03-11854. Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities-Update

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would update the payment rates used under the prospective payment system (PPS) for skilled nursing facilities (SNFs), for fiscal year (FY) 2004, as required by statute. Annual updates to the PPS rates are required by section 1888(e) of the Social Security Act (the Act), as amended by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), and the Medicare, Medicaid, and State Children's Health Insurance Program (SCHIP) Benefits Improvement and Protection Act of 2000 (BIPA), relating to Medicare payments and consolidated billing for SNFs.

DATES:

We will consider comments if we receive them at the appropriate address, as provided below, no later than 5 p.m. on July 7, 2003.

ADDRESSES:

Mail written comments (one original and three copies) to the following address: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1469-P, PO Box 8013, Baltimore, MD 21244-8013.

If you prefer, you may deliver your written comments (one original and three copies) to one of the following addresses: Hubert H. Humphrey Building, Room 443-G, 200 Independence Avenue, SW., Washington, DC 20201, or Centers for Medicare & Medicaid Services, Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-8013.

Comments mailed to those addresses designated for courier delivery may be delayed and could be considered late. Because of staffing and resource limitations, we cannot accept comments by facsimile (FAX) transmission. Please refer to file code CMS-1469-P on each comment. Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of this document, in Room C5-12-08 of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland, Monday through Friday of each week from 8:30 a.m. to 4 p.m. Please call [phone] to make an appointment to view comments.

FOR FURTHER INFORMATION CONTACT:

John Davis, [phone] (for information related to the Wage Index, and for information related to swing-bed providers).

Ellen Gay, [phone] (for information related to the case-mix classification methodology, and for information related to swing-bed providers).

Bill Ullman, [phone] (for information related to level of care determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION:

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, PO Box 371954, Pittsburgh, PA 15250-7954. The cost for each copy is $9. Please specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling the order desk at [phone] (or toll free at 1-888-293-6498) or by faxing to [phone]. You can also view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that receive the Federal Register.

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 (the BBA) for Updating the Prospective Payment System for Skilled Nursing Facilities

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

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

E. Skilled Nursing Facility Prospective Payment—General Overview

1. Payment Provisions—Federal Rates

2. Payment Provisions—Initial Transition Period

F. Skilled Nursing Facility Market Basket Index

II. 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 Adjustment

C. Wage Index Adjustment to Federal Rates

D. Updates to the Federal Rates

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

F. Initial Three-year Transition Period

G. 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. Federal Rate Update Factor

IV. Consolidated Billing

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

VI. Distinct Part Definition

A. Background

B. Proposed Revision

VII. Provisions of the Proposed Rule

VIII. Collection of Information Requirements

IX. Regulatory Impact Analysis

A. Overall Impact

B. Anticipated Effects

C. Alternatives Considered

D. Conclusion

Regulation Text

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

ADL	Activity of Daily Living
AHE	Average Hourly Earnings
ARD	Assessment Reference Date
BBA	Balanced Budget Act of 1997, Pub.L. 105-33
BBRA	Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, Pub.L. 106-113
BEA	(U.S.) Bureau of Economic Analysis
BIPA	Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub.L. 106-554
CAH	Critical Access Hospital
CFR	Code of Federal Regulations
CMS	Centers for Medicare & Medicaid Services
CPT	(Physicians') Current Procedural Terminology
DRG	Diagnosis Related Group
FI	Fiscal Intermediary
FR	Federal Register
FY	Fiscal Year
GAO	General Accounting Office
HCPCS	Healthcare Common Procedure Coding System
ICD-9-CM	International Classification of Diseases, Ninth Edition, Clinical Modification
IFC	Interim Final Rule with Comment Period
MDS	Minimum Data Set
MEDPAR	Medicare Provider Analysis and Review File
MIP	Medicare Integrity Program
MSA	Metropolitan Statistical Area
NECMA	New England County Metropolitan Area
OIG	Office of the Inspector General
OMRA	Other Medicare Required Assessment
PCE	Personal Care Expenditures
PPI	Producer Price Index
PPS	Prospective Payment System
PRM	Provider Reimbursement Manual
RAI	Resident Assessment Instrument
RAP	Resident Assessment Protocol
RAVEN	Resident Assessment Validation Entry
RFA	Regulatory Flexibility Act, Pub. L. 96-354
RIA	Regulatory Impact Analysis
RUG	Resource Utilization Groups
SCHIP	State Children's Health Insurance Program
SNF	Skilled Nursing Facility
STM	Staff Time Measure
UMRA	Unfunded Mandates Reform Act, Pub. L. 104-4

I. Background

On July 31, 2002, we published a notice in the Federal Register (67 FR 49798) that set forth updates to the payment rates used under the prospective payment system (PPS) for skilled nursing facilities (SNFs), for fiscal year (FY) 2003. Annual updates to the PPS rates are required by section 1888(e) of the Social Security Act (the Act), as amended by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (the BBRA) and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (the BIPA), relating to Medicare payments and consolidated billing for SNFs.

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 (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. We propose to update the per diem payment rates for SNFs for FY 2004. Major elements of the SNF PPS include:

• Rates. Per diem Federal rates were established 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 were furnished to Medicare beneficiaries in a SNF during a Part A covered stay. The rates were adjusted annually using a SNF market basket index. Rates were case-mix adjusted using a classification system (Resource Utilization Groups, version III (RUG-III)) based on beneficiary assessments (using the Minimum Data Set (MDS) 2.0). The rates were also adjusted by the hospital wage index to account for geographic variation in wages. (In section II.C of this preamble, we discuss the wage index adjustment in detail.) A correction notice was published on December 27, 2002 (67 FR 79123) that announced corrections to several of the wage factors. Additionally, as noted in the July 31, 2002 update notice (67 FR 49798), section 101 of the BBRA and certain sections of the BIPA also affect the payment rate.
• Transition. The SNF PPS included an initial 3-year, phased transition that blended a facility-specific payment rate with the Federal case-mix adjusted rate. For each cost reporting period after a facility migrated to the new system, the facility-specific portion of the blend decreased and the Federal portion increased in 25 percentage point increments. For most facilities, the facility-specific rate was based on allowable costs from FY 1995; however, since the last year of the transition was FY 2001, all facilities were paid at the full Federal rate by the following fiscal year (FY 2002). Therefore, we are no longer including 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 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 involving level of care determinations with the outputs of beneficiary assessment and RUG-III classifying activities. We discuss this coordination in greater detail in section II.E of this preamble. Another SNF benefit requirement is that the SNF in which the services are furnished must be certified by Medicare as meeting the requirements for program participation contained in section 1819 of the Act. This provision of the law defines a SNF as “* * * an institution (or a distinct part of an institution). * * *” In section VI of this preamble, we discuss a clarification that we propose to make in defining the term “distinct part” with respect to SNFs.

In addition, we are taking this opportunity to make a technical correction in a cross-reference that appears in § 409.20(c) of the regulations. Section 409.20 provides a general introduction to the subsequent sections (§ 409.21 through § 409.36) that set forth the specific requirements pertaining to the SNF benefit. However, in referring to the sections that follow, the cross-reference in § 409.20(c) concerning terminology inadvertently omits a reference to § 409.21, and we would now correct that omission by revising the cross-reference to read “§ 409.21 through § 409.36”.

• Consolidated Billing. The SNF PPS includes a consolidated billing provision (described in greater detail in section IV of this proposed rule) that requires a SNF to submit consolidated Medicare bills 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, occupational, and speech-language therapy that the resident receives during a noncovered stay.) The statute excludes from the consolidated billing provision a small list of services—primarily those of physicians and certain other types of practitioners—which remain separately billable to Part B by the outside entity that furnishes them.
• 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, such 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 proposed rule.

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

Section 1888(e)(4)(H) of the Act requires that we publish in the Federal Register:

1. The unadjusted Federal per diem rates to be applied to days of covered SNF services furnished during the FY.

2. The case-mix classification system to be applied with respect to these services during the FY.

3. The factors to be applied in making the area wage adjustment with respect to these services.

In the July 30, 1999 final rule (64 FR 41670), we indicated that we would announce any changes to the guidelines for Medicare level of care determinations related to modifications in the RUG-III classification structure (see section II.E of this preamble).

Along with a number of other revisions discussed later in this preamble, this proposed rule provides the annual updates to the Federal rates as mandated by the Act.

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

There were several provisions in the BBRA that resulted in adjustments to the SNF PPS. These provisions were described in detail in the final rule that we published in the Federal Register on July 31, 2000 (65 FR 46770). In particular, section 101 of the BBRA provided for a temporary 20 percent increase in the per diem adjusted payment rates for 15 specified RUG-III groups (SE3, SE2, SE1, SSC, SSB, SSA, CC2, CC1, CB2, CB1, CA2, CA1, RHC, RMC, and RMB). Under the law, this temporary increase remains in effect until the later of October 1, 2000, or the implementation of case-mix refinements in the PPS. Section 101 also included a 4 percent across-the-board increase in the adjusted Federal per diem payment rates each year for FYs 2001 and 2002, exclusive of the 20 percent increase. Accordingly, this 4 percent temporary increase has now expired.

We included further information on all of the provisions of the BBRA that affect the SNF PPS in Program Memoranda A-99-53 and A-99-61 (December 1999), and Program Memorandum AB-00-18 (March 2000). In addition, for swing-bed hospitals with more than 49 (but less than 100) beds, section 408 of the BBRA provided for the repeal of certain statutory restrictions on length of stay and aggregate payment for patient days, effective with the end of the SNF PPS transition period described in section 1888(e)(2)(E) of the Act. In the July 31, 2001 final rule (66 FR 39562), we made conforming changes to the regulations in § 413.114(d), effective for services furnished in cost reporting periods beginning on or after July 1, 2002.

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

The BIPA also included several provisions that resulted in adjustments to the PPS for SNFs. These provisions were described in detail in the final rule that we published in the Federal Register on July 31, 2001 (66 FR 39562) as follows:

• Section 203 of the BIPA exempted critical access hospital (CAH) swing-beds from the SNF PPS; we included further information on this provision in Program Memorandum A-01-09 (January 16, 2001).
• Section 311 of the BIPA eliminated the one percent reduction in the SNF market basket that the statutory update formula had previously specified for FY 2001, and changed the one percent reduction specified for FYs 2002 and 2003 to a 0.5 percent reduction. This section also required us to conduct a study of alternative case-mix classification systems for the SNF PPS, and to submit a report to the Congress by January 1, 2005.
• Section 312 of the BIPA provided for a temporary 16.66 percent increase in the nursing component of the case-mix adjusted Federal rate for services furnished on or after April 1, 2001, and before October 1, 2002. Accordingly, this temporary increase has now expired. This section also required the General Accounting Office (GAO) to conduct an audit of SNF nursing staff ratios and submit a report to the Congress on whether the temporary increase in the nursing component should be continued.
• 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.
• Section 314 of the BIPA adjusted the payment rates for all of the rehabilitation RUGs to correct an anomaly under which the existing payment rates for the RHC, RMC, and RMB rehabilitation groups were higher than the rates for some other, more intensive rehabilitation RUGs.
• 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.

We included further information on several of these provisions in Program Memorandum A-01-08 (January 16, 2001).

E. Skilled Nursing Facility Prospective Payment—General Overview

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

1. Payment Provisions—Federal Rate

The PPS uses per diem Federal payment rates based on mean SNF costs in a base year updated for inflation to the first effective period of the PPS. We developed the Federal payment rates using allowable costs from hospital-based and freestanding SNF cost reports for reporting periods beginning in FY 1995. The data used in developing the Federal rates also incorporated an estimate of the amounts that would be payable under Part B for covered SNF services furnished to individuals during the course of a covered Part A stay in a SNF.

In developing the rates for the initial period, we updated costs to the first effective year of PPS (the 15-month period beginning July 1, 1998) using a SNF market basket, and then standardized for the costs of facility differences in case-mix and for geographic variations in wages. Providers that received new provider exemptions from the routine cost limits were excluded from the database used to compute the Federal payment rates, as well as costs related to payments for exceptions to the routine cost limits. In accordance with the formula prescribed in the BBA, we set the Federal rates at a level equal to the weighted mean of freestanding costs plus 50 percent of the difference between the freestanding mean and weighted mean of all SNF costs (hospital-based and freestanding) combined. We computed and applied separately the payment rates for facilities located in urban and rural areas. In addition, we adjusted the portion of the Federal rate attributable to wage-related costs by a wage index.

The Federal rate also incorporates adjustments to account for facility case-mix, using a classification system that accounts for the relative resource utilization of different patient types. This classification system, Resource Utilization Groups, version III (RUG-III), uses beneficiary assessment data from the Minimum Data Set (MDS) completed by SNFs to assign beneficiaries to one of 44 RUG-III groups. The May 12, 1998 interim final rule (63 FR 26252) included a complete and detailed description of the RUG-III classification system, and a further discussion appears in section II.B of this preamble.

The Federal rates in this proposed rule reflect an update to the rates that we published in the July 31, 2002 Federal Register (67 FR 49798) equal to the full change in the SNF market basket index. According to section 1888(e)(4)(E)(ii)(IV) of the Act, for FY 2004, we would update the rate by adjusting the current rates by the full SNF market basket index.

2. Payment Provisions—Initial Transition Period

The SNF PPS included an initial, phased transition from a facility-specific rate (which reflected the individual facility's historical cost experience) to the Federal case-mix adjusted rate. The transition extended through the facility's first three cost reporting periods under the PPS, up to, and potentially including, the one that began in FY 2001. Furthermore, pursuant to section 102 of BBRA, a facility could nonetheless elect to be paid entirely under the Federal rates.

Accordingly, starting with cost reporting periods beginning in FY 2002, we base payments entirely on the Federal rates and, as mentioned previously in this preamble, we no longer include adjustment factors related to facility-specific rates for the coming fiscal year.

F. 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 the covered SNF services. The SNF market basket index is used to update the Federal rates on an annual basis, and is discussed in greater detail in section III of this preamble.

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

A. Federal Prospective Payment System

This proposed rule sets forth a schedule of Federal prospective payment rates applicable to Medicare Part A SNF services beginning October 1, 2003. The schedule incorporates per diem Federal rates that provide Part A payment for all costs of services furnished to a beneficiary in a SNF during a Medicare-covered stay.

1. Costs and Services Covered by the Federal Rates

The Federal rates apply to all costs (routine, ancillary, and capital-related costs) of covered SNF services other than costs associated with approved educational activities as defined in § 413.85. Under section 1888(e)(2) of the Act, covered SNF services include post-hospital SNF services for which benefits are provided under Part A (the hospital insurance program), as well as all items and services (other than those services excluded by statute) that, before July 1, 1998, were paid under Part B (the supplementary medical insurance program) but furnished to Medicare beneficiaries in a SNF during a Part A covered stay. (These excluded service categories are discussed in greater detail in section V.B.2 of the May 12, 1998 interim final rule (63 FR 26295-97)).

2. Methodology Used for the Calculation of the Federal Rates

The proposed FY 2004 rates would reflect an update using the full amount of the latest market basket index. The FY 2004 market basket increase factor is 2.9 percent. Consistent with previous years, this factor may be revised in the final rule when later forecast data are available. For a complete description of the multi-step process, see the May 12, 1998 interim final rule (63 FR 26252). We note that in accordance with section 101(a) of the BBRA and section 314 of the BIPA, the existing, temporary increase in the per diem adjusted payment rates of 20 percent for certain specified RUGs (and 6.7 percent for certain others) remains in effect until the implementation of case-mix refinements. As we discuss elsewhere in this proposed rule, while we are proceeding with our ongoing research in this area, we are not proposing to implement case-mix refinements in this proposed rule.

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, 2002, and ending September 30, 2003, and the midpoint of the Federal fiscal year beginning October 1, 2003, and ending September 30, 2004, to which the payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, the payment rates for FY 2004 are updated by a factor equal to the market basket index percentage increase to determine the payment rates for FY 2004. The rates would be further adjusted by a wage index budget neutrality factor, described later in this section. Tables 1 and 2 reflect the updated components of the unadjusted Federal rates for FY 2004.

Table 1.—Unadjusted Federal Rate Per Diem: Urban

Rate component	Nursing—case-mix	Therapy—case-mix	Therapy—non-case-mix	Non-case-mix
Per Diem Amount	$125.15	$94.27	$12.42	$63.87

Table 2.—Unadjusted Federal Rate Per Diem: Rural

Rate component	Nursing—case-mix	Therapy—case-mix	Therapy-non-case-mix	Non-case-mix
Per Diem Amount	$119.57	$108.70	$13.26	$65.06

B. Case-Mix Adjustment

Under the BBA, we must publish the SNF PPS case-mix classification methodology applicable for the next Federal FY before August 1 of each year. As noted in the following discussion, we are proceeding with our ongoing research regarding possible refinements in the existing case-mix classification system, but we are not proposing to implement the refinements in this proposed rule.

As discussed previously in this preamble, 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. This legislation specified that the 20 percent increase would be effective for SNF services furnished on or after April 1, 2000, and would continue until the later of: (1) October 1, 2000, or (2) implementation of a refined case-mix classification system under section 1888(e)(4)(G)(i) of the Act that would better account for medically complex patients.

In the SNF PPS proposed rule for FY 2001 (65 FR 19190, April 10, 2000), we proposed making an extensive, comprehensive set of refinements to the existing case-mix classification system that collectively would have significantly expanded the existing 44-group structure. However, when our subsequent validation analyses indicated that the refinements would afford only a limited degree of improvement in explaining resource utilization relative to the significant increase in complexity that they would entail, we decided not to implement them at that time (see the FY 2001 final rule published July 31, 2000 (65 FR 46773)). Nevertheless, since the BBRA provision had demonstrated a Congressional interest in improving the ability of the payment system to account for the care furnished to medically complex patients in SNFs, we continued to conduct research in this area.

The Congress subsequently enacted section 311(e) of the BIPA, which directed us to conduct a study of the different systems for categorizing patients in Medicare SNFs in a manner that accounts for the relative resource utilization of different patient types, and to issue a report with any appropriate recommendations to the Congress by January 1, 2005. The lengthy timeframe for conducting the study, and its broad mandate to consider various classification systems and the full range of patient types, stood in sharp contrast to the BBRA language regarding more incremental refinements to the existing case-mix classification system under section 1888(e)(4)(G)(i) of the Act, and made clear that implementing the latter type of refinements to the existing system in order to better account for medically complex patients need not await the completion of the more comprehensive changes envisioned in the BIPA. Accordingly, we considered the possibility of including such refinements as part of last year's annual update of the SNF payment rates.

However, in the July 31, 2002 update notice (67 FR 49801), we determined that, while the research gives a sound basis for developing improvements to the SNF PPS, we need additional time to review and analyze the implications. Therefore, we decided not to implement any case-mix refinements at that time, leaving the current classification system in place. This also left in place the temporary add-on payments enacted in section 101(a) of the BBRA.

Accordingly, the payment rates set forth in this proposed rule reflect the continued use of the 44-group RUG-III classification system discussed in the May 12, 1998 interim final rule (63 FR 26252). Consequently, in this proposed rule, we will also maintain the add-ons to the Federal rates for the specified RUG-III groups required by section 101(a) of the BBRA and subsequently modified by section 314 of the BIPA. The case-mix adjusted payment rates are listed separately for urban and rural SNFs in Tables 3 and 4, with the corresponding case-mix values. These tables do not reflect the add-ons to the specified RUG-III groups provided for in the BBRA, which are applied only after all other adjustments (wage and case-mix) have been made.

Meanwhile, we are continuing to explore both short-term and longer-range revisions to our case-mix classification methodology. In July 2001, we awarded a contract to the Urban Institute for performance of research to aid us in making incremental refinements to the case-mix classification system under section 1888(e)(4)(G)(i) of the Act and starting the case-mix study mandated by section 311(e) of the BIPA. The results of the research in which we are currently engaged will be included in the report to the Congress that section 311(e) of the BIPA requires us to submit by January 1, 2005. As we noted in the May 10, 2001 proposed rule (66 FR 23990), this research may also support a longer term goal of developing more integrated approaches for the payment and delivery system for Medicare post acute services generally. This broader, ongoing research project will pursue several avenues in studying various case-mix classification systems. We have encouraging preliminary results from incorporating comorbidities and complications into the classification strategy, and will thoroughly explore and evaluate this and other approaches in our ongoing work.

C. Wage Index Adjustment to Federal Rates

Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the Federal rates to account for differences in area wage levels, using a wage index that we find appropriate. Since the inception of a PPS for SNFs, we have used hospital wage data in developing a wage index to be applied to SNFs. We propose to continue that practice for FY 2004.

Section 315 of the BIPA authorizes us to establish a reclassification system for SNFs, similar to the hospital methodology. This geographic reclassification system cannot be implemented until we have collected the data necessary to establish an area wage index for SNFs based on their wage data. We presented a comprehensive discussion of this wage data in the May 10, 2001 proposed rule (66 FR 23984) and the July 31, 2001 final rule (66 FR 39562).

In the May 10, 2001 proposed rule, we published a wage index prototype based on SNF data, along with the wage index based on the hospital wage data that was used in the preceding year's final rule (July 31, 2000, 65 FR 46770). In addition, we included a discussion of the wage index computations for the SNF prototype. We also indicated our concern about the reliability of the existing data used in establishing a SNF wage index, in view of the significant variations in the SNF-specific wage data and the large number of SNFs that are unable to provide adequate wage and hourly data. Accordingly, we expressed the belief that a wage index based on hospital wage data remains the best and most appropriate to use in adjusting payments to SNFs, since both hospitals and SNFs compete in the same labor markets.

In the July 31, 2001 final rule (66 FR 39579), we indicated that we had decided not to adopt the SNF-specific wage index prototype from the proposed rule, citing concerns such as the significant amount of volatility in the data. In addition, while we acknowledged that auditing all SNFs would provide more accurate and reliable data, we observed that this would place a burden on providers in terms of recordkeeping and completion of the cost report worksheet. We also noted that adopting such an approach would require a significant commitment of resources by us and by our contractors:

Developing a desk review and audit program similar to that required in the hospital setting would require significant resources. The fiscal intermediaries (FIs) that are involved in preparing the hospital wage data currently spend considerable resources to ensure the accuracy of the wage data submitted by approximately 6,000 hospitals. This process involves editing, reviewing, auditing, and performing desk reviews of the data. Requiring FIs to do the same for the approximately 14,000 SNFs would nearly triple the FIs' workload and budgets in this area. (66 FR 39579).

While we continue to believe that the development of a SNF-specific wage index potentially could improve the accuracy of SNF payments, we do not regard an undertaking of this magnitude as being feasible within the current level of programmatic resources. However, we remain willing to consider the adoption of a SNF-specific wage index should sufficient staffing and budgetary resources to support it become available in the future.

We also propose to continue use of the FY 2003 wage index to adjust SNF PPS payments beginning October 1, 2003. The wage indexes published on July 31, 2002 (67 FR 49798) have undergone a number of changes to reflect certain changes in the data that were not foreseen prior to publication. For example, the Killeen-Temple, Texas Metropolitan Statistical Area (MSA) had two changes to its wage index during the course of the year. While this is consistent with the regulations governing mid-year corrections in the hospital wage index, it results in uncertainty for SNFs in knowing the wage index that will be applied to their payments at the beginning of the year. Such changes also prevent us from calculating the most accurate wage index budget neutrality factor, discussed later in this section. It is our intent that, for each future year, we will use a wage index based on the most recently published final hospital wage index data. In using the most recently published final data, we can be assured that the wage index published in each year's update will be used throughout the year to adjust payments. Therefore, providers and other interested parties who use the wage indexes to prepare budget and payment forecasts can be assured that the wage index will not change, thus also assuring the prospective nature of the SNF payment system. The policy of using the most recently published hospital wage index would also conform to the approach currently used in Medicare payment systems for other provider types, including home health agencies (HHAs) and inpatient rehabilitation hospitals.

The wage index adjustment would be applied to the proposed labor-related portion of the Federal rate, which is 76.435 percent of the total rate. This percentage reflects the labor-related relative importance for FY 2004. The labor-related relative importance is calculated from the SNF market basket, and approximates the labor-related portion of the total costs after taking into account historical and projected price changes between the base year and FY 2004. 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 2004 than the base year weights from the SNF market basket.

We calculate the labor-related relative importance for FY 2004 in four steps. First, we compute the FY 2004 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 2004 price index level for that cost category by the total market basket price index level. Third, we determine the FY 2004 relative importance for each cost category by multiplying this ratio by the base year (FY 1997) weight. Finally, we sum the FY 2004 relative importance for each of the labor-related cost categories (wages and salaries, employee benefits, nonmedical professional fees, labor-intensive services, and capital-related expenses) to produce the FY 2004 labor-related relative importance. Tables 5 and 6 show the Federal rates by labor-related and non-labor-related components.

Table 5.—Case-Mix Adjusted Federal Rates for Urban SNFs by Labor and Non-Labor Component

RUG III category	Total rate	Labor portion	Non-labor portion
RUC	438.68	335.31	103.37
RUB	394.87	301.82	93.05
RUA	373.60	285.56	88.04
RVC	338.21	258.51	79.70
RVB	326.95	249.90	77.05
RVA	298.16	227.90	70.26
RHC	310.17	237.08	73.09
RHB	285.14	217.95	67.19
RHA	261.36	199.77	61.59
RMC	305.41	233.44	71.97
RMB	272.87	208.57	64.30
RMA	256.60	196.13	60.47
RLB	243.33	185.99	57.34
RLA	204.53	156.33	48.20
SE3	289.05	220.94	68.11
SE2	250.25	191.28	58.97
SE1	222.72	170.24	52.48
SSC	217.71	166.41	51.30
SSB	207.70	158.76	48.94
SSA	202.69	154.93	47.76
CC2	216.46	165.45	51.01
CC1	200.19	153.02	47.17
CB2	190.18	145.36	44.82
CB1	181.42	138.67	42.75
CA2	180.16	137.71	42.45
CA1	170.15	130.05	40.10
IB2	162.64	124.31	38.33
IB1	160.14	122.40	37.74
IA2	147.63	112.84	34.79
IA1	142.62	109.01	33.61
BB2	161.39	123.36	38.03
BB1	157.64	120.49	37.15
BA2	146.37	111.88	34.49
BA1	136.36	104.23	32.13
PE2	175.16	133.88	41.28
PE1	172.66	131.97	40.69
PD2	166.40	127.19	39.21
PD1	163.90	125.28	38.62
PC2	157.64	120.49	37.15
PC1	156.39	119.54	36.85
PB2	140.12	107.10	33.02
PB1	138.87	106.15	32.72
PA2	137.61	105.18	32.43
PA1	133.86	102.32	31.54

Table 6.—Case-Mix Adjusted Federal Rates for Rural SNFs by Labor and Non-Labor Component

RUG III category	Total rate	Labor portion	Non-labor portion
RUC	465.08	355.48	109.60
RUB	423.23	323.50	99.73
RUA	402.90	307.96	94.94
RVC	353.44	270.15	83.29
RVB	342.68	261.93	80.75
RVA	315.18	240.91	74.27
RHC	317.90	242.99	74.91
RHB	293.98	224.70	69.28
RHA	271.27	207.35	63.92
RMC	310.18	237.09	73.09
RMB	279.09	213.32	65.77
RMA	263.55	201.44	62.11
RLB	244.52	186.90	57.62
RLA	207.46	158.57	48.89
SE3	281.59	215.23	66.36
SE2	244.52	186.90	57.62
SE1	218.22	166.80	51.42
SSC	213.43	163.14	50.29
SSB	203.87	155.83	48.04
SSA	199.09	152.17	46.92
CC2	212.24	162.23	50.01
CC1	196.69	150.34	46.35
CB2	187.13	143.03	44.10
CB1	178.76	136.64	42.12
CA2	177.56	135.72	41.84
CA1	168.00	128.41	39.59
IB2	160.82	122.92	37.90
IB1	158.43	121.10	37.33
IA2	146.47	111.95	34.52
IA1	141.69	108.30	33.39
BB2	159.63	122.01	37.62
BB1	156.04	119.27	36.77
BA2	145.28	111.04	34.24
BA1	135.71	103.73	31.98
PE2	172.78	132.06	40.72
PE1	170.39	130.24	40.15
PD2	164.41	125.67	38.74
PD1	162.02	123.84	38.18
PC2	156.04	119.27	36.77
PC1	154.84	118.35	36.49
PB2	139.30	106.47	32.83
PB1	138.11	105.56	32.55
PA2	136.91	104.65	32.26
PA1	133.32	101.90	31.42

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 lesser than would otherwise be made in the absence of the wage adjustment. In this sixth PPS year (Federal rates effective October 1, 2003), we are reapplying, or applying, the wage index applicable to SNF payments using the hospital wage data applicable to FY 2003 payments (as discussed earlier in this section) and applying an adjustment to fulfill the budget neutrality requirement. This requirement will be met 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, 2003. The same volume weights are used in both the numerator and denominator and will be derived from 1997 Medicare Provider Analysis and Review File (MEDPAR) data. The wage adjustment factor used in this calculation is defined as the labor share of the rate component multiplied by the wage index plus the non-labor share. Because the wage index applicable to FY 2004 is the same as that for FY 2003 and new data on the distribution of days by MSA is not yet available, the proposed budget neutrality factor for this year is 1.000. However, this may change in the final rule. In order to give the public a sense of the magnitude of this adjustment, last year's factor was 0.9997.

Finally, since we propose to use the FY 2003 wage index, we are republishing it in this proposed rule. The wage index applicable to FY 2004 can be found in Table 7 and Table 8 of this proposed rule. The tables reflect the mid-year corrections made to the hospital wage data since the publication of the SNF update notice for FY 2003 payments (please see our correction notice that was published in the Federal Register on December 27, 2002 (67 FR 79123)).

Table 7.—Wage Index for Urban Areas

Urban area (constituent counties or county equivalents)	Wage index
0040 Abilene, TX	0.7792
Taylor, TX
0060 Aguadilla, PR	0.4587
Aguada, PR
Aguadilla, PR
Moca, PR
0080 Akron, OH	0.9600
Portage, OH
Summit, OH
0120 Albany, GA	1.0594
Dougherty, GA
Lee, GA
0160 Albany-Schenectady-Troy, NY	0.8384
Albany, NY
Montgomery, NY
Rensselaer, NY
Saratoga, NY
Schenectady, NY
Schoharie, NY
0200 Albuquerque, NM	0.9315
Bernalillo, NM
Sandoval, NM
Valencia, NM
0220 Alexandria, LA	0.7859
Rapides, LA
0240 Allentown-Bethlehem-Easton, PA	0.9735
Carbon, PA
Lehigh, PA
Northampton, PA
0280 Altoona, PA	0.9225
Blair, PA
0320 Amarillo, TX	0.9034
Potter, TX
Randall, TX
0380 Anchorage, AK	1.2358
Anchorage, AK
0440 Ann Arbor, MI	1.1103
Lenawee, MI
Livingston, MI
Washtenaw, MI
0450 Anniston, AL	0.8044
Calhoun, AL
0460 Appleton-Oshkosh-Neenah, WI	0.8997
Calumet, WI
Outagamie, WI
Winnebago, WI
0470 Arecibo, PR	0.4337
Arecibo, PR
Camuy, PR
Hatillo, PR
0480 Asheville, NC	0.9876
Buncombe, NC
Madison, NC
0500 Athens, GA	1.0211
Clarke, GA
Madison, GA
Oconee, GA
0520 Atlanta, GA	0.9991
Barrow, GA
Bartow, GA
Carroll, GA
Cherokee, GA
Clayton, GA
Cobb, GA
Coweta, GA
De Kalb, GA
Douglas, GA
Fayette, GA
Forsyth, GA
Fulton, GA
Gwinnett, GA
Henry, GA
Newton, GA
Paulding, GA
Pickens, GA
Rockdale, GA
Spalding, GA
Walton, GA
0560 Atlantic City-Cape May, NJ	1.1017
Atlantic City, NJ
Cape May, NJ
0580 Auburn-Opelika, AL	0.8325
Lee, AL
0600 Augusta-Aiken, GA-SC	1.0264
Columbia, GA
McDuffie, GA
Richmond, GA
Aiken, SC
Edgefield, SC
0640 Austin-San Marcos, TX	0.9637
Bastrop, TX
Caldwell, TX
Hays, TX
Travis, TX
Williamson, TX
0680 Bakersfield, CA	0.9877
Kern, CA
0720 Baltimore, MD	0.9929
Anne Arundel, MD
Baltimore, MD
Baltimore City, MD
Carroll, MD
Harford, MD
Howard, MD
Queen Annes, MD
0733 Bangor, ME	0.9664
Penobscot, ME
0743 Barnstable-Yarmouth, MA	1.3202
Barnstable, MA
0760 Baton Rouge, LA	0.8294
Ascension, LA
East Baton Rouge, LA
Livingston, LA
West Baton Rouge, LA
0840 Beaumont-Port Arthur, TX	0.8324
Hardin, TX
Jefferson, TX
Orange, TX
0860 Bellingham, WA	1.2282
Whatcom, WA
0870 Benton Harbor, MI	0.8965
Berrien, MI
0875 Bergen-Passaic, NJ	1.2150
Bergen, NJ
Passaic, NJ
0880 Billings, MT	0.9022
Yellowstone, MT
0920 Biloxi-Gulfport-Pascagoula, MS	0.8757
Hancock, MS
Harrison, MS
Jackson, MS
0960 Binghamton, NY	0.8341
Broome, NY
Tioga, NY
1000 Birmingham, AL	0.9222
Blount, AL
Jefferson, AL
St. Clair, AL
Shelby, AL
1010 Bismarck, ND	0.7972
Burleigh, ND
Morton, ND
1020 Bloomington, IN	0.8907
Monroe, IN
1040 Bloomington-Normal, IL	0.9109
McLean, IL
1080 Boise City, ID	0.9310
Ada, ID
Canyon, ID
1123 Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH	1.1229
Bristol, MA
Essex, MA
Middlesex, MA
Norfolk, MA
Plymouth, MA
Suffolk, MA
Worcester, MA
Hillsborough, NH
Merrimack, NH
Rockingham, NH
Strafford, NH
1125 Boulder-Longmont, CO	0.9689
Boulder, CO
1145 Brazoria, TX	0.8535
Brazoria, TX
1150 Bremerton, WA	1.0944
Kitsap, WA
1240 Brownsville-Harlingen-San Benito, TX	0.8880
Cameron, TX
1260 Bryan-College Station, TX	0.8821
Brazos, TX
1280 Buffalo-Niagara Falls, NY	0.9365
Erie, NY
Niagara, NY
1303 Burlington, VT	1.0052
Chittenden, VT
Franklin, VT
Grand Isle, VT
1310 Caguas, PR	0.4371
Caguas, PR
Cayey, PR
Cidra, PR
Gurabo, PR
San Lorenzo, PR
1320 Canton-Massillon, OH	0.8932
Carroll, OH
Stark, OH
1350 Casper, WY	0.9690
Natrona, WY
1360 Cedar Rapids, IA	0.9056
Linn, IA
1400 Champaign-Urbana, IL	1.0635
Champaign, IL
1440 Charleston-North Charleston, SC	0.9235
Berkeley, SC
Charleston, SC
Dorchester, SC
1480 Charleston, WV	0.8898
Kanawha, WV
Putnam, WV
1520 Charlotte-Gastonia-Rock Hill, NC-SC	0.9875
Cabarrus, NC
Gaston, NC
Lincoln, NC
Mecklenburg, NC
Rowan, NC
Stanly, NC
Union, NC
York, SC
1540 Charlottesville, VA	1.0438
Albemarle, VA
Charlottesville City, VA
Fluvanna, VA
Greene, VA
1560 Chattanooga, TN-GA	0.8976
Catoosa, GA
Dade, GA
Walker, GA
Hamilton, TN
Marion, TN
1580 Cheyenne, WY	0.8628
Laramie, WY
1600 Chicago, IL	1.1044
Cook, IL
De Kalb, IL
Du Page, IL
Grundy, IL
Kane, IL
Kendall, IL
Lake, IL
McHenry, IL
Will, IL
1620 Chico-Paradise, CA	0.9745
Butte, CA
1640 Cincinnati, OH-KY-IN	0.9381
Dearborn, IN
Ohio, IN
Boone, KY
Campbell, KY
Gallatin, KY
Grant, KY
Kenton, KY
Pendleton, KY
Brown, OH
Clermont, OH
Hamilton, OH
Warren, OH
1660 Clarksville-Hopkinsville, TN-KY	0.8406
Christian, KY
Montgomery, TN
1680 Cleveland-Lorain-Elyria, OH	0.9670
Ashtabula, OH
Geauga, OH
Cuyahoga, OH
Lake, OH
Lorain, OH
Medina, OH
1720 Colorado Springs, CO	0.9916
El Paso, CO
1740 Columbia, MO	0.8496
Boone, MO
1760 Columbia, SC	0.9307
Lexington, SC
Richland, SC
1800 Columbus, GA-AL	0.8374
Russell, AL
Chattanoochee, GA
Harris, GA
Muscogee, GA
1840 Columbus, OH	0.9751
Delaware, OH
Fairfield, OH
Franklin, OH
Licking, OH
Madison, OH
Pickaway, OH
1880 Corpus Christi, TX	0.8729
Nueces, TX
San Patricio, TX
1890 Corvallis, OR	1.1453
Benton, OR
1900 Cumberland, MD-WV	0.7847
Allegany, MD
Mineral, WV
1920 Dallas, TX	0.9998
Collin, TX
Dallas, TX
Denton, TX
Ellis, TX
Henderson, TX
Hunt, TX
Kaufman, TX
Rockwall, TX
1950 Danville, VA	0.8859
Danville City, VA
Pittsylvania, VA
1960 Davenport-Moline-Rock Island, IA-IL	0.8835
Scott, IA
Henry, IL
Rock Island, IL
2000 Dayton-Springfield, OH	0.9282
Clark, OH
Greene, OH
Miami, OH
Montgomery, OH
2020 Daytona Beach, FL	0.9071
Flagler, FL
Volusia, FL
2030 Decatur, AL	0.8973
Lawrence, AL
Morgan, AL
2040 Decatur, IL	0.8055
Macon, IL
2080 Denver, CO	1.0601
Adams, CO
Arapahoe, CO
Broomfield, CO
Denver, CO
Douglas, CO
Jefferson, CO
2120 Des Moines, IA	0.8791
Dallas, IA
Polk, IA
Warren, IA
2160 Detroit, MI	1.0448
Lapeer, MI
Macomb, MI
Monroe, MI
Oakland, MI
St Clair, MI
Wayne, MI
2180 Dothan, AL	0.8137
Dale, AL
Houston, AL
2190 Dover, DE	0.9356
Kent, DE
2200 Dubuque, IA	0.8795
Dubuque, IA
2240 Duluth-Superior, MN-WI	1.0368
St Louis, MN
Douglas, WI
2281 Dutchess County, NY	1.0684
Dutchess, NY
2290 Eau Claire, WI	0.8952
Chippewa, WI
Eau Claire, WI
2320 El Paso, TX	0.9265
El Paso, TX
2330 Elkhart-Goshen, IN	0.9722
Elkhart, IN
2335 Elmira, NY	0.8416
Chemung, NY
2340 Enid, OK	0.8376
Garfield, OK
2360 Erie, PA	0.8925
Erie, PA
2400 Eugene-Springfield, OR	1.0944
Lane, OR
2440 Evansville-Henderson, IN-KY	0.8177
Posey, IN
Vanderburgh, IN
Warrick, IN
Henderson, KY
2520 Fargo-Moorhead, ND-MN	0.9684
Clay, MN
Cass, ND
2560 Fayetteville, NC	0.8889
Cumberland, NC
2580 Fayetteville-Springdale-Rogers, AR	0.8100
Benton, AR
Washington, AR
2620 Flagstaff, AZ-UT	1.0682
Coconino, AZ
Kane, UT
2640 Flint, MI	1.1135
Genesee, MI
2650 Florence, AL	0.7792
Colbert, AL
Lauderdale, AL
2655 Florence, SC	0.8780
Florence, SC
2670 Fort Collins-Loveland, CO	1.0066
Larimer, CO
2680 Ft Lauderdale, FL	1.0297
Broward, FL
2700 Fort Myers-Cape Coral, FL	0.9680
Lee, FL
2710 Fort Pierce-Port St Lucie, FL	0.9823
Martin, FL
St Lucie, FL
2720 Fort Smith, AR-OK	0.7895
Crawford, AR
Sebastian, AR
Sequoyah, OK
2750 Fort Walton Beach, FL	0.9693
Okaloosa, FL
2760 Fort Wayne, IN	0.9457
Adams, IN
Allen, IN
De Kalb, IN
Huntington, IN
Wells, IN
Whitley, IN
2800 Fort Worth-Arlington, TX	0.9446
Hood, TX
Johnson, TX
Parker, TX
Tarrant, TX
2840 Fresno, CA	1.0169
Fresno, CA
Madera, CA
2880 Gadsden, AL	0.8505
Etowah, AL
2900 Gainesville, FL	0.9871
Alachua, FL
2920 Galveston-Texas City, TX	0.9465
Galveston, TX
2960 Gary, IN	0.9584
Lake, IN
Porter, IN
2975 Glens Falls, NY	0.8281
Warren, NY
Washington, NY
2980 Goldsboro, NC	0.8892
Wayne, NC
2985 Grand Forks, ND-MN	0.8897
Polk, MN
Grand Forks, ND
2995 Grand Junction, CO	0.9456
Mesa, CO.
3000 Grand Rapids-Muskegon-Holland, MI	0.9525
Allegan, MI
Kent, MI
Muskegon, MI
Ottawa, MI
3040 Great Falls, MT	0.8950
Cascade, MT
3060 Greeley, CO	0.9237
Weld, CO
3080 Green Bay, WI	0.9502
Brown, WI
3120 Greensboro-Winston-Salem-High Point, NC	0.9282
Alamance, NC
Davidson, NC
Davie, NC
Forsyth, NC
Guilford, NC
Randolph, NC
Stokes, NC
Yadkin, NC
3150 Greenville, NC	0.9100
Pitt, NC
3160 Greenville-Spartanburg-Anderson, SC	0.9122
Anderson, SC
Cherokee, SC
Greenville, SC
Pickens, SC
Spartanburg, SC
3180 Hagerstown, MD	0.9268
Washington, MD
3200 Hamilton-Middletown, OH	0.9418
Butler, OH
3240 Harrisburg-Lebanon-Carlisle, PA	0.9223
Cumberland, PA
Dauphin, PA
Lebanon, PA
Perry, PA
3283 Hartford, CT	1.1549
Hartford, CT
Litchfield, CT
Middlesex, CT
Tolland, CT
3285 Hattiesburg, MS	0.7659
Forrest, MS
Lamar, MS
3290 Hickory-Morganton-Lenoir, NC	0.9028
Alexander, NC
Burke, NC
Caldwell, NC
Catawba, NC
3320 Honolulu, HI	1.1457
Honolulu, HI
3350 Houma, LA	0.8317
Lafourche, LA
Terrebonne, LA
3360 Houston, TX	0.9892
Chambers, TX
Fort Bend, TX
Harris, TX
Liberty, TX
Montgomery, TX
Waller, TX
3400 Huntington-Ashland, WV-KY-OH	0.9636
Boyd, KY
Carter, KY
Greenup, KY
Lawrence, OH
Cabell, WV
Wayne, WV
3440 Huntsville, AL	0.8903
Limestone, AL
Madison, AL
3480 Indianapolis, IN	0.9717
Boone, IN
Hamilton, IN
Hancock, IN
Hendricks, IN
Johnson, IN
Madison, IN
Marion, IN
Morgan, IN
Shelby, IN
3500 Iowa City, IA	0.9587
Johnson, IA
3520 Jackson, MI	0.9532
Jackson, MI
3560 Jackson, MS	0.8607
Hinds, MS
Madison, MS
Rankin, MS
3580 Jackson, TN	0.9275
Chester, TN
Madison, TN
3600 Jacksonville, FL	0.9381
Clay, FL
Duval, FL
Nassau, FL
St. Johns, FL
3605 Jacksonville, NC	0.8239
Onslow, NC
3610 Jamestown, NY	0.7976
Chautaqua, NY
3620 Janesville-Beloit, WI	0.9849
Rock, WI
3640 Jersey City, NJ	1.1190
Hudson, NJ
3660 Johnson City-Kingsport-Bristol, TN-VA	0.8268
Carter, TN
Hawkins, TN
Sullivan, TN
Unicoi, TN
Washington, TN
Bristol City, VA
Scott, VA
Washington, VA
3680 Johnstown, PA	0.8329
Cambria, PA
Somerset, PA
3700 Jonesboro, AR	0.7749
Craighead, AR
3710 Joplin, MO	0.8613
Jasper, MO
Newton, MO
3720 Kalamazoo-Battle Creek, MI	1.0595
Calhoun, MI
Kalamazoo, MI
Van Buren, MI
3740 Kankakee, IL	1.0790
Kankakee, IL
3760 Kansas City, KS-MO	0.9736
Johnson, KS
Leavenworth, KS
Miami, KS
Wyandotte, KS
Cass, MO
Clay, MO
Clinton, MO
Jackson, MO
Lafayette, MO
Platte, MO
Ray, MO
3800 Kenosha, WI	0.9686
Kenosha, WI
3810 Killeen-Temple, TX	1.0399
Bell, TX
Coryell, TX
3840 Knoxville, TN	0.8970
Anderson, TN
Blount, TN
Knox, TN
Loudon, TN
Sevier, TN
Union, TN
3850 Kokomo, IN	0.8971
Howard, IN
Tipton, IN
3870 La Crosse, WI-MN	0.9400
Houston, MN
La Crosse, WI
3880 Lafayette, LA	0.8452
Acadia, LA
Lafayette, LA
St. Landry, LA
St. Martin, LA
3920 Lafayette, IN	0.9278
Clinton, IN
Tippecanoe, IN
3960 Lake Charles, LA	0.7965
Calcasieu, LA
3980 Lakeland-Winter Haven, FL	0.9357
Polk, FL
4000 Lancaster, PA	0.9078
Lancaster, PA
4040 Lansing-East Lansing, MI	0.9726
Clinton, MI
Eaton, MI
Ingham, MI
4080 Laredo, TX	0.8472
Webb, TX
4100 Las Cruces, NM	0.8745
Dona Ana, NM
4120 Las Vegas, NV-AZ	1.1521
Mohave, AZ
Clark, NV
Nye, NV
4150 Lawrence, KS	0.8323
Douglas, KS
4200 Lawton, OK	0.8315
Comanche, OK
4243 Lewiston-Auburn, ME	0.9179
Androscoggin, ME
4280 Lexington, KY	0.8581
Bourbon, KY
Clark, KY
Fayette, KY
Jessamine, KY
Madison, KY
Scott, KY
Woodford, KY
4320 Lima, OH	0.9483
Allen, OH
Auglaize, OH
4360 Lincoln, NE	0.9892
Lancaster, NE
4400 Little Rock-North Little Rock, AR	0.9097
Faulkner, AR
Lonoke, AR
Pulaski, AR
Saline, AR
4420 Longview-Marshall, TX	0.8629
Gregg, TX
Harrison, TX
Upshur, TX
4480 Los Angeles-Long Beach, CA	1.2001
Los Angeles, CA
4520 Louisville, KY-IN	0.9276
Clark, IN
Floyd, IN
Harrison, IN
Scott, IN
Bullitt, KY
Jefferson, KY
Oldham, KY
4600 Lubbock, TX	0.9646
Lubbock, TX
4640 Lynchburg, VA	0.9219
Amherst, VA
Bedford City, VA
Bedford, VA
Campbell, VA
Lynchburg City, VA
4680 Macon, GA	0.9204
Bibb, GA
Houston, GA
Jones, GA
Peach, GA
Twiggs, GA
4720 Madison, WI	1.0467
Dane, WI
4800 Mansfield, OH	0.8900
Crawford, OH
Richland, OH
4840 Mayaguez, PR	0.4914
Anasco, PR
Cabo Rojo, PR
Hormigueros, PR
Mayaguez, PR
Sabana Grande, PR
San German, PR
4880 McAllen-Edinburg-Mission, TX	0.8428
Hidalgo, TX
4890 Medford-Ashland, OR	1.0498
Jackson, OR
4900 Melbourne-Titusville-Palm Bay, FL	1.0253
Brevard, Fl
4920 Memphis, TN-AR-MS	0.8920
Crittenden, AR
De Soto, MS
Fayette, TN
Shelby, TN
Tipton, TN
4940 Merced, CA	0.9742
Merced, CA
5000 Miami, FL	0.9802
Dade, FL
5015 Middlesex-Somerset-Hunterdon, NJ	1.1213
Hunterdon, NJ
Middlesex, NJ
Somerset, NJ
5080 Milwaukee-Waukesha, WI	0.9893
Milwaukee, WI
Ozaukee, WI
Washington, WI
Waukesha, WI
5120 Minneapolis-St. Paul, MN-WI	1.0903
Anoka, MN
Carver, MN
Chisago, MN
Dakota, MN
Hennepin, MN
Isanti, MN
Ramsey, MN
Scott, MN
Sherburne, MN
Washington, MN
Wright, MN
Pierce, WI
St. Croix, WI
5140 Missoula, MT	0.9157
Missoula, MT
5160 Mobile, AL	0.8108
Baldwin, AL
Mobile, AL
5170 Modesto, CA	1.0498
Stanislaus, CA
5190 Monmouth-Ocean, NJ	1.0674
Monmouth, NJ
Ocean, NJ
5200 Monroe, LA	0.8137
Ouachita, LA
5240 Montgomery, AL	0.7734
Autauga, AL
Elmore, AL
Montgomery, AL
5280 Muncie, IN	0.9284
Delaware, IN
5330 Myrtle Beach, SC	0.8976
Horry, SC
5345 Naples, FL	0.9754
Collier, FL
5360 Nashville, TN	0.9578
Cheatham, TN
Davidson, TN
Dickson, TN
Robertson, TN
Rutherford, TN
Sumner, TN
Williamson, TN
Wilson, TN
5380 Nassau-Suffolk, NY	1.3357
Nassau, NY
Suffolk, NY
5483 New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT	1.2408
Fairfield, CT
New Haven, CT
5523 New London-Norwich, CT	1.1767
New London, CT
5560 New Orleans, LA	0.9046
Jefferson, LA
Orleans, LA
Plaquemines, LA
St. Bernard, LA
St. Charles, LA
St. James, LA
St. John The Baptist, LA
St. Tammany, LA
5600 New York, NY	1.4414
Bronx, NY
Kings, NY
New York, NY
Putnam, NY
Queens, NY
Richmond, NY
Rockland, NY
Westchester, NY
5640 Newark, NJ	1.1381
Essex, NJ
Morris, NJ
Sussex, NJ
Union, NJ
Warren, NJ
5660 Newburgh, NY-PA	1.1387
Orange, NY
Pike, PA
5720 Norfolk-Virginia Beach-Newport News, VA-NC	0.8574
Currituck, NC
Chesapeake City, VA
Gloucester, VA
Hampton City, VA
Isle of Wight, VA
James City, VA
Mathews, VA
Newport News City, VA
Norfolk City, VA
Poquoson City, VA
Portsmouth City, VA
Suffolk City, VA
Virginia Beach City, VA
Williamsburg City, VA
York, VA
5775 Oakland, CA	1.5072
Alameda, CA
Contra Costa, CA
5790 Ocala, FL	0.9402
Marion, FL
5800 Odessa-Midland, TX	0.9397
Ector, TX
Midland, TX
5880 Oklahoma City, OK	0.8900
Canadian, OK
Cleveland, OK
Logan, OK
McClain, OK
Oklahoma, OK
Pottawatomie, OK
5910 Olympia, WA	1.0960
Thurston, WA
5920 Omaha, NE-IA	0.9978
Pottawattamie, IA
Cass, NE
Douglas, NE
Sarpy, NE
Washington, NE
5945 Orange County, CA	1.1474
Orange, CA
5960 Orlando, FL	0.9640
Lake, FL
Orange, FL
Osceola, FL
Seminole, FL
5990 Owensboro, KY	0.8344
Daviess, KY
6015 Panama City, FL	0.8865
Bay, FL
6020 Parkersburg-Marietta, WV-OH	0.8127
Washington, OH
Wood, WV
6080 Pensacola, FL	0.8610
Escambia, FL
Santa Rosa, FL
6120 Peoria-Pekin, IL	0.8739
Peoria, IL
Tazewell, IL
Woodford, IL
6160 Philadelphia, PA-NJ	1.0713
Burlington, NJ
Camden, NJ
Gloucester, NJ
Salem, NJ
Bucks, PA
Chester, PA
Delaware, PA
Montgomery, PA
Philadelphia, PA
6200 Phoenix-Mesa, AZ	0.9820
Maricopa, AZ
Pinal, AZ
6240 Pine Bluff, AR	0.7962
Jefferson, AR
6280 Pittsburgh, PA	0.9365
Allegheny, PA
Beaver, PA
Butler, PA
Fayette, PA
Washington, PA
Westmoreland, PA
6323 Pittsfield, MA	1.0235
Berkshire, MA
6340 Pocatello, ID	0.9372
Bannock, ID
6360 Ponce, PR	0.5169
Guayanilla, PR
Juana Diaz, PR
Penuelas, PR
Ponce, PR
Villalba, PR
Yauco, PR
6403 Portland, ME	0.9794
Cumberland, ME
Sagadahoc, ME
York, ME
6440 Portland-Vancouver, OR-WA	1.0667
Clackamas, OR
Columbia, OR
Multnomah, OR
Washington, OR
Yamhill, OR
Clark, WA
6483 Providence-Warwick-Pawtucket, RI	1.0854
Bristol, RI
Kent, RI
Newport, RI
Providence, RI
Washington, RI
6520 Provo-Orem, UT	0.9984
Utah, UT
6560 Pueblo, CO	0.8820
Pueblo, CO
6580 Punta Gorda, FL	0.9218
Charlotte, FL
6600 Racine, WI	0.9334
Racine, WI
6640 Raleigh-Durham-Chapel Hill, NC	0.9990
Chatham, NC
Durham, NC
Franklin, NC
Johnston, NC
Orange, NC
Wake, NC
6660 Rapid City, SD	0.8846
Pennington, SD
6680 Reading, PA	0.9295
Berks, PA
6690 Redding, CA	1.1135
Shasta, CA
6720 Reno, NV	1.0648
Washoe, NV
6740 Richland-Kennewick-Pasco, WA	1.1491
Benton, WA
Franklin, WA
6760 Richmond-Petersburg, VA	0.9477
Charles City County, VA
Chesterfield, VA
Colonial Heights City, VA
Dinwiddie, VA
Goochland, VA
Hanover, VA
Henrico, VA
Hopewell City, VA
New Kent, VA
Petersburg City, VA
Powhatan, VA
Prince George, VA
Richmond City, VA
6780 Riverside-San Bernardino, CA	1.1365
Riverside, CA
San Bernardino, CA
6800 Roanoke, VA	0.8614
Botetourt, VA
Roanoke, VA
Roanoke City, VA
Salem City, VA
6820 Rochester, MN	1.2139
Olmsted, MN
6840 Rochester, NY	0.9194
Genesee, NY
Livingston, NY
Monroe, NY
Ontario, NY
Orleans, NY
Wayne, NY
6880 Rockford, IL	0.9625
Boone, IL
Ogle, IL
Winnebago, IL
6895 Rocky Mount, NC	0.9228
Edgecombe, NC
Nash, NC
6920 Sacramento, CA	1.1500
El Dorado, CA
Placer, CA
Sacramento, CA
A6960 Saginaw-Bay City-Midland, MI	0.9650
Bay, MI
Midland, MI
Saginaw, MI
6980 St Cloud, MN	0.9700
Benton, MN
Stearns, MN
7000 St Joseph, MO	0.9544
Andrews, MO
Buchanan, MO
7040 St Louis, MO-IL	0.8855
Clinton, IL
Jersey, IL
Madison, IL
Monroe, IL
St. Clair, IL
Franklin, MO
Jefferson, MO
Lincoln, MO
St. Charles, MO
St. Louis, MO
St. Louis City, MO
Warren, MO
Sullivan City, MO
7080 Salem, OR	1.0500
Marion, OR
Polk, OR
7120 Salinas, CA	1.4623
Monterey, CA
7160 Salt Lake City-Ogden, UT	0.9945
Davis, UT
Salt Lake, UT
Weber, UT
7200 San Angelo, TX	0.8374
Tom Green, TX
7240 San Antonio, TX	0.8753
Bexar, TX
Comal, TX
Guadalupe, TX
Wilson, TX
7320 San Diego, CA	1.1131
San Diego, CA
7360 San Francisco, CA	1.4142
Marin, CA
San Francisco, CA
San Mateo, CA
7400 San Jose, CA	1.4145
Santa Clara, CA
7440 San Juan-Bayamon, PR	0.4741
Aguas Buenas, PR
Barceloneta, PR
Bayamon, PR
Canovanas, PR
Carolina, PR
Catano, PR
Ceiba, PR
Comerio, PR
Corozal, PR
Dorado, PR
Fajardo, PR
Florida, PR
Guaynabo, PR
Humacao, PR
Juncos, PR
Los Piedras, PR
Loiza, PR
Luguillo, PR
Manati, PR
Morovis, PR
Naguabo, PR
Naranjito, PR
Rio Grande, PR
San Juan, PR
Toa Alta, PR
Toa Baja, PR
Trujillo Alto, PR
Vega Alta, PR
Vega Baja, PR
Yabucoa, PR
7460 San Luis Obispo-Atascadero-Paso Robles, CA	1.1271
San Luis Obispo, CA
7480 Santa Barbara-Santa Maria-Lompoc, CA	1.0481
Santa Barbara, CA
7485 Santa Cruz-Watsonville, CA	1.3646
Santa Cruz, CA
7490 Santa Fe, NM	1.0712
Los Alamos, NM
Santa Fe, NM
7500 Santa Rosa, CA	1.3046
Sonoma, CA
7510 Sarasota-Bradenton, FL	0.9425
Manatee, FL
Sarasota, FL
7520 Savannah, GA	0.9376
Bryan, GA
Chatham, GA
Effingham, GA
7560 Scranton-Wilkes-Barre-Hazleton, PA	0.8599
Columbia, PA
Lackawanna, PA
Luzerne, PA
Wyoming, PA
7600 Seattle-Bellevue-Everett, WA	1.1474
Island, WA
King, WA
Snohomish, WA
7610 Sharon, PA	0.7869
Mercer, PA
7620 Sheboygan, WI	0.8697
Sheboygan, WI
7640 Sherman-Denison, TX	0.9255
Grayson, TX
7680 Shreveport-Bossier City, LA	0.8987
Bossier, LA
Caddo, LA
Webster, LA
7720 Sioux City, IA-NE	0.9046
Woodbury, IA
Dakota, NE
7760 Sioux Falls, SD	0.9257
Lincoln, SD
Minnehaha, SD
7800 South Bend, IN	0.9802
St. Joseph, IN
7840 Spokane, WA	1.0852
Spokane, WA
7880 Springfield, IL	0.8659
Menard, IL
Sangamon, IL
7920 Springfield, MO	0.8424
Christian, MO
Greene, MO
Webster, MO
8003 Springfield, MA	1.0927
Hampden, MA
Hampshire, MA
8050 State College, PA	0.8941
Centre, PA
8080 Steubenville-Weirton, OH-WV	0.8804
Jefferson, OH
Brooke, WV
Hancock, WV
8120 Stockton-Lodi, CA	1.0506
San Joaquin, CA
8140 Sumter, SC	0.8273
Sumter, SC
8160 Syracuse, NY	0.9714
Cayuga, NY
Madison, NY
Onondaga, NY
Oswego, NY
8200 Tacoma, WA	1.0940
Pierce, WA
8240 Tallahassee, FL	0.8504
Gadsden, FL
Leon, FL
8280 Tampa-St Petersburg-Clearwater, FL	0.9065
Hernando, FL
Hillsborough, FL
Pasco, FL
Pinellas, FL
8320 Terre Haute, IN	0.8599
Clay, IN
Vermillion, IN
Vigo, IN
8360 Texarkana, AR-Texarkana, TX	0.8088
Miller, AR
Bowie, TX
8400 Toledo, OH	0.9810
Fulton, OH
Lucas, OH
Wood, OH
8440 Topeka, KS	0.9199
Shawnee, KS
8480 Trenton, NJ	1.0432
Mercer, NJ
8520 Tucson, AZ	0.8911
Pima, AZ
8560 Tulsa, OK	0.8332
Creek, OK
Osage, OK
Rogers, OK
Tulsa, OK
Wagoner, OK
8600 Tuscaloosa, AL	0.8130
Tuscaloosa, AL
8640 Tyler, TX	0.9521
Smith, TX
8680 Utica-Rome, NY	0.8465
Herkimer, NY
Oneida, NY
8720 Vallejo-Fairfield-Napa, CA	1.3354
Napa, CA
Solano, CA
8735 Ventura, CA	1.1096
Ventura, CA
8750 Victoria, TX	0.8756
Victoria, TX
8760 Vineland-Millville-Bridgeton, NJ	1.0031
Cumberland, NJ
8780 Visalia-Tulare-Porterville, CA	0.9418
Tulare, CA
8800 Waco, TX	0.8073
McLennan, TX
8840 Washington, DC-MD-VA-WV	1.0851
District of Columbia, DC
Calvert, MD
Charles, MD
Frederick, MD
Montgomery, MD
Prince Georges, MD
Alexandria City, VA
Arlington, VA
Clarke, VA
Culpeper, VA
Fairfax, VA
Fairfax City, VA
Falls Church City, VA
Fauquier, VA
Fredericksburg City, VA
King George, VA
Loudoun, VA
Manassas City, VA
Manassas Park City, VA
Prince William, VA
Spotsylvania, VA
Stafford, VA
Warren, VA
Berkeley, WV
Jefferson, WV
8920 Waterloo-Cedar Falls, IA	0.8069
Black Hawk, IA
8940 Wausau, WI	0.9782
Marathon, WI
8960 West Palm Beach-Boca Raton, FL	0.9939
Palm Beach, FL
9000 Wheeling, OH-WV	0.7670
Belmont, OH
Marshall, WV
Ohio, WV
9040 Wichita, KS	0.9520
Butler, KS
Harvey, KS
Sedgwick, KS
9080 Wichita Falls, TX	0.8498
Archer, TX
Wichita, TX
9140 Williamsport, PA	0.8544
Lycoming, PA
9160 Wilmington-Newark, DE-MD	1.1173
New Castle, DE
Cecil, MD
9200 Wilmington, NC	0.9640
New Hanover, NC
Brunswick, NC
9260 Yakima, WA	1.0569
Yakima, WA
9270 Yolo, CA	0.9434
Yolo, CA
9280 York, PA	0.9026
York, PA
9320 Youngstown-Warren, OH	0.9358
Columbiana, OH
Mahoning, OH
Trumbull, OH
9340 Yuba City, CA	1.0276
Sutter, CA
Yuba, CA
9360 Yuma, AZ	0.8589
Yuma, AZ

Table 8.—Wage Index for Rural Areas

Rural area	Wage index
Alabama	0.7660
Alaska	1.2293
Arizona	0.8493
Arkansas	0.7666
California	0.9899
Colorado	0.9015
Connecticut	1.2394
Delaware	0.9128
Florida	0.8827
Georgia	0.8230
Guam	0.9611
Hawaii	1.0255
Idaho	0.8747
Illinois	0.8204
Indiana	0.8755
Iowa	0.8315
Kansas	0.7900
Kentucky	0.8079
Louisiana	0.7580
Maine	0.8874
Maryland	0.8946
Massachusetts	1.1288
Michigan	0.9009
Minnesota	0.9151
Mississippi	0.7680
Missouri	0.7881
Montana	0.8481
Nebraska	0.8204
Nevada	0.9577
New Hampshire	0.9839
New Jersey 1
New Mexico	0.8872
New York	0.8542
North Carolina	0.8669
North Dakota	0.7788
Ohio	0.8613
Oklahoma	0.7590
Oregon	1.0259
Pennsylvania	0.8462
Puerto Rico	0.4356
Rhode Island 1
South Carolina	0.8607
South Dakota	0.7815
Tennessee	0.7877
Texas	0.7821
Utah	0.9312
Vermont	0.9345
Virginia	0.8504
Virgin Islands	0.7845
Washington	1.0179
West Virginia	0.7975
Wisconsin	0.9162
Wyoming	0.9007
1 All counties within the State are classified urban.

D. Updates to the Federal Rates

In accordance with section 1888(e)(4)(E) of the Act, the proposed payment rates listed here reflect an update equal to the full SNF market basket, which equals 2.9 percent. We will continue to publish the rates, wage index, and case-mix classification methodology in the Federal Register before August 1 preceding the start of each succeeding fiscal year We discuss the Federal rate update factor in greater detail in section III.B of this preamble.

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

As discussed in § 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 § 40930. This designation reflects an administrative presumption under the current 44-group RUG-III classification system. Our presumption is that any beneficiary who is correctly assigned to one of the upper 26 RUG-III groups in the initial 5-day, Medicare-required assessment is automatically classified as meeting the SNF level of care definition up to the assessment reference date for that assessment.

Any 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 26 groups during the immediate post-hospital period require a covered level of care, which would be significantly less likely for those beneficiaries assigned to one of the lower 18 groups.

In this proposed rule, we are continuing the existing designation of the upper 26 RUG-III groups for purposes of this administrative presumption Accordingly, we are designating the following RUG-III classifications:

• All groups within the Ultra High Rehabilitation category;
• All groups within the Very High Rehabilitation category;
• All groups within the High Rehabilitation category;
• All groups within the Medium Rehabilitation category;
• All groups within the Low Rehabilitation category;
• All groups within the Extensive Services category;
• All groups within the Special Care category; and
• All groups within the Clinically Complex category.

F. Initial Three-Year Transition Period

As noted previously, the rates that we now propose are for the sixth year of the SNF PPS. As a result, the PPS is no longer operating under the initial three-year transition period from facility-specific to Federal rates; therefore, payment now equals 100 percent of the adjusted Federal per diem rate

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

Using the model SNF (XYZ) described in Table 9, the following shows the adjustments made to the Federal per diem rate to compute the provider's actual per diem PPS payment. XYZ's 12-month cost reporting period begins October 1, 2004. XYZ's total PPS payment would equal $20,017. The Labor and Non-labor columns are derived from Table 5. In addition, the adjustments for certain specified RUG-III groups enacted in section 101(a) of the BBRA (as amended by section 314 of the BIPA) remain in effect, and are reflected in Table 9.

Table 9.—SNF XYZ: Located in State College, PA

[Wage Index: 0.8941]

RUG group	Labor	Wage index	Adj. labor	Non-labor	Adj. rate	Percent adjustment	Medicare days	Payment
RVC	$258.51	0.8941	$231.13	$79.70	$310.83	1 $331.66	14	$4,643
RHA	199.77	0.8941	178.61	61.59	240.20	1 256.29	16	4,101
SSC	166.41	0.8941	148.79	51.30	200.09	2 240.11	30	7,203
IA2	112.84	0.8941	100.89	34.79	135.68	135.68	30	4,070
Total							90	20,017
1 Reflects a 6.7 percent adjustment from section 314 of the BIPA.
2 Reflects a 20 percent adjustment from section 101(a) of the BBRA.

III. The Skilled Nursing Facility Market Basket Index

Section 1888(e)(5)(A) of the Act requires us to establish an SNF market basket index (input price index) that reflects changes over time in the prices of an appropriate mix of goods and services included in the SNF PPS. This proposed rule incorporates the latest available projections of the SNF market basket index. The final rule will incorporate updated projections based on the latest available projections at that time. Accordingly, we have developed an SNF market basket index that encompasses the most commonly used cost categories for SNF routine services, ancillary services, and capital-related expenses. In the July 31, 2001 Federal Register (66 FR 39562), we included a complete discussion on the rebasing of the SNF market basket to FY 1997. There are 21 separate cost categories and respective price proxies. These cost categories were illustrated in Table 10.A, Table 10.B, and Appendix A, along with other relevant information, in the July 31, 2001 Federal Register.

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 10 summarizes the updated labor-related share for FY 2004. The forecasted rates of growth used to compute the proposed SNF market basket percentage described in section II.D of this proposed rule are shown in Table 11.

Table 10.—FY 2004 Labor-Related Share

Cost category	FY 2003 relative importance	FY 2004 relative importance
Wages and Salaries	54.796	55.143
Employee Benefits	11.232	11.269
Nonmedical Professional Fees	2.652	2.661
Labor-intensive Services	4.124	4.137
Capital-related	3.324	3.226
Total	76.128	76.435

Table 11.—SNF Total Cost Market Basket Change FY 1998 Through FY 2004

Fiscal years beginning October 1	Skilled nursing facility total cost market basket
October 1997, FY 1998	2.8
October 1998, FY 1999	3.0
October 1999, FY 2000	4.0
October 2000, FY 2001	4.9
October 2001, FY 2002	3.4
October 2002, FY 2003	3.1
October 2003, FY 2004	2.9
Source: (Table 10) Global Insights, Inc., DRI-WEFA, 4th Quarter, 2002.
Source: (Table 11) Global Insights Inc., DRI-WEFA, 4th Quarter, 2002.
@USAMACRO/MODTREND@CISSIM/CNTL25R2.SIM
Released by CMS, OACT, National Health Statistics Group.

A. Use of the Skilled Nursing Facility Market Basket Percentage

Section 1888(e)(5)(B) of the Act defines the SNF market basket percentage as the percentage change in the SNF market basket index, as described in the previous section, from the average index level of the prior fiscal year to the average index level of the current fiscal year. For the Federal rates established in this proposed rule, this percentage increase in the SNF market basket index would be used to compute the update factor occurring between FY 2003 and FY 2004. We used the Global Insights, Inc. (formerly DRI-WEFA), 4th quarter 2002 forecasted percentage increase in the FY 1997-based SNF market basket index for routine, ancillary, and capital-related expenses, described in the previous section, to compute the update factor.

B. Federal Rate Update Factor

Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update factor used to establish the FY 2004 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, 2002 through September 30, 2003 to the average market basket level for the period of October 1, 2003 through September 30, 2004. Using this process, the update factor for FY 2004 SNF Federal rates is 2.9 percent.

We used this revised update factor to compute the Federal portion of the SNF PPS rate shown in Tables 1 and 2.

IV. Consolidated Billing

As established by section 4432(b) of the BBA, the consolidated billing requirement places with the SNF the Medicare billing responsibility for virtually all of the services that the SNF's residents receive, except for a small number of services that the statute specifically identifies as being excluded from this provision. Section 103 of the BBRA amended this provision by further excluding a number of high-cost, low probability services (identified by Healthcare Common Procedure Coding System (HCPCS) codes) within several broader categories that otherwise remained subject to the provision. Section 313 of the BIPA further amended this provision by repealing its Part B aspect, that is, its applicability to services furnished to a resident during a SNF stay that Medicare does not cover. (However, physical, occupational, and speech-language therapy remain subject to consolidated billing, regardless of whether the resident who receives these services is in a covered Part A stay.)

To date, the Congress has enacted no further legislation affecting the consolidated billing provision. However, as we noted in the proposed rule of April 10, 2000 (65 FR 19232), section 1888(e)(2)(A)(iii) of the Act, as added by section 103 of the BBRA, not only identified for exclusion from this provision a number of particular service codes within four specified categories (that is, chemotherapy items, chemotherapy administration services, radioisotope services, and customized prosthetic devices), but “ * * * also gives the Secretary the authority to designate additional, individual services for exclusion within each of the specified service categories.” In that proposed rule, we also noted that the BBRA Conference report (H.R. Conf. Rep. No. 106-479 at 854) characterizes the individual services that this legislation targets for exclusion as “* * * high-cost, low probability events that could have devastating financial impacts because their costs far exceed the payment [SNFs] receive under the prospective payment system * * *” According to the conferees, section 103(a) “is an attempt to exclude from the PPS certain services and costly items that are provided infrequently in SNFs * * *” By contrast, we noted that the Congress declined to designate for exclusion any of the remaining services within those four categories (thus leaving all of those services subject to SNF consolidated billing), because they are relatively inexpensive and are furnished routinely in SNFs.

As we further explained in the final rule of July 31, 2000 (65 FR 46790), any additional service codes that we might designate for exclusion under our discretionary authority must meet the same criteria that the Congress used in identifying the original codes excluded from consolidated billing under section 103(a) of the BBRA: they must fall within one of the four service categories specified in the BBRA, and they also must meet the same standards of high cost and low probability in the SNF setting. Accordingly, we characterized this statutory authority to identify additional service codes for exclusion “* * * as essentially affording the flexibility to revise the list of excluded codes in response to changes of major significance that may occur over time (for example, the development of new medical technologies or other advances in the state of medical practice)” (65 FR 46791). In view of the amount of time that has elapsed since we made that statement, we believe it is appropriate at this point to invite public comments that identify codes in any of these four service categories representing recent medical advances that might meet the BBRA criteria for exclusion from SNF consolidated billing.

We note that the original BBRA legislation (as well as the implementing regulations) identified a set of excluded services by means of specifying HCPCS codes that were in effect as of a particular date (that is, July 1, 1999). Identifying the excluded services in this manner made it possible for us to utilize a Program Memorandum as the vehicle for accomplishing routine updates of the excluded codes, in order to reflect any minor revisions that might subsequently occur in the coding system itself (for example, the assignment of a different code number to the same service). Accordingly, for any new services that would actually represent a substantive change in the scope of services that are excluded from the SNF consolidated billing provision, we would identify these additional excluded services by means of the HCPCS codes that are in effect as of a specific date (in this case, October 1, 2002). By making any new exclusions in this manner, we could similarly accomplish routine future updates of these additional codes through the issuance of a Program Memorandum.

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

In the July 31, 2001 final rule (66 FR 39562), we announced the conversion of swing-bed hospitals to the SNF PPS, effective with the start of the provider's first cost reporting period beginning on or after July 1, 2002. We selected this date consistent with the statutory provision to integrate swing-bed hospitals into the SNF PPS by the end of the SNF transition period, that is, June 30, 2002.

By July 31, 2003, the SNF PPS will cover all swing-bed hospitals. Therefore, all rates and wage indexes outlined in earlier sections of this notice for SNF PPS also apply to all swing-bed hospitals. A complete discussion of assessment schedules, the MDS and the transmission software, Raven-SB for Swing Beds can be found in the July 31, 2001 final rule (66 FR 39562). The latest changes in the MDS for swing-bed hospitals are listed on our SNF PPS Web site, http://.www.cms.hhs.gov/​providers/​snfpps/​default.asp.

VI. Distinct Part Definition

While some SNFs function as separate, independent entities, we have recognized since the inception of the Medicare program that it is also possible for a SNF to operate as a component, or “distinct part,” of a larger organization. As indicated in the discussion below, the predominant organizational form for such distinct part SNFs has been that of a component of a hospital that furnishes SNF services within the larger hospital complex. However, most program requirements that address SNF distinct parts have focused on operating and cost reporting procedures, without precisely defining what a “distinct part” is. The definition of a distinct part is particularly meaningful in today's environment, since entities other than hospitals are increasingly exploring diversification to provide SNF services. In addition, the growing frequency of hospital mergers (in which each of the merging hospitals brings its own distinct part SNF into the merger) has created situations where the newly-merged hospital entity includes the merger of components that are furnishing SNF services at two different physical locations; that is, the creation of a “composite” distinct part SNF. Moreover, such a hospital might additionally purchase a freestanding SNF for use in placing those of its inpatients who are ready for hospital discharge.

As a result of these changes in facility practices, it has become increasingly important to document the assumptions used historically to survey and certify distinct part units. The purpose of this portion of the proposed rule is to clarify the definition of a “distinct part,” to provide more precise guidance to providers and State licensure and certification agencies. This guidance will assist providers in understanding the criteria that govern the financial and organizational structure of such entities, which will facilitate the application and certification process. In this proposed rule, we also explain how the survey and certification requirements are being applied to distinct parts in separate physical locations.

This proposal is not expected to have any adverse financial impact on hospitals or other entities exploring or operating distinct part SNFs. In fact, clarifying our expectations regarding operating criteria could enable providers to identify as duplicative or unnecessary certain procedures that they may have adopted before these clarifications were available, but that are not actually required by our programs. We are also evaluating ways to ensure that the survey and certification process includes ongoing monitoring of changes in distinct part status, and we invite comments on appropriate ways to accomplish this.

Similarly, we do not anticipate any negative impact on beneficiary access to care or on the quality of care furnished in distinct part SNFs. Distinct part SNFs already operate under the same benefit, eligibility, and coverage regulations as freestanding SNFs, and beneficiaries who reside in a distinct part SNF also have the same rights and protections as beneficiaries residing in freestanding SNFs. In fact, in this proposed rule, we clarify how certain resident rights and protections should be administered in composite distinct part SNFs. We anticipate that this clarification of our expectations will promote improved provider compliance with these program requirements.

A. Background

As noted in section I.A of this preamble, services are covered under the Part A SNF benefit only when furnished in a SNF that Medicare has certified as meeting the requirements for program participation contained in section 1819 of the Act. This section of the Act defines a SNF in terms of being “* * * an institution (or a distinct part of an institution) * * *. ” The committee report that accompanied the original Medicare legislation (cited below) contained the following explanation of the distinct part concept as applied to “posthospital extended care facilities,” or SNFs: “* * * A posthospital extended care facility could be an institution, such as a skilled nursing home, or a distinct part of an institution, such as a ward or wing of a hospital or a section of a facility another part of which might serve as an old-age home.” (Senate Finance Committee Rep. No. 404, 89th Cong., 1st Sess. 31-32 (1965)).

Under the reasonable cost payment methodology that applied to covered Part A SNF stays prior to the inception of the SNF PPS, a determination that a SNF was a distinct part of a hospital (or “hospital-based”) rather than a freestanding facility directly affected the amount of the SNF's Medicare payment. This is because that payment methodology set higher limits on routine service costs for hospital-based SNFs than for freestanding facilities.

In the Federal Register of September 4, 1980 (45 FR 58701), we defined a “hospital-based SNF” for this purpose as being an integral and subordinate part of a hospital that is operated with other departments of the hospital under common licensure, governance, and professional supervision, with all services of both the hospital and the SNF being fully integrated. In addition, we included the following specific criteria:

• The SNF and hospital are subject to the bylaws and operating decisions of a common governing board;
• The SNF and hospital are financially integrated as evidenced by the cost report, which must reflect the certified or noncertified SNF beds of the hospital, the allocation of hospital overhead to the SNF through the required stepdown methodology, and common billing for all services of both facilities.
• While colocation is not an essential factor, the distance between the two facilities must be reasonable.
• The existence of a transfer agreement or a shared service agreement between the SNF and the hospital does not determine a SNF to be hospital-based and is not considered in determining the status of the facility.

We recognize that the April 7, 2000 final rule for the PPS for outpatient hospital services promulgated a set of criteria for use in determining whether an entity is “provider-based” (65 FR 18504), including several criteria that were similar to the 1980 hospital-based criteria for SNFs. However, SNFs are not subject to the provider-based regulations (see § 413.65(a)(1)(ii)(D)).

B. Proposed Revision

It has been noted that the regulations at § 413.65 already set forth detailed criteria for determining provider-based status in other settings, but that no similar regulations exist with regard to SNFs. The need to clarify the criteria for identifying distinct parts is especially pronounced in the context of survey and certification procedures.

In addition, the concept of a distinct part is actually broader than that of a “hospital-based” facility, in that the former can encompass situations in which a SNF is a part of a larger institution that is not a hospital (for example, a domiciliary or “board and care” facility). Further, the distinct part concept applies to Medicaid nursing facilities (NFs) as well as to SNFs, and involves not only payment issues, but also the requirements specified in the regulations at part 483, subpart B (the requirements for program participation for long-term care facilities (that is, SNFs and NFs)). Further, while the regulations at § 483.5 (which define a long-term care facility in this context) refer to the existence of “distinct part” SNFs and NFs, they do not currently contain a specific definition of this term.

Accordingly, in this proposed rule, we propose to add a number of specific criteria that would serve to determine whether a SNF or NF can be designated as a distinct part of a hospital or other entity, in the requirements for participation for long-term care facilities in subpart B of part 483. These proposed revisions would essentially reflect the 1980 “hospital-based” criteria discussed previously (which focus primarily on such elements as common ownership and control, financial integration, and location), and would also incorporate existing criteria included in the State Operations Manual and in Survey and Certification Letters into a single regulation. We also propose to make a number of conforming changes elsewhere in subpart B of part 483 of the regulations (specifically §§ 483.10 and 483.12), as well as to other distinct part references that appear in parts 413 and 440.

At § 483.5, we would define a distinct part as a physically identifiable component of an institution (for example, a hospital, or a board and care facility) or institutional complex (for example, a hospital or continuing care retirement community that includes various subprovider units and occupies several buildings) that is certified as meeting the applicable statutory requirements for SNFs or NFs in sections 1819 or 1919 of the Act, respectively, as well as the participation requirements for long-term care facilities set forth in subpart B of part 483. A SNF or NF distinct part may be comprised of one or more buildings or designated parts of buildings (that is, wings, wards, or floors) that are located in the same physical area immediately adjacent to the institution's main buildings, other areas and structures that are not strictly contiguous to the main buildings but are within close proximity of the main buildings, and any other areas that we determine, on an individual basis, to be part of the institution's campus. A distinct part must include all of the beds within the designated area, and cannot consist of a random collection of individual rooms or beds that are scattered throughout the physical plant.

In addition, we would set forth a number of specific criteria for use in determining whether a SNF or NF can be considered a distinct part of a larger institution, as follows:

• The SNF or NF must be operated under common ownership and control (that is, common governance) by the institution of which it is a distinct part, as evidenced by the following:

(1) The SNF or NF is wholly owned by the institution of which it is a distinct part;

(2) The SNF or NF is subject to the by-laws and operating decisions of a common governing body;

(3) The institution of which the SNF or NF is a distinct part has final responsibility for the distinct part's administrative decisions and personnel policies, and final approval for the distinct part's personnel actions; and

(4) The SNF or NF functions as an integral and subordinate part of the institution to which it is based, with significant common resource usage of buildings, equipment, personnel, and services.

• The administrator of the SNF or NF reports to and is directly accountable to the management of the institution of which the SNF or NF is a distinct part.
• The SNF or NF must have a designated medical director who is responsible for implementing care policies and coordinating medical care, and who is directly accountable to the management of the institution of which it is a distinct part.
• The SNF or NF is financially integrated with the institution of which it is a distinct part, as evidenced by the sharing of income and expenses with that institution, and the reporting of its costs on that institution's cost report.
• A single institution can have a maximum of only one distinct part SNF and one distinct part NF. (If an institution exercises the option to have both a distinct part SNF and a distinct part NF, its SNF and NF distinct parts may overlap entirely, partially, or not at all. Further, if the SNF and NF distinct parts partially overlap, the area of overlap would not represent a separate, dually-certified “SNF/NF.”)
• An institution cannot designate itself as a SNF or NF distinct part, but instead must submit a written request to us to determine if it may be considered a distinct part, along with documentation that demonstrates that it meets the criteria set forth above. The effective date of approval of a distinct part is the date that we determine all requirements (including enrollment with the fiscal intermediary) are met for approval, and cannot be made retroactive. If a distinct part is established without our notification and approval, CMS will determine the distinct part has not been appropriately designated as such from the date that the entity began its operation. CMS must approve all proposed changes in the number of beds in the approved distinct part. (Such modifications would be subject to the applicable requirements governing changes in bed size or location in SNFs and NFs, as set forth in section 2337 of the Provider Reimbursement Manual, Part 1 (CMS Pub. 15-1), and in section 3202 of the State Operations Manual (CMS Pub. 7).)

We note that our proposed definition of distinct parts does not represent an additional burden on SNFs; rather, it would simply add increased clarity and specificity to the process of determining distinct part status. We believe that establishing more definitive criteria in this area will actually help reduce the existing burden on SNFs by adding greater clarity and predictability to the process of determining a SNF's distinct part status.

Further, we note that the numerous requests that we have received for clarification of the distinct part criteria have arisen, in part, from a June 4, 1996, memorandum in which we reiterated our longstanding interpretation that sections 1819(a) and 1919(a) of the Act allow for a maximum of one distinct part SNF (and one distinct part NF) within a single institution. We issued this memorandum in response to an increasing number of situations involving the merger of two hospitals on separate campuses, each of which brings its own distinct part SNF into the merger. Under our policy of allowing only one distinct part SNF per institution, such a merger would result in the creation of a single distinct part SNF consisting of two noncontiguous units in different locations (as opposed, for example, to a distinct part consisting of noncontiguous wards, wings, or floors that are all located within the same building or campus).

In this proposed rule, we refer to such a configuration as a “composite distinct part.” A composite distinct part could also be created when a hospital that already has a distinct part SNF acquires an additional nursing home that is not co-located on the hospital's campus. This, in turn, has raised a number of questions and concerns regarding the treatment of such entities under the survey and certification process, which we now propose to address as well.

Accordingly, we propose to establish certain additional criteria that would apply specifically to a composite distinct part SNF or NF of a hospital, or of a nonhospital organization such as a continuing care retirement community (CCRC). Under these criteria, a composite distinct part would be treated as a single distinct part of the institution to which it is based and, as such, would have only one provider agreement. It should be noted that in establishing criteria specific to composite distinct parts, it is not our intent to create a new category of nursing homes, but rather, simply to address certain survey and certification issues that arise from the use of this particular type of configuration. By explicitly recognizing composite distinct parts, we can help ensure that survey and other program oversight functions are coordinated and uniformly administered. Since the designation of a composite distinct part is not designed to supersede or replace existing policies, the use of a composite SNF or NF configuration is limited to facilities within the same State. Further, in order to ensure quality of care and quality of life for all residents, the constituent components of a composite distinct part would be required to meet all of the participation requirements set forth in subpart B of part 483 independently in each location.

We also wish to take this opportunity to provide clarification regarding the logistics of applying the survey and certification process to a composite distinct part that consists of components in different locations. Specifically, we note that for such facilities, surveyors will place particular emphasis on the following requirements, which must be met independently in each location of the composite distinct part:

• Posting of resident's rights (§ 483.10(b));
• Posting of names, addresses, and telephone numbers of all pertinent State client advocacy groups (§ 483.10(b)(7)(iii));
• Prominently displayed facility information (§ 483.10(b)(10));
• Readily available survey results (§ 483.10(g));
• Organized resident and family groups (§ 483.15(c));
• Equal access by residents to activities and social services (§ 483.15(b), § 483.15(f), and § 483.15(g));
• Except where waived, the services of a registered nurse for at least 8 consecutive hours a day, 7 days a week (§ 483.30(b));
• Designating a person to serve as director of food services who receives frequently scheduled consultation from a qualified dietitian, unless a qualified dietitian is employed on a full-time basis (§ 483.35(a)); and
• The physical environment requirements, including life safety, and provisions for space and equipment in dining, health services, recreation and program areas, to enable staff to provide residents with needed services as required by these standards and as identified in each resident's plan of care (§ 483.15(h) and § 483.70).

We also propose to amend the regulations at § 483.12, to establish a resident's right to remain in (or return to) the same location of the composite distinct part to which he or she was originally admitted. To avoid any confusion regarding the distinct part criteria applicable to SNFs, we would amend the provider-based regulations at § 413.65(a)(1)(ii)(D) to include a cross-reference to the new distinct part criteria. Currently, the regulations at § 413.65(a)(1)(ii)(D) indicate only that provider-based determinations under these regulations do not apply to SNFs. We would amend § 413.65(a)(1)(ii)(D) by adding a parenthetical statement indicating that determinations for SNFs are made under the regulations at § 483.5.

We are also taking this opportunity to correct a typographical error that currently appears in the regulations text at § 483.20(k)(1) (regarding the required comprehensive care plan for long-term care facility residents), in which the word “describe” is misspelled as “describer.”

VII. Provisions of the Proposed Rule

In this proposed rule, we propose to make the following revisions to the existing text of the regulations:

• In § 409.20, we would make a technical correction to the cross-reference that appears in paragraph (c).
• We would revise § 483.5 to include specific definitions of the terms “distinct part” and “composite distinct part.” In addition, we would make conforming changes elsewhere in subpart B of part 483 of the regulations, as well as in parts 413 and 440, and we would correct a typographical error that currently appears in the regulations text at § 483.20(k)(1).

VIII. Collection of Information Requirements

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

IX. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this proposed rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, (the Act) the Unfunded Mandates Reform Act of 1995 (UMRA), (Pub. L. 104-4), and Executive Order 13132.

Executive Order 12866 (as amended by Executive Order 13258, which merely assigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). This proposed rule is a major rule, as defined in Title 5, United States Code, section 804(2), because we estimate the impact of the update will be to increase payments to SNFs by approximately $400 million. The update set forth in this proposed rule applies to payments in FY 2004. Accordingly, the analysis that follows describes the impact of this one fiscal year only. In accordance with the requirements of the Act, we will publish a notice for each subsequent fiscal year that will provide for an update to the payment rates and that will include an associated impact analysis.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most SNFs and most other providers and suppliers are small entities, either by their nonprofit status or by having revenues of $11.5 million or less in any 1 year. For purposes of the RFA, approximately 53 percent of SNFs are considered small businesses according to the Small Business Administration's latest size standards with total revenues of $11.5 million or less in any 1 year (for further information, see 65 FR 69432, November 17, 2000). Individuals and States are not included in the definition of a small entity.

This proposed rule would update the SNF PPS rates published in the July 31, 2002 update notice (67 FR 49798), thereby increasing aggregate payments by an estimated $400 million. Accordingly, we certify that this proposed rule would not have a significant impact on small entities.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. For a proposed rule, this analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. Because the payment rates set forth in this proposed rule also affect rural hospital swing-bed services, we believe that this proposed rule would have an impact on small rural hospitals (this impact is discussed later in this section). However, because this incremental increase in payments for Medicare swing-bed services is relatively minor in comparison to overall rural hospital revenues, this notice will not have a significant impact on the overall operations of these small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million or more. This proposed rule would have no substantial effect on State, local, or tribal governments. We believe the private sector cost of this proposed rule falls below these thresholds as well.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. As stated above, this proposed rule would have no substantial effect on State and local governments.

The purpose of this proposed rule is not to initiate significant policy changes with regard to the SNF PPS; rather, it is to provide an update to the rates for FY 2004 and to address a number of policy issues related to the PPS. We believe that the revisions and clarifications mentioned elsewhere in the preamble (for example, with respect to determining distinct part status) will have, at most, only a negligible overall effect upon the regulatory impact estimate specified in the rule. As such, these revisions would not represent an additional burden to the industry.

B. Anticipated Effects

This proposed rule sets forth updates of the SNF PPS rates contained in the July 31, 2002 update (67 FR 49798). The impact analysis of this proposed rule represents the projected effects of the changes in the SNF PPS from FY 2003 to FY 2004. We estimate the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these changes, and we do not make adjustments for future changes in such variables as days or case-mix.

This analysis incorporates the latest estimates of growth in service use and payments under the Medicare SNF benefit, based on the latest available Medicare claims from 2001. We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, very susceptible to forecasting errors due to other changes in the forecasted impact time period. Some examples of such possible events are newly-legislated general Medicare program funding changes by the Congress, or changes specifically related to SNFs. In addition, changes to the Medicare program may continue to be made as a result of the BBA, the BBRA, the BIPA, or new statutory provisions. Although these changes may not be specific to the SNF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon SNFs.

As mentioned previously, we propose to continue use of the FY 2003 wage index to adjust SNF PPS payments beginning October 1, 2003, in order to assure that the wage index published in each year's update will be used throughout the year to adjust payments. Therefore, the wage index has not changed and provides no additional impact on payment rates.

In accordance with section 1888(e)(4)(E) of the Act, the payment rates for FY 2004 are updated by a factor equal to the market basket index percentage increase to determine the payment rates for FY 2004. We note that in accordance with section 101(a) of the BBRA and section 314 of the BIPA, the existing, temporary increase in the per diem adjusted payment rates of 20 percent for certain specified RUGs (and 6.7 percent for certain others) remains in effect until the implementation of case-mix refinements. Because there have been no other revisions or clarifications affecting the payment rates for this proposed rule, the amount of the full market basket update is the only impact on facility payment rates. This leads to an increase in payments to SNFs of approximately $400 million (including approximately $6.4 million for swing-bed facilities, as discussed below), which is the full impact of this proposed rule with respect to SNFs.

Since the impact is limited to the 2.9 percentage increase due to the market basket update, the impact is the same for every facility without regard to Census region, ownership type, or urban/rural designation. For this reason, we have not included an impact table as we have in previous years.

With regard to the specific impact on swing-bed providers, in the July 31, 2002 update notice (67 FR 49798), we projected payments for these providers under the SNF PPS by first using the MEDPAR analog to assign 1999 claims records to a RUG-III group, then applying FY 2003 payment rates to calculate annual estimated payments.

For the purpose of this proposed rule, we have used the MEDPAR analog classification, and estimated current SNF PPS reimbursement as if the swing-bed providers were fully phased into the SNF PPS in FY 2002. Then, using the same MEDPAR analog classifications, we applied the FY 2004 changes for a fully phased-in swing-bed population. We estimate that the overall impact on swing-bed facilities will be an increase in payments of approximately 2.9 percent, or $6.4 million.

C. Alternatives Considered

Section 1888(e) of the Act establishes the SNF PPS for the payment of Medicare SNF services for cost reporting periods beginning on or after July 1, 1998. This section of the statute prescribes a detailed formula for calculating payment rates under the SNF PPS, and does not provide for the use of any alternative methodology. It specifies that the base year cost data to be used for computing the RUG-III payment rates must be from FY 1995 (October 1, 1994, through September 30, 1995.) In accordance with the statute, we also incorporated a number of elements into the SNF PPS, such as case-mix classification methodology, the MDS assessment schedule, a market basket index, a wage index, and the urban and rural distinction used in the development or adjustment of the Federal rates. Further, section 1888(e)(4)(H) of the Act specifically requires us to publish the payment rates for each new fiscal year in the Federal Register, and to do so prior to the August 1 that precedes the start of the new fiscal year. Accordingly, based upon the prescriptive nature of the statute, we are not pursuing alternatives.

D. Conclusion

For the reasons set forth in the preceding discussion, we are not preparing analyses for either the RFA or section 1102(b) of the Act because we have determined, and we certify, that this proposed rule will not have a significant economic impact on a substantial number of small entities or a significant impact on the operations of a substantial number of small rural hospitals.

Finally, in accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 409

• Health facilities
• Medicare

42 CFR Part 413

• Health facilities
• Kidney diseases
• Medicare
• Reporting and recordkeeping requirements

42 CFR Part 440

• Grants programs—health
• Medicaid

42 CFR Part 483

• Grants programs—health
• Health facilities
• Health professions
• Health records
• Medicaid
• Medicare
• Nursing homes
• Nutrition
• Reporting and recordkeeping requirements
• Safety

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as follows:

PART 409—HOSPITAL INSURANCE BENEFITS

1. The authority citation for part 409 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

Subpart C—Posthospital SNF Care

2. In § 409.20, the introductory text to paragraph (c) is revised to read as follows:

§ 409.20

Coverage of services.

* * * * *

(c) * * *

In § 409.21 through § 409.36—.

* * * * *

PART 413—PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT RATES FOR SKILLED NURSING FACILITIES

1. The authority citation for part 413 continues to read as follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i) and (n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

SUBPART E—PAYMENTS TO PROVIDERS

2. In § 413.65, paragraph (a)(1)(ii)(D) is revised to read as follows:

§ 413.65

Requirements for a determination that a facility or organization has provider-based status.

(a) Scope and definitions. (1) Scope.

(ii) * * *

(D) Skilled nursing facilities (SNFs) (determinations for SNFs are made in accordance with the criteria set forth in § 483.5 of this chapter).

* * * * *

PART 440—SERVICES: GENERAL PROVISIONS

1. The authority citation for part 440 continues to read as follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302).

Subpart A—Definitions

2. In § 440.40, paragraph (a)(1)(ii)(A) is revised to read as follows:

§ 440.40

Nursing facility services for individuals age 21 or older (other than services in an institution for mental disease), EPSDT, and family planning services and supplies.

(a) * * *

(1) * * *

(ii) * * *

(A) A facility or distinct part (as defined in § 483.5(b) of this chapter) that is certified to meet the requirements for participation under subpart B of part 483 of this chapter, as evidenced by a valid agreement between the Medicaid agency and the facility for providing nursing facility services and making payments for services under the plan; or

* * * * *

2. In § 440.155(c), the introductory text is revised to read as follows:

§ 440.155

Nursing facility services, other than in institutions for mental diseases.

* * * * *

(c) “Nursing facility services” may include services provided in a distinct part (as defined in § 483.5(b) of this chapter) of a facility other than a nursing facility if the distinct part (as defined in § 483.5(b) of this chapter)—

* * * * *

PART 483—REQUIREMENTS FOR STATES AND LONG TERM CARE FACILITIES

1. The authority citation for part 483 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

Subpart B—Requirements for Long Term Care Facilities

2. Section 483.5 is revised to read as follows:

§ 483.5

Definitions.

(a) Facility defined. For purposes of this subpart, facility means a skilled nursing facility (SNF) that meets the requirements of sections 1819 (a), (b), (c), and (d) of the Act, or a nursing facility (NF) that meets the requirements of sections 1919 (a), (b), (c), and (d) of the Act. “Facility” may include a distinct part of an institution (as defined in paragraph (b) of this section and specified in § 440.40 and § 440.155 of this chapter), but does not include an institution for the mentally retarded or persons with related conditions described in § 440.150 of this chapter. For Medicare and Medicaid purposes (including eligibility, coverage, certification, and payment), the “facility” is always the entity that participates in the program, whether that entity is comprised of all of, or a distinct part of, a larger institution. For Medicare, a SNF (see section 1819(a)(1) of the Act), and for Medicaid, a NF (see section 1919(a)(1) of the Act) may not be an institution for mental diseases as defined in § 435.1009 of this chapter.

(b) Distinct part.

(1) Definition. A distinct part SNF or NF is a physically identifiable component of an institution (for example, a hospital) or institutional complex (for example, a hospital that includes various subprovider units and occupies several buildings) that meets the requirements of this paragraph and of paragraph (b)(2) of this section, and is certified as meeting the applicable statutory requirements for SNFs or NFs in sections 1819 or 1919 of the Act, respectively. A SNF or NF distinct part may be comprised of one or more buildings or designated parts of buildings (that is, wings, wards, or floors) that are: in the same physical area immediately adjacent to the institution's main buildings; other areas and structures that are not strictly contiguous to the main buildings but are located within close proximity of the main buildings; and any other areas that CMS determines on an individual basis, to be part of the institution's campus. A distinct part must include all of the beds within the designated area, and cannot consist of a random collection of individual rooms or beds that are scattered throughout the physical plant. The term “distinct part” also includes a composite distinct part that meets the additional requirements of paragraph (c) of this section.

(2) Requirements. In addition to meeting the participation requirements for long-term care facilities set forth elsewhere in this subpart, a SNF or NF also must meet all of the following requirements in order to be designated as a distinct part of an institution for payment or other purposes:

(i) The SNF or NF must be operated under common ownership and control (that is, common governance) by the institution of which it is a distinct part, as evidenced by the following:

(A) The SNF or NF is wholly owned by the institution of which it is a distinct part.

(B) The SNF or NF is subject to the by-laws and operating decisions of a common governing body.

(C) The institution of which the SNF or NF is a distinct part has final responsibility for the distinct part's administrative decisions and personnel policies, and final approval for the distinct part's personnel actions.

(D) The SNF or NF functions as an integral and subordinate part of the institution to which it is based, with significant common resource usage of buildings, equipment, personnel, and services.

(ii) The administrator of the SNF or NF reports to and is directly accountable to the management of the institution of which the SNF or NF is a distinct part.

(iii) The SNF or NF must have a designated medical director who is responsible for implementing care policies and coordinating medical care, and who is directly accountable to the management of the institution of which it is a distinct part.

(iv) The SNF or NF is financially integrated with the institution of which it is a distinct part, as evidenced by the sharing of income and expenses with that institution, and the reporting of its costs on that institution's cost report.

(v) A single institution can have a maximum of only one distinct part SNF and one distinct part NF.

(vi) An institution cannot designate itself as an SNF or NF distinct part, but instead must submit a written request to CMS to determine if it may be considered a distinct part, along with documentation that demonstrates that it meets the criteria set forth above. The effective date of approval of a distinct part is the date that CMS determines all requirements (including enrollment with the fiscal intermediary) are met for approval, and cannot be made retroactive. If a distinct part is established without CMS's notification and approval, CMS will determine the distinct part has not been appropriately designated as such from the date that the entity began its operation. CMS must approve all proposed changes in the number of beds in the approved distinct part.

(c) Composite distinct part.

(1) Definition. A composite distinct part is a distinct part consisting of two or more noncontiguous components that are not located within the same campus, as defined in § 413.65(a)(2) of this chapter.

(2) Requirements. In addition to meeting the requirements of paragraph (b) of this section, a composite distinct part also must meet all of the following requirements:

(i) An SNF or NF that is a composite of more than one location will be treated as a single distinct part of the institution to which it is based. As such, the composite distinct part will have only one provider agreement.

(ii) If there is a change of ownership of a composite distinct part SNF or NF, the assignment of the provider agreement to the new owner will apply to all of the approved locations that comprise the composite distinct part SNF or NF.

(iii) If two or more hospitals (each with a distinct part SNF or NF) merge, CMS must approve the existing SNFs or NFs as meeting the requirements of this paragraph before they can be merged and considered a single distinct part of the hospital that survives the merger. In making such a determination, CMS will consider whether its approval or disapproval of a proposed merger promotes the effective and efficient use of public monies without sacrificing the quality of care.

(iv) To ensure quality of care and quality of life for all residents, the various components of a composite distinct part must meet all of the requirements for participation independently in each location.

3. In § 483.10, the following new paragraph (b)(12) is added to read as follows:

§ 483.10

Resident rights.

* * * * *

(b) * * *

(12) Admission to a composite distinct part. In its admission agreement, a facility that is a composite distinct part (as defined in § 483.5(c) of this subpart) must disclose its physical configuration, including the various locations that comprise the composite distinct part, and must specify the policies that apply to room changes between its different locations under § 483.12(a)(8) of this subpart.

* * * * *

4. In § 483.12, the following changes are made:

A. A new paragraph (a)(8) is added.

B. A new paragraph (b)(4) is added.

The additions read as follows:

§ 483.12

Admission, transfer, and discharge rights.

(a) * * *

(8) Room changes in a composite distinct part. Room changes in a facility that is a composite distinct part (as defined in § 483.5(c) of this subpart) must be limited to moves within the particular building in which the resident resides, unless the resident voluntarily agrees to move to another of the composite distinct part's locations.

* * * * *

(b) * * *

(4) Readmission to a composite distinct part. When the nursing facility to which a resident is readmitted is a composite distinct part (as defined in § 483.5(c) of this subpart), the resident must be permitted to return to an available bed in the particular location of the composite distinct part in which he or she resided previously. If a bed is not available in that location at the time of readmission, the resident must be given the option to return to that location upon the first availability of a bed there.

* * * * *

§ 483.20

[Amended]

3. In § 483.20(k)(1), the word “describer” is revised to read “describe''.

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare-Hospital Insurance Program; and No. 93.774, Medicare-Supplementary Medical Insurance Program)

Dated: January 29, 2003.

Thomas A. Scully,

Administrator, Centers for Medicare & Medicaid Services.

Dated: April 21, 2003.

Tommy G. Thompson,

Secretary.