Peter Gruhn, Senior Director of Research Elise Smith, Senior Vice President, Finance Policy and Legal Affairs

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1 1201 L Street, NW, Washington, DC T: F: Neil Pruitt, Jr. CHAIR UHS-Pruitt Corporation Norcross, GA Leonard Russ VICE CHAIR Bayberry Care Center New Rochelle, NY Lane Bowen SECRETARY/TREASURER Kindred Healthcare Louisville, KY Robert Van Dyk IMMEDIATE PAST CHAIR Van Dyk Health Care Ridgewood, NJ Robin Hillier EXECUTIVE COMMITTEE LIAISON Lake Point Rehab & Nursing Center Conneaut, OH Orlando Bisbano, Jr. AT-LARGE MEMBER Orchard View Manor Nursing & Rehabilitation Center East Providence, RI Paul Liistro AT-LARGE MEMBER Arbors of Hop Brook Manchester, CT Frank Romano AT-LARGE MEMBER Essex Health Care Rowley, MA Michael Wylie AT-LARGE MEMBER Genesis Health Care Kennett Square, PA Tom Coble INDEPENDENT OWNER MEMBER Elmbrook Management Company Ardmore, OK Tim Lukenda MULTIFACILITY MEMBER Extendicare Milwaukee, WI Gary Kelso NOT FOR PROFIT MEMBER Mission Health Services Huntsville, UT Glenn Van Ekeren REGIONAL MULTIFACILITY MEMBER Vetter Health Services Elkhorn, NE Mike Shepard NCAL MEMBER Shepard Group Mena, AR John Poirier ASHCAE MEMBER New Hampshire Health Care Association Pembroke, NH Shawn Scott ASSOCIATE BUSINESS MEMBER Medline Healthcare Mundelein, IL TO: FROM: AHCA Members Peter Gruhn, Senior Director of Research Elise Smith, Senior Vice President, Finance Policy and Legal Affairs SUBJECT: Overview of the Skilled Nursing Facility Prospective Payment System Final Rule for FY 2014 DATE: August 1, 2013 On July 31, 2013, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for the skilled nursing facility (SNF) prospective payment system (PPS) fiscal year (FY) 2014 update: Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY The final rule will be published on August 6, 2013 in the Federal Register. A desk copy of the final rule as well as a spreadsheet with the SNF PPS wage indexes can be viewed on the SNF PPS page of the AHCA website. Below please find highlights and a more detailed overview of key provisions in the final rule. Highlights The final rule provides for a net market basket update for SNFs of 1.3% beginning October 1, The 1.3% market basket update reflects a full market basket increase of 2.3%, less a 0.5% multifactor productivity adjustment (MFP) required by Section 3401(b) of the Affordable Care Act (ACA), and a 0.5% adjustment to correct for an error in forecasting the market basket in FY CMS estimates that the net market basket update would increase SNF payments by approximately $470 million in FY 2014 (about $7 per Medicare patient day). The 1.3% update is 0.1 percentage points lower than the 1.4% update noted in the proposed rule due to an updated projection of the MFP adjustment. The MFP adjustment of 0.4 percentage points set forth in the proposed rule was based on IHS Global Insight s first quarter 2013 forecast. The 0.5 percentage point MFP adjustment set forth in the final rule is based on updated IHS Global Insight s data from their second quarter 2013 forecast. Mark Parkinson PRESIDENT & CEO The American Health Care Association and National Center for Assisted Living (AHCA/NCAL) represent more than 11,000 nonprofit and proprietary skilled nursing centers, assisted living communities, sub-acute centers and homes for individuals with intellectual and development disabilities. By delivering solutions for quality care, AHCA/NCAL aims to improve the lives of the millions of frail, elderly and individuals with disabilities who receive long term or post-acute care in our member facilities each day.

2 The SNF PPS includes a provision to adjust payment rates for market basket forecasting errors whenever the difference between the forecasted and actual change in the market basket exceeds a 0.5 percentage point threshold. Since the 0.51% error in forecasting the FY 2012 market basket exceeds the 0.5% threshold, CMS will reduce the market basket by 0.5 percentage points in FY In accordance with the Medicare Modernization Act (MMA), the per diem rate for SNF patients with Acquired Immune Deficiency Syndrome (AIDS) had been increased by 128% as of October 1, Under the CMS final rule, this add-on will remain in effect for FY CMS rebased and revised its market basket update methodology for the SNF PPS to use more current Medicare cost report information for FY The rebasing will modify and update the weights of the various cost categories to reflect FY 2010 Medicare cost report relative costs rather than the current 2004 Medicare cost report based market basket cost weights, and modify some of the price proxies used to forecast increases for the various cost categories. In the proposed rule, CMS estimated that the utilization of the rebased FY 2010-based SNF market basket would be 0.2 percentage points lower (i.e. 2.3%) for FY 2014 then what the SNF market basket update would have been under the old system. All rates and wage indexes outlined in the proposed rule for the SNF PPS for FY 2014 apply to all swing-bed rural hospitals but not to critical access hospitals (CAHs) that would continue to be paid on a reasonable cost basis for SNF services furnished under a swing-bed agreement. The labor-related weight for FY 2014 is %, up from % for FY In the final rule, CMS clarifies that the qualifying condition for the Rehab Medium RUG categories require 5 distinct calendar days of therapy and that the Rehab Low RUG categories require 3 distinct calendar days of therapy. As such, CMS will modify the RUG-IV grouper to utilize a new item on the MDS (O0420) to record the number of distinct calendar days of therapy provided by all rehabilitation disciplines to a beneficiary over the seven day look-back period. For FY 2014, CMS continues to employ inpatient hospital wage data in the computation of the Core-Based Statistical Area (CBSA) SNF PPS wage index that is used to adjust the labor-related portion of the federal rate. In geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the SNF PPS wage index, CMS will continue to update the wage index using its alternative urban and rural methodologies in FY The Hinesville Fort Stewart, GA metropolitan statistical area (CBSA: 25980) is the only area affected in FY AHCA commented extensively on the CMS FY 2014 SNF PPS proposed rule, particularly as it relates to rebasing and revising the market basket, the alternative forecast error correction methodology, SNF wage index reform, counting distinct calendar days of therapy, and payment reform. Our comments are available on the SNF PPS page of the AHCA website. 2

3 OVERVIEW I. CMS Projected Impact of the SNF PPS Notice For FY 2014, CMS estimates the aggregate increase in Medicare Part A payments to SNFs associated with this final rule at $470 million or about $7 per Medicare patient day, a 1.3% increase. The distributional effect of the budget-neutral adjustment to the wage index, and the notice overall including the market basket update, are detailed below: Projected Impact to the SNF PPS for FY 2014 Wage Index Total Impact Total 0.0% 1.3% Urban 0.1% 1.4% Rural -0.3% 1.0% Hospital based urban 0.2% 1.5% Freestanding urban 0.1% 1.4% Hospital based rural -0.3% 1.0% Freestanding rural -0.3% 1.0% Government 0.2% 1.5% Profit 0.0% 1.3% Non-profit 0.0% 1.3% II. The SNF PPS Market Basket Update The final rule provides for a market basket increase for SNFs of 1.3% beginning October 1, The 1.3% market basket update reflects a full market basket increase of 2.3%, less a 0.5% multifactor productivity adjustment required by Section 3401(b) of the Affordable Care Act (ACA), and a 0.5% adjustment to correct for an error in forecasting the market basket in FY Every year, CMS calculates a revised labor-related share based on the relative importance of labor-related cost categories in the price index. The labor-related weight for FY 2013 is %, up from % for FY Relative Importance of Labor Share FY :2 forecast FY :2 forecast Wages and salaries Employee benefits Nonmedical professional fees: labor related Administrative and facilities support services N/A All Other: Labor-intensive services Capital-related (.391) Total

4 III. The SNF PPS Market Basket Multifactor Productivity Adjustment Section 3401(b) of the ACA requires that the SNF market basket update be reduced by a productivity adjustment. The purpose of the adjustment is to help ensure that the increase in the cost of goods and services used to provide patient care in SNFs that is reflected in the market basket also reflects improvements in productivity that reduce the cost of providing SNF services. Section 1886(b)(3)(B) of the ACA amended Social Security Act (SSA) defines the productivity adjustment to be equal to the 10-year moving average of changes in the annual economy-wide private nonfarm business multi-factor productivity (MFP), as projected by the Secretary for the 10-year period ending with the applicable year/period. CMS calculated the MFP-adjusted market basket update for the SNF PPS by subtracting the projected MFP percentage adjustment from the FY 2014 market basket percentage. IHS Global Insights (an economic forecasting firm) computed the MFP adjustment as the 10-year moving average of changes in the MFP for the period ending September 30, 2014, and rounded the final annual adjustment to the nearest tenth of a percentage point. The MFP adjustment is recalculated each year. Furthermore, the reduction of the market basket percentage change by the MFP adjustment may result in the market basket percentage change being less than zero for a fiscal year, and may result in unadjusted Federal payment rates being less than such payment rates for the preceding fiscal year. As noted above, the MFP adjustment is calculated as 0.5 percentage points for FY The MFP in the final rule is higher than in the proposed rule. The MFP adjustment of 0.4 percentage points set forth in the proposed rule was based on IHS Global Insight s first quarter 2013 forecast. The 0.5 percentage point MFP adjustment set forth in the final rule is based on updated IHS Global Insight s data from their second quarter 2013 forecast. IV. The Forecast Error Correction to the SNF Market Basket The SNF PPS contains a provision to correct for major, unexpected errors in the annual forecast of the market basket. For FY 2014 there will be a market basket forecast error correction in the SNF PPS market basket. Based on FY 2012 data (the most recently available fiscal year for which there is final data), the forecasted increase in the market basket index was 2.7 percentage points, while the actual increase was 2.2 percentage points a difference of 0.5 percentage points. Since the forecast error for FY 2012 was equal to 0.5 percentage points when rounded to the nearest tenth of a percentage point, CMS decided in the final rule to determine the forecast error to the nearest hundredth of a percentage point. When rounded to the nearest hundredth, the forecasted increase in the market basket index was 2.69, while the actual increase was 2.18 percentage points. Since the difference between the estimated and actual market basket forecast error (0.51) is greater than the 0.5 percentage point threshold, CMS will reduce payment rates for FY 2014 by 0.5 percentage points. Difference between Forecasted & Actual Market Basket Increases for FY 2012 Index SNF (rounded to nearest tenth) SNF (rounded to nearest hundredth) Forecasted FY 2012 Increase 4 Actual FY 2012 Increase FY 2012 Difference 2.7% 2.2% -0.5% 2.69% 2.18% -0.51%

5 V. Rebasing and Revising the SNF Market Basket Index Section1888(e)(5)(A) of the Act requires the Secretary to establish a market basket index that reflects the changes over time in the prices of an appropriate mix of goods and services included in the SNF PPS. The term market basket refers to the mix of goods and services needed to produce SNF care, and is also commonly used to denote the input price index that includes both weights (the mix of goods and services) and price factors. The percentage change in the market basket reflects the average change in the price of a fixed set of goods and services purchased by SNFs to furnish services. CMS periodically rebases and revises the SNF market basket. CMS indicates that rebasing means shifting the base year for the structure of costs of the input price index, while revising means changing data sources, cost categories, price proxies and/or methodologies used in developing the input price index. For FY 2014, CMS proposes to update the current FY based SNF market basket to develop cost category weights based on FY 2010 SNF Medicare cost reports, supplemented with data from the U.S. Department of Commerce Bureau of Economic Analysis (BEA) 2002 Benchmark Input-Output (IO) tables for the nursing home sector aged forward to the base year using price changes. As part of the revision, CMS proposes to include a total of 29 detailed cost categories for the proposed FY 2010-based SNF market basket six more than under the current system. CMS is proposing to include five new cost categories (Medical Instruments and Supplies; Apparel; Machinery and Equipment; Administrative and Facilities Support Services, and Financial Services), and dividing the current Nonmedical Professional Fees cost category into a Nonmedical Professional Fees: Labor-Related and Nonmedical Professional Fees: Nonlabor- Related cost categories. Table 9 (see below) provides information on the composition and relative weights of the market basket by major cost categories. Appendix Table X provides info on the cost categories, weights, and price proxies under the previous and newly rebased and revised market basket. AHCA commented extensively on the proposed CMS rebasing and revision to the market basket update. We identified discrepancies between the CMS findings and AHCA s replication of the CMS methodology. We requested clarification and greater transparency on the agency s market basket calculation methodology, and proposed a more appropriate method for calculating contract labor. AHCA also commented extensively on CMS proposed changes to the price proxies for salaries and benefits. In its comments, CMS provided more detail on its calculation methodology. In the coming weeks, AHCA will attempt again to replicate the CMS methodology and will likely provide feedback to CMS for consideration in future rule making. While CMS did not modify its contract labor calculation methodology in the final rule, they indicated that they would conduct further analysis and communicate any findings in future rulemaking. CMS however dismissed comments from AHCA and other stakeholders on continuing to utilize a blended price proxy for salaries and benefits. VI. HIV Add-On In accordance with the Medicare Modernization Act (MMA), the per diem rate for SNF patients with Acquired Immune Deficiency Syndrome (AIDS) had been increased by 128% as of October 1, For FY 2014, CMS proposes that the add-on remain in effect. 5

6 In the final rule, CMS also notes that the agency will discontinue the use of the ICD-9-CM and begin use of the ICD-10-CM system effective October 1, 2014 (i.e. for FY 2015). As such, CMS will transition from ICD-9-CM diagnosis code 42 for HIV infection to the ICD-10-CM diagnosis code B20. VII. Area Wage Index Adjustment to the Federal Rates Section 1888(e)(4)(G)(ii) of the Social Security Act requires that CMS adjust the federal rates to account for differences in area wage levels, using an appropriate wage index. Given the volatility of existing SNF wage data and the significant amount of resources that would be required to improve the quality of the data, CMS believes it is appropriate and reasonable to use hospital wage data for the SNF PPS wage index. Since the inception of a prospective payment system for SNFs, CMS has used hospital wage data in developing a wage index for the SNF PPS, a practice that CMS will continue for FY Section 1888(e)(4)(G)(ii) of the Social Security Act also requires that CMS apply the wage index in a manner that does not result in aggregate payments that are greater or less than would otherwise be made in the absence of the wage adjustment. CMS currently adjusts the wage index to ensure that it is budget neutral in terms of aggregate payments. CMS will continue this practice as well. CMS will continue to use its urban/rural alternative wage index methodology in geographic areas where there are no hospitals, and thus, no hospital wage data upon which to base calculations for the FY 2014 SNF PPS wage index. For rural geographic areas without hospital wage data, CMS will use the average wage index for all contiguous Core-Based Statistical Areas (CBSAs) as a reasonable proxy. For urban geographic areas without hospital wage data, CMS will use the average wage index of all of the urban areas within the state as a reasonable proxy. The alternative FY 2014 SNF PPS urban wage index methodology will be used to construct the wage index for Hinesville-Fort Stewart, Georgia (CBSA 25890). Given that there is at least one hospital with wage data in all rural areas, the alternative rural wage index methodology will not be required in FY AHCA commented extensively that the wage index system was broken, highlighted issues with wage index volatility that had no relationship to wage inflation, argued for wage index reform across Medicare provider settings, and asked for feedback on CMS plans on SNF wage index reform. In its response, CMS indicated the ongoing issues that prevent CMS from reforming the SNF wage index, and its efforts to monitor developments of an alternative wage index for hospitals. VIII. Reporting of Distinct Therapy Days In the proposed rule, CMS sought to clarify its classification criteria for rehabilitation RUGs categories indicating that they require that the resident receive the requisite number of distinct calendar days of therapy to be classified into rehab RUG categories, and focused particularly on issues related to classification into the medium and low rehabilitation categories. CMS noted that in the current system that the MDS item set requires the SNF to record, separately by each therapy discipline, the number of days therapy was received during the 7-day look-back period, without distinguishing between distinct calendar days. The RUG grouper currently adds these 6

7 days together which results in some residents being classified into the medium and low rehab RUG categories when they do not actually meet the CMS classification criteria. In the final rule, CMS clarified that the qualifying condition for the Rehab Medium RUG categories require 5 distinct calendar days of therapy and that the Rehab Low RUG categories require 3 distinct calendar days of therapy. As such, CMS will modify the RUG-IV grouper and add an item to the MDS (O0420) to record the number of distinct calendar days of therapy provided by all rehabilitation disciplines to a beneficiary over the seven day look-back period. AHCA commented extensively on CMS proposal. AHCA proposed that CMS defer changes pending further review, and allow for special case exemptions to hold the facility harmless due to changes in the beneficiaries medical condition. In the final rule, CMS however held steadfastly to its position that this was not a change in policy but rather a change that would allow CMS to implement its existing policy more accurately. IX. SNF PPS Reform In the proposed rule, CMS requested comments on potential alternative to the existing methodology used to pay for therapy services received under the SNF PPS. In our comments, AHCA provided a detailed overview of our research efforts to examine payment alternatives and develop quality measures that better evaluate the quality of care delivered to individuals receiving SNF post-acute care services. AHCA also made recommendations on collecting additional data and involving AHCA and other stakeholders in the payment system reform process. In the final rule, CMS indicated that they recognize the importance of seeking input from stakeholders, and requested that input could be submitted at any time to CMS. 7

8 Appendix Table A: Previous and Final SNF Market Basket Weights and Price Proxies Previous FY 2004-based Market Basket Final FY 2010-based Market Basket Cost Category Weights 1 Wage and Price Proxies Weights 1 Wage and Price Proxies Compensation Blended proxy of 50 percent ECI for Wages and ECI for Wages and Salaries for Nursing Care facilities Salaries for Private Nursing and Residential care Wages and Salaries facilities and 50 percent for Wages and Salaries for Civilian Hospital Workers Blended proxy of 50 percent ECI for Benefits for Private Employee benefits Nursing and Residential care facilities and 50 percent ECI for Benefits for Nursing Care facilities for Benefits for Civilian Hospital Workers Nonmedical professional fees ECI for Compensation for Private Professional, Technical and Specialty workers N/A See related items under Other Services Professional Liability Insurance CMS Hospital Professional Liability Index CMS Hospital Professional Liability Insurance Index Utilities Electricity PPI for Commercial Electric Power PPI for Commercial Electric Power Fuels, non-highway PPI for Commercial Natural Gas PPI for Commercial Natural Gas Water and sewerage CPI-U for Water and Sewerage CPI-U for Water and Sewerage All Other Other Products Pharmaceuticals PPI for Prescription Drugs PPI for Pharmaceuticals for Human Use, Prescription Food, wholesale purchase PPI for Processed Foods PPI for Processed Foods and Feeds Food, retail purchase CPI-U for Food Away From Home CPI-U for Food Away From Home Chemicals Blended PPI for Chemicals Blended PPI for Chemicals Rubber and plastics PPI for Rubber and Plastic Products PPI for Rubber and Plastic Products Paper products PPI for Converted Paper and Paperboard PPI for Converted Paper and Paperboard Medical instruments and supplies N/A PPI for Medical, Surgical, and Personal Aid Devices Apparel N/A PPI for Apparel Machinery and Equipment N/A PPI for Machinery and Equipment Miscellaneous products PPI for Finished Goods less Food and Energy PPI for Finished Goods less Food and Energy Other Services Labor-Related Services ECI for Compensation for Private Service Occupations N/A Nonmedical Professional Fees N/A ECI for Total Compensation for Professional and Related Occupations Administrative and Facilities Support N/A ECI for Total Compensation for Office and Administrative Support All Other N/A ECI for Total Compensation for Service Occupations Non Labor-Related Services CPI-U for All Items N/A Nonmedical Professional Fees N/A ECI for Total Compensation for Professional and Related Occupations Financial Services N/A ECI for Total Compensation for Financial Activities Telephone Services CPI-U for Telephone Services CPI-U for Telephone Services Postage CPI - Postage CPI-U for Postage and Delivery Services Capital-related Expenses Total Depreciation Building & Fixed Equipment Boeckh Institutional Construction Index (vintageweighted over 22 years) BEA chained price index for nonresidential construction for hospitals and special care facilities vintage weighted (25 years) PPI for Machinery and Equipment vintage weighted (6 years) Movable Equipment PPI for Machinery & Equipment (vintage-weighted over 9 years) Total Interest For-Profit SNFs Average Yield Moody's AAA Bonds (vintage-weighted over 20 years) Government & Nonprofit SNFs Average Yield Municipal Bonds (Bond Buyer Index-20 bonds) (vintage-weighted over 20 years) Other Capital-related Expenses CPI-U for Residential Rent CPI-U for Rent for Primary Residence Total Average Yield Moody's AAA Bonds vintage weighted (22 years) Average Yield Municipal Bonds (Bond Buyer Index-20 bonds) - vintage-weighted (22 years) 1 Note: Total may not sum to 100 due to rounding.

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