Regulatory Report

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October 2001

By Stuart S. Kurlander, JD, MHA

On July 31, CMS released its final rule updating the prospective payment system (PPS) for skilled nursing facilities (SNFs). The rule addresses a number of items, including planned case-mix adjustments, "add-ons" for designated Resource Utilization Groups (RUGs), wage and market basket indexes, concurrent therapy services, and consolidated billing.

Case-Mix Adjustments Postponed. In its proposed rule issued on May 10, 2001, CMS solicited comments on possible refinements or alternatives to the current case-mix classification system for SNFs. The final rule reiterates CMS's commitment to monitoring and refining the RUG-III classification system. However, it also announces that no such refinements will be implemented for FY2002. A contract has been awarded to the Urban Institute to research appropriate methodologies for the eventual refinements.

Therapy Add-Ons. In accordance with the provisions of the Balanced Budget Refinement Act of 1999 and Benefits Improvement and Protection Act of 2000 (BIPA), the final rule reflects temporary increases in per diem payments for specific RUGs, as well as an across-the-board per diem increase for all RUGs. For rehabilitation-related RUGs, the overall increase stands at 10.7% over the federal rates. Because CMS has not yet finalized a proposal to modify its case-mix classification system, the temporary increases will remain in place for FY2002.

Wage and Market Basket Indexes. The final rule provides that the net market basket increase for FY2002 will be 2.8%, rather than 2.4% as put forward in the proposed rule. Meanwhile, the hospital-based wage index is being retained in FY2002, and CMS will continue to use it until a SNF-specific wage index is developed. Providers will not be reclassified geographically into an adjacent area prior to implementation of such a SNF-specific index.

Concurrent Therapy. In response to numerous comments on this issue, CMS explicitly acknowledges in the final rule that concurrent therapy (the treatment of multiple beneficiaries at one time) has a "legitimate place in the spectrum of care options available to therapists treating Medicare beneficiaries." The final rule states that CMS will not change its existing policies permitting concurrent therapy as long as the decision is driven by valid clinical considerations. However, the rule stresses that it is inappropriate to require a therapist, as a condition of employment, to agree to treat more than one beneficiary at a time in situations where this is contrary to the therapist's professional judgment. The final rule expressly leaves open the possibility that CMS will revisit this issue in the future, should the need arise.

Consolidated Billing. Several commenters on the May 10 proposed rule sought temporary exclusions from consolidated billing requirements for specific items and services, including blood transfusions, liquid oxygen, and specialty beds for patients with severe skin breakdown. CMS rejected these requests, asserting in the final rule that expanding the list of exclusions would conflict with the "fundamental purpose" of consolidated billing-namely, to make the SNF responsible for billing Medicare for essentially all of its residents' services.

In addition to these changes, the final rule announces a substantially revised estimate of the overall increases in total payments to SNFs that can be expected in Fiscal Year 2002. While the proposed rule estimated that aggregate payments would increase by 2.1%, the final rule estimates that the change will be 10.3%, a substantially higher increase. This is attributable largely to an error in the original impact analysis.

PROSPECTIVE PAYMENT FOR INPATIENT REHABILITATION FACILITIES
In further PPS news, CMS published a final rule on August 7 implementing prospective payment for inpatient rehabilitation facilities, effective January 1, 2002. The new PPS will replace the previous cost-based reimbursement system, as required by the Balanced Budget Act of 1997. (Inpatient rehabilitation facilities are exempt from the PPS already in place for most acute care hospitals.)

The newly announced final rule supersedes the earlier, proposed version of the rule, which was published in the Federal Register on November 3, 2000. Highlights of the new PPS include the following:

-Inpatient rehabilitation facilities will no longer be reimbursed on a cost basis. Instead, patient discharges will be classified into case-mix groups (CMGs) related by function. Preestablished payment rates will be keyed to each CMG.

-A patient assessment tool will be used to assign patients to the appropriate CMG. Such groupings will be based on various elements, including impairment, age, co-morbidities, and functional capability. The intent is to ensure that facilities are paid at relatively higher rates to care for those patients with more intensive needs.

-CMG payments are intended to cover virtually all costs of furnishing covered inpatient rehabilitation services, including routine, ancillary, and capital costs. (Bad debt and certain other costs will be paid for separately.) The PPS will thus reward facilities that are able to reduce their costs.

-As with ordinary acute care hospitals, payments to rehabilitation facilities will be adjusted when a patient is transferred to another hospital or nursing home before completing the full course of care.

-Payment rate adjustments will also be made to reflect geographical differences in wages, the higher costs of providing rural care, and the burden of providing services to a disproportionate number of low-income patients. In addition, supplemental payments will be made for "outlier" cases (those where the beneficiary has extraordinary care needs, far exceeding those normally associated with the assigned CMG).

In an important departure from the proposed rule, the new PPS will not include a proposed 2% reduction in payments to providers from what they would have been paid under the current cost-based system. This change is being made to comply with requirements of the Medicare, Medicaid and State Children's Health Insurance Program BIPA.

According to CMS, the "higher payments" mandated by BIPA "will help providers cover the costs of implementing the new patient assessment survey." This refers only to the elimination of proposed cuts, however, rather than actual increases in payment. Nonetheless, BIPA intends to assure full budget neutrality (referenced to FY2001 expenditures) in the implementation of the new PPS.

Inpatient rehabilitation facilities may transition into the new payment system over a 1-year period, during which payment would be made in accordance with "blended" rates combining the old and new systems. (The proposed rule had provided for a 2-year transition period.) Alternatively, facilities may elect to go directly to the full PPS rate as of January 1, 2002.

These are some of the key changes impacting the rehabilitation industry. Be sure to consult appropriate counsel as needed.

Stuart Kurlander, JD, MHA, is a health care partner at Latham & Watkins, Washington, DC, and can be reached at stuart.kurlander@lw.com.

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October 2001