Understanding the SNF PPS final regulation.

Here's how the final ruling will impact you financially

WHEN THE HEALTH CARE FINANCING Administration (HCFA) issued its anxiously anticipated SNF PPS regulation July 31, 2000, many in the SNF community were relieved to learn that HCFA was not proceeding with its proposed plan to increase the number of Resource Utilization Groups (RUGs) to 178 and redistribute payments. Rather than issuing a final regulation with the case mix refinement, HCFA issued an update notice retaining the 44-group RUG system, incorporating the market basket updates mandated by the BBA of 1997 and the 20 percent and 4 percent add-ons mandated by the Balanced Budget Refinement Act (BBRA) of 1999.

This article will analyze the financial impact of the final regulation and identify HCFA's responses to comments, including new policy developments that have occurred since the final regulation was published.

Why HCFA didn't implement the case mix refinement

Until the regulation was revealed, HCFA's plans appeared unstoppable. High-level HCFA officials consistently reported to Congress on a firm Oct. 1, 2000 timeline for implementing a case mix refinement that would bring equity in payment for medically complex patients who used substantially more non-therapy ancillaries. Continuing on this fast track, HCFA issued a proposed regulation in April 2000 with a recommendation to move to a 178-group RUG system with a newly created nontherapy ancillary (NTA) index.

Throughout this comment period, many sectors of the SNF community opposed the proposed regulation, seeking additional research and imploring HCFA not to create further chaos for SNFs. While the majority of SNFs sought a delay, some subacute SNFs (including hospital-based SNFs) did support the proposed refinement because of the substantial payment increases for rehabilitation patients who are also medially complex. Unfortunately, the failure of the NTA refinement leaves the existing concerns about inadequate payment and diminished SNF access for medically complex patients an on-going concern.

Since the NTA index models were based upon data from demonstration states, HCFA had planned to validate the index models with national post-PPS claims data. Key Minimum Data Set (MDS) variables such as use of IV therapy and respiratory therapy were integral to this approach. To HCFA's surprise, subsequent research on national PPS claims revealed that the NTA index had very low ability to predict these costs. HCFA speculates that changes in facility practice and billing patterns with the introduction of SNF PPS and consolidated billing have lead to this unexpected outcome. For example, HCFA researchers found that respiratory therapy charges decreased substantially while drug charges increased substantially.

Ultimately, HCFA decided not to proceed with the refinement and instead maintain the current 44-group RUG system. Therefore the temporary increases in selected RUG groups will also remain in effect.

Overall financial impact

The news that FY 2001 increase for SNF providers would bring a 21.8 percent increase in rates and an aggregate increase of $3.1 billion for the period from Oct. 1, 2000 through Sept. 30, 2001 was welcomed by SNFs that have been devastated by steep revenue reductions associated with PPS. As expected, the largest portion of this increase occurs because SNFs retain the 20 percent add-on to the 15 selected RUG groups; this add-on would have been eliminated had the refinement been implemented as originally planned.

These rates also include a $0.05 reduction in per diem rates to account for the new items excluded from consolidated billing as a result of the BBRA of 1999, including certain prosthetic and orthotic devices and certain chemotherapy services. This results in a $2 million reduction in total payments for this period. Although this reduction is minor, it was mandated by the BBRA of 1999.

Table 1 (left) shows the sources of the FY 2001 increase:

While the news of these increases is positive overall, there is a substantial distributional impact to these increases. Not all SNFs will share equally in the increase, and as expected, the greatest financial gain occurs for free-standing urban SNFs.

Calculating the SNF PPS rates with the add-ons

This update notice carries forward the same payment methodology and transition schedule for FY 2001 (Oct. 1, 2000 through Sept. 30, 2001). What's new is the application of the two adds-ons simultaneously--the 20 percent add-on to the 15 RUGs groups and the 4 percent across-the-board add-on to all 44 RUG groups. (See chart, below.) First the federal rates are adjusted by the wage index and then the appropriate add-ons are applied to the wage adjusted federal rate. Note that if a provider is not yet on the full federal rate, then this amount is prorated to reflect the year of the transition.

Impact on the rehab hierarchy

As originally intended, the 20 percent add-on was a temporary increase in selected RUG groups with a higher proportion of patients experiencing high NTA costs. In practice, however, the add-on does not target dollars to those patients who actually incur high NTA costs. Not all patients in a RUG group with an add-on experience high NTA costs, and there are some patients in every RUG group with high NTA costs.

The 20 percent add-on distorts the rehab hierarchy by providing more revenue when less therapy is provided, in some RUG groups. Essentially, the 20 percent add-on changes the RUG hierarchy in the rehabilitation classes and provides an add-on to RHC (Rehab High, ADL level C), RMC (Rehab Medium. ADL level C) and RMB (Rehab Medium, ADL level B) only. Consequently, the RMB payment is $309 for up to 150 minutes of therapy as compared with the RHB payment of $271 for up to 325 minutes of therapy. (See "Case-mix ajusted federal rates" table, above.)

In the regulation, HCFA expresses its concern about these unintended financial incentives to under serve rehabilitation patients. HCFA provides a clear warning to providers that they will be monitoring the patterns of RUG classification and any inappropriate denial of services to achieve higher payments.

What's new in the update notice

In addition, the update notice did provide several useful clarifications and policy statements:

Midnight rule.

HCFA has decided that the "midnight rule" will prevail for both Part A and Part B. SNFs will be responsible for the billing of services for a Part A resident after departure from the SNF, but only if the resident returns to the SNF by midnight. HCFA has now agreed to apply this same policy to Part B consolidated billing when it is implemented.

Section U. HCFA's requirement to collect medication specific information in Section U remains on hold for Medicare SNF patients.

Part A consolidated billing

Despite numerous requests by many different pundits, HCFA declined to expand the list of items excluded from PPS consolidated billing, beyond those expansions already allowed by the BBRA of 1999.

Part B consolidated billing.

HCFA makes no definitive announcement about the timeline and plans for implementation of Part B consolidating billing. However, since the publication of the final regulation, HCFA has released a draft Program Memoranda that does make consolidated billing optional as of April 1, 2001 and mandatory as of January 1, 2002.

Looking ahead, HCFA must still revise the current SNF PPS so that appropriate reimbursement is available for medially complex patients with high NTA costs. HCFA has already announced that they will be seeking a contractor to conduct additional research. In all likelihood, it's back to the drawing board for HCFA.

Finally, two new program memoranda have also recently been released that are important for billing office staff. Effective June 1, 2000, adjustment bills should be submitted to reflect corrections to MDS data that result in changes to the RUG classification. HCFA has also released new billing codes that became effective Oct. 1, 2000.

In the meantime, SNFs asked for additional time to focus on refining their operational policies under the current PPS before having to adjust to any major changes, such as a major expansion in RUG categories or consolidated billing. Now that this request has been granted, SNFs should take this opportunity to conduct a thorough analysis of all areas of PPS operations and fine-tune areas of weakness.

Jade Gong, RN, is a health care consultant to trade associations and providers on Medicare and long-term care issues.