United States: Medicare 2006 SNF PPS Payment Update Proposes Significant Changes; Long-Term Care Pharmacies Part D Plan Arrangements for January 1, 2006

As mandated under the Prospective Payment System (PPS) for skilled nursing facilities (SNFs) in effect since July 1, 1998, the Centers for Medicare and Medicaid Services (CMS) published its proposed annual update of Medicare rates for fiscal year 2006, which starts on October 1, 2005. Proposed "refinements" of the Resource Utilization Group (RUG) methodology, tied with the elimination of financially significant temporary add-ons to SNF payment, will require analysis of the effect of the proposed changes on individual facilities. Notwithstanding anticipated variations in individual facility payment resulting from the changes, finalization of the regulation will result in virtually no change in overall Medicare payments for the next fiscal year. In addition, CMS is soliciting comments on topics affecting other providers, such as how hospital observation days should be considered in determining a qualifying three-day inpatient hospital stay for admission of a patient to an SNF.

The PPS rates cover all the costs of furnishing skilled nursing services (routine, ancillary and capital-related costs) other than costs associated with approved educational activities. The proposal would increase the PPS rates by a market basket factor of three percent and, under proposed RUG "refinements," expand the RUG-III groups from the current 44 to 53 groups. According to CMS, the $510 million increase in payments associated with the RUG-III refinements, together with a $510 million increase from the update to the payment rates, offset by the $1.02 billion reduction due to the elimination of temporary add-ons for complex medical RUG-III groups and for rehabilitation groups granted under the Balanced Budget Refinement Act of 1999 (BBRA), will result in virtually no change in overall SNF Medicare payments in FY 2006. The update appears in the Federal Register, Vol. 70, No. 96, page 29,070 (May 19, 2005) or at http://www.cms.hhs.gov/providerupdate/regs/cms1282P.pdf. To assure consideration, comments must be received at CMS offices by July 12, 2005.

The BBRA implemented a temporary 20 percent increase in the per diem adjusted payment rates for 12 complex medical RUG-III groups and a 6.7 percent increase to all 14 rehabilitation groups. Under the BBRA, this temporary increase remains in effect until the later of October 1, 2000 or the implementation of case-mix refinements that would better account for medically complex patients in the PPS. The prospect of the elimination of temporary add-ons to SNF payment has been referred to as the "Medicare cliff," reflecting the high level of provider concern over the eliminated payment. If CMS does adopt the proposed rule for FY 2006 payment, it will implement case-mix refinements, thereby triggering the end of the add-on payments.

Under the proposed rule, the temporary add-on RUG payments would continue through the first quarter of FY 2006 (i.e., through December 31, 2005.) Starting on January 1, 2006, and for the remaining nine months of FY 2006, payments would reflect the RUG refinements made by the addition of nine new RUG-III groups, established to account for the higher costs of residents requiring both high intensity medical services and rehabilitation services. CMS’s Regulatory Impact Analysis anticipates a positive three percent overall impact from the proposed case-mix refinements. In light of distributional effects, hospital-based facilities are expected to receive greater than a 5.6 percent increase in payment, compared with freestanding facilities that show an increase in payment between 2.4 and 2.9 percent. (See "Table 12–Projected Impact to the SNF PPS for FY 2006," on page 29102 of the May 19, 2005 Federal Register.) Rural census regions show payment increases of 3.4 percent.

Each of the nine new RUG groups reflects a rehabilitation service plus other services, starting with "Rehabilitation Ultra High plus Extensive Services High" and moving down to "Rehabilitation Low plus Extensive Services." The proposed rule increases the case-mix indices of all 53 RUG-III groups to reflect variations in non-therapy ancillary costs and takes into account staff time, nursing and therapy services required for different types of SNF residents. The proposed rule maintains the 128 percent payment adjustment for FY 2006, first effective October 1, 2004, for services furnished to SNF residents with AIDS. (This adjustment to PPS was granted by the Medicare Modernization Act of 2003 (MMA), and to keep matters in perspective, CMS estimates that less than 2,000 beneficiaries qualify for this add-on payment.)

Since the inception of SNF PPS, CMS has used hospital wage data to develop a wage index for SNFs, a practice CMS proposes to continue for FY 2006 in the absence of SNF-specific wage data. The wage index adjustment is applied to the labor-related portion of the federal rate. For FY 2006, CMS is setting the labor portion of the rate at 76.087. Since CMS has paid all SNFs at the full Federal rate since FY 2002, CMS no longer includes adjustment factors related to facility-specific rates. CMS proposes to adopt the U.S. Census Bureau’s Core-Based Statistical Area (CBSA) labor area definitions to determine wage rates for the FY 2006 SNF PPS rate year without a transition period and without a hold harmless policy. CMS adopted the CBSAs for hospital PPS in FY 2005 but did so with a transition period and a hold harmless policy. CMS indicates that only 1.4 percent of SNFs would qualify for such a policy, and the adjustment would then require a budget neutrality adjustment for all providers.

SNF PPS includes a consolidated billing provision that requires an SNF to submit consolidated Medicare bills for almost all of the services its residents receive during the course of a covered Part A stay. The statute excludes from consolidated billing a small list of services—primarily those of physicians and certain other practitioners—that outside suppliers currently bill separately. The BBRA not only excludes a number of particular service codes within four specified categories (chemotherapy items, chemotherapy administration services, radioisotope service and customized prosthetic devices), but the act also authorizes the secretary of the U.S. Department of Health and Human Services to designate additional, individual services for exclusion within each of the specified service categories. Targeted for exclusion are high-cost, low-probability events that could have devastating financial impacts because their costs far exceed the payment SNFs received under PPS. CMS will consider public comments that identify codes for exclusion from consolidated billing in any one of the four service categories specified in the BBRA that also meet the standard of high cost and low probability in the SNF setting.

When the Medicare program was established in 1965, Congress enacted a prerequisite for SNF coverage: a beneficiary must be a hospital inpatient for "not less than three consecutive days before his discharge from the hospital." The three-day requirement begins on "the calendar day of admission" to the hospital. In light of changes in hospital admission practices that have occurred since 1965, some patients who would have been considered an inpatient for at least three days are now placed in observation status before formal admission to the hospital. CMS is inviting comments on whether it should consider the possibility of counting the time spent in observation status toward meeting the SNF benefit’s qualifying three-day requirement. In evaluating the potential impact of such a change, CMS also wishes to assess potential negative consequences, such as altering the SNF benefit in a manner that is inconsistent with Congressional intent in establishing the three-day requirement. In soliciting comments, CMS notes that time spent in emergency rooms is not considered a substitute for or equivalent to inpatient hospital care, so such time could not be considered as part of the three-day hospital inpatient stay requirement.

CMS has also invited comments on the practice of concurrent therapy, also known as "dovetailing," to ensure that it is performed only when it is clinically justified and to prevent an abuse of the practice. The therapy involves a single professional therapist treating more than one Medicare beneficiary at a time. In contrast to group therapy, in which all participants are working on a common skill development, the beneficiary may not receive services that relate to those needed by any other participants. CMS is concerned facility management might inappropriately attempt to increase productivity by coercing a therapist to perform concurrent therapy—therapy that does not conform to Medicare coverage guidelines because it is not individual and not at the complex skill level required for coverage by Medicare.

The implementation of MMA requirements on January 1, 2006 for long-term care pharmacy access for Part D enrollees will add to the responsibilities of nursing facilities, long-term care pharmacies and managed care plans that are successful Part D plan bidders. Section 103 of the MMA has important implications for how beneficiaries eligible for both full benefits under both Medicaid and Medicare will have their drug costs financed in 2006 and later. The law shifts dual eligible Medicaid recipients to the new Part D prescription drug program, and this will affect how Medicare and Medicaid nursing facilities provide their drug coverage. Many dual eligible beneficiaries reside in licensed nursing facilities and receive their prescription drugs through a long-term care pharmacy. In the majority of cases, the pharmacy bills the state Medicaid program for drugs directly on a fee-for-service basis. This arrangement will change on January 1, 2006. Under Medicare Part D, each drug plan will be administered by a Part D Plan sponsor (such as an HMO) that will contract with long-term care pharmacies to provide convenient access to pharmacy services for resident plan members. The pharmacies must be prepared to meet certain performance and service criteria under their agreement with the Part D plan sponsor, and the plan sponsor must negotiate payments in a way that provides the "best deals" for beneficiaries. The Part D benefit will place additional burdens on nursing facilities, long-term care pharmacies and Part D plan sponsors.

SNFs will need to review the proposed changes for the potential impact on their facility and to gear-up for what seems a likely expansion of the RUG groups to 53. Where SNFs and other providers will be affected by the proposed changes, or where CMS has specifically solicited comments, such as on counting observation days toward a qualifying three-day inpatient hospital stay, providers should consider submission of comments to CMS by the July 12, 2005 deadline. In anticipation of the January 1, 2006 implementation date of the Part D benefit, providers should review their long-term care pharmacy arrangements to assure they will be in compliance with the new Part D requirements.

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