adjust the non-labor portion of the payment rates for providers located outside the continental United States, despite assertions by SNFs in Alaska and Hawaii that they incur higher costs.

      11. Low-Volume SNFs

      HCFA cited the BBA in rejecting one suggestion that low-volume SNFs should be exempt from the PPS and that their costs should be eliminated from the calculation of the federal rates.

   3. Federal Rates -- Part B Add-On
      1. Detailed Description

         HCFA provided a detailed discussion of the methodological design it used to create the "Part B add-on," i.e., an estimate of the amounts payable under Part B for covered SNF services furnished to residents during a Part A stay. These estimates were developed using allowable charges from all Part B claims actually submitted during the base period. HCFA then created a list of the dates for SNF stays for each beneficiary, identified all non-physician Part B claims, and matched the list of stay’s to these claims. Durable medical equipment ("DME") claims were identified by HCPCS codes and excluded. Total charges on Part B outpatient facility bills were adjusted to reflect total Medicare payments using a payment to charge ratio calculated from FY 1995 outpatient cost reports, outpatient bills were removed, and totals were calculated. Additionally, descriptive categories were created, at the request of industry; however, HCFA claimed precise disaggregation was not possible. Finally, HCFA noted that no comments contained substantiated evidence of systematic defects in this methodology or data, and in any event, the BBA precludes administrative review of its Part B estimate.

      2. Availability Of Data

      In response to requests that HCFA publish the complete data used in computing of the federal rates, HCFA indicated that it has already done so, to a large extent, through its Website and responses to Freedom of Information Act ("FOIA") requests. In addition, HCFA has provided a percentage breakdown of the nursing case-mix component of the rates, to the extent feasible.

   4. Facility-Specific Rates -- Transition
      1. New SNFs

         HCFA declined to change its policy of categorizing new SNFs as those first receiving payment on or after October 1, 1995, citing consistency with the statute.

      2. By-Pass Transition

         Despite recognizing that some SNFs may have changed their care delivery model or made significant capital investments since FY 1995, HCFA declined to allow such facilities to elect to by-pass the PPS transition period, citing reasonableness and consistency with the BBA. In response to a subsequent comment, HCFA confirmed that it would not allow any SNF to elect to by-pass the transition.

      3. Part B Add-On For Demonstration Facilities

      While acknowledging that a Part B add-on for demonstration SNFs might be conceptually appropriate, HCFA determined that it is constrained by the terms of the BBA and therefore cannot adopt such a policy. However, HCFA did alter its policy with regard to demonstration SNFs that have both a short cost reporting period between the base year and the initial period -- these SNFs should be treated as if they had only a short period in the base year.

   5. MDS Assessments

      At the outset, HCFA noted that it received numerous suggestions regarding methods to improve and modify the MDS. However, HCFA stated that many comments were so specific and numerous that it was unable to address each comment; it suggested that many of these issues could be more appropriately addressed through manual provisions. That said, HCFA responded to comments on three broad topics: billing issues, corrections, and the Other Medicare Required Assessment ("OMRA").

      1. Billing Issues: HIPPS, PIP, and Bad Debt

         HCFA stated that, while not addressed in the interim final rule, the Health Insurance Prospective Payment System ("HIPPS") codes are 5-character codes used solely for billing the Medicare fiscal intermediaries ("FIs") for the Part A SNF stay, and are distinct from similar information contained in the MDS. The HIPPS codes reflect both the RUG-III group of a particular beneficiary, as well as the reason for the assessment, but do not appear on the MDS. HCFA noted that the "reason for the assessment" reflected in the HIPPS code is based on information from sections A(8)(a) and (b) of the MDS, but is not a duplication of this information, as certain conversions must take place between the MDS and the HIPPS code.

         HCFA next addressed periodic interim payments ("PIP") -- biweekly payments dispersed to SNFs under the reasonable cost payment system. Under PPS, payments are not calculated based on costs as reported in the cost report per se; nevertheless, PIP remains available under the statute and regulations for SNFs meeting certain requirements. See 42 C.F.R. § 413.64(h). In the final rule, HCFA assented to preserve the existing administrative policy for dispensing PIP, but indicated that its utility may need to be reexamined in the future.

         Lastly, HCFA confirmed that providers are entitled to reimbursement for bad debts and other costs outside of the PPS rates, such as costs for approved medical education programs. According to HCFA, since payment for these costs is based on the cost report, it is appropriate for SNFs to receive estimated interim payments during the year, representing these costs. No special requirements must be satisfied to receive this unique type of interim payment.

      2. Corrections To The MDS

         HCFA noted that its MDS corrections policy is set forth in the State Operations Manual, and applies to all MDS users. For issues specific to SNF Part A bills, HCFA indicated that the Provider Reimbursement Manual should be referenced.

      3. OMRA

      HCFA addressed a number of comments about when the OMRA should be performed and whether it should be a comprehensive assessment. According to HCFA, an OMRA is required, and must be completed, during an 8 to 10 day window after therapy is discontinued. The reference date must be set at day 8, 9, or 10. This ensures that no therapy time will be captured on the MDS, and the beneficiary will be classified into one of the lower, non-therapy RUGs. In fact, HCFA noted that an "OMRA will always result in classification into a non-therapy RUG-III group." Importantly, HCFA confirmed that for "the days between the cessation of rehabilitation therapy and the assessment reference date of the OMRA, the beneficiary continues to be covered at the therapy RUG-III group level to which he or she was classified before cessation."

      However, the OMRA is only required, and should only be performed, where the beneficiary still requires skilled care after therapy is discontinued. Therefore, if the beneficiary is discharged prior to the eighth day after therapy, HCFA does not expect an OMRA to be performed. As was the pattern under reasonable cost, HCFA anticipates that many beneficiaries will be discharged after therapy is discontinued. If, however, the beneficiary remains in the SNF longer than 8 days after therapy was discontinued, there must be supporting clinical reasons documented in the medical record. According to HCFA, it is not appropriate to routinely wait 8 days to perform an OMRA to verify that the beneficiary is stable and no longer requires skilled services. This type of pattern would indicate that the SNF is using these 8 to 10 days at the therapy rate improperly. Conservation of the patient’s 100 benefit days must be balanced against the beneficiary’s actual need for skilled services. This interpretation of the OMRA is consistent with HCFA’s position in several informal policy statements issued over the past year.

   6. Certification And Recertification

      Prior to actually addressing comments regarding statutory requirements for certification of skilled level of care, HCFA noted that the statutory requirements are distinct from requirements related to the plan of treatment for therapy or the multidisciplinary plan of care. In a later section, HCFA confirmed that the existing certification requirements remain unchanged. That is, a physician (or nurse practitioner or specialist who does not have an employment relationship with the SNF) must initially certify, and periodically recertify, a beneficiary’s need for skilled services.

   7. MDS Scheduling Requirements

      HCFA addressed five distinct categories of comments pertaining to MDS scheduling requirements: (1) Grace Days; (2) RAPs; (3) Completion and Locking; (4) Discharge and Leave of Absence; and (5) MDS Scheduling.

      1. Grace Days

         HCFA first stated that a SNF may use any one of the first 8 days as the reference date for the Medicare Day 5 assessment. However, HCFA then stated that it discourages the "routine use of grace days for assessing every Medicare admission." HCFA claimed its primary interest is encouraging facilities to use grace days as a "cushion." Patterns of inappropriate use of grace days will be identified by HCFA once it has determined facilities’ normal practice patterns. HCFA suspects that facilities that routinely use Day 8 as the reference date will sometimes miss that date, resulting in payment at the default rate. According to HCFA, the lack of a certain amount of corresponding claims paid at the default rate would suggest that some misrepresentation (i.e., back-dating) had occurred.

         On the other hand, HCFA recognized that some beneficiaries may not be well-suited for therapy until 5 to 8 days after admission to the SNF. Accordingly, it would be appropriate for the reference date to occur on a grace day under these circumstances, in order to capture the therapy minutes. Similarly, this is true for classification into the top two RUG-III categories, which require 7 days of therapy.

      2. RAPs

         HCFA noted that Resident Assessment Protocols ("RAPs") are a Medicare requirement distinct from the PPS requirements. According to HCFA, the requirements for completion of Section V of the MDS (RAP Summary Form) remain unchanged by PPS. In response to queries on this issue, HCFA emphasized that the discussion of RAPs in the interim final rule was merely to demonstrate how existing Medicare requirements could be coordinated with PPS requirements.

      3. Completion and Locking

         For payment purposes, all assessments must be completed (i.e., signed by all members of the care team) within 14 days of the assessment reference date, stated HCFA. The assessment must then be "locked" within 7 days of the completion date, and transmitted to the state in which the SNF operates within 31 days of the lock date.

         However, other considerations impact these deadlines. For example, HCFA noted that an Initial Admission Assessment as required by the Omnibus Budget Reconciliation Act of 1987 ("OBRA ’87"), must be completed by the 14^th day of a SNF stay. Also, the Day 5 assessment must be completed within 14 days of the assessment reference date. Given these and other requ