Section 1888(e)(4)(H) of the Act requires that we provide for publication annually in the Federal Register:

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

2. The casemix classification system to be applied with respect to these services during the upcoming FY.

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

Along with other revisions discussed later in this preamble, this final rule provides these required annual updates to the Federal rates. C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA)

There were several provisions in the BBRA that resulted in adjustments to the SNF PPS. We described these provisions in detail in the SNF PPS final rule for FY 2001 (65 FR 46770, July 31, 2000). In particular, section 101(a) of the BBRA provided for a temporary 20 percent increase in the per diem adjusted payment rates for 15 specified RUGIII groups. In accordance with section 101(c)(2) of the BBRA, this temporary payment adjustment expired on January 1, 2006, upon the implementation of casemix refinements (see section I.F.1. of this final rule). We included further information on BBRA provisions that affected the SNF PPS in Program Memorandums A9953 and A9961 (December 1999).

Also, section 103 of the BBRA designated certain additional services for exclusion from the consolidated billing requirement, as discussed in greater detail in section III.G of this final rule. Further, for swingbed 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 final rule for FY 2002 (66 FR 39562, July 31, 2001), we made conforming changes to the regulations at Sec. 413.114(d), effective for services furnished in cost reporting periods beginning on or after July 1, 2002, to reflect section 408 of the BBRA.
D. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)

The BIPA also included several provisions that resulted in adjustments to the SNF PPS. We described these provisions in detail in the final rule for FY 2002 (66 FR 39562, July 31, 2001). In particular:

We included further information on several of the BIPA provisions in Program Memorandum A0108 (Change Request 1510), issued January 16, 2001, which is available online at http://www.cms.hhs.gov/ transmittals/downloads/a0108.pdf.
E. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)

The MMA included a provision that results in a further adjustment to the SNF PPS. Specifically, section 511 of the MMA amended section 1888(e)(12)
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of the Act, to provide for a temporary increase of 128 percent in the PPS per diem payment for any SNF residents with Acquired Immune Deficiency Syndrome (AIDS), effective with services furnished on or after October 1, 2004. This special AIDS addon was to remain in effect until ``* * * the Secretary certifies that there is an appropriate adjustment in the case mix * * * to compensate for the increased costs associated with [such] residents * * *.'' The AIDS addon is also discussed in Program Transmittal 160 (Change Request 3291), issued on April 30, 2004, which is available online at http://www.cms.hhs.gov/transmittals/downloads/r160cp.pdf. As discussed in the SNF PPS final rule for FY 2006 (70 FR 45028, August 4, 2005), we did not address the certification of the AIDS addon in that final rule's implementation of the casemix refinements, thus allowing the temporary addon payment created by section 511 of the MMA to remain in effect.

For the limited number of SNF residents that qualify for the AIDS addon, implementation of this provision results in a significant increase in payment. For example, using FY 2007 data, we identified slightly more than 2,700 SNF residents with a diagnosis code of 042 (Human Immunodeficiency Virus (HIV) Infection). For FY 2010, an urban facility with a resident with AIDS in RUG group ``SSA'' would have a casemix adjusted payment of $252.95 (see Table 4) before the application of the MMA adjustment. After an increase of 128 percent, this urban facility would receive a casemix adjusted payment of approximately $576.73. A further discussion of the AIDS addon in the context of research conducted during the recent STRIVE study appears in section III.C.5 of this final rule.

In addition, section 410 of the MMA contained a provision that excluded from consolidated billing certain practitioner and other services furnished to SNF residents by rural health clinics (RHCs) and Federally Qualified Health Centers (FQHCs), as discussed in section III.G of this final rule.
F. Skilled Nursing Facility Prospective PaymentGeneral Overview

We implemented the Medicare SNF PPS effective with cost reporting periods beginning on or after July 1, 1998. This PPS pays SNFs through prospective, casemix adjusted per diem payment rates applicable to all covered SNF services. These payment rates cover all costs of furnishing covered SNF services (routine, ancillary, and capitalrelated costs) other than costs associated with approved educational activities. Covered SNF services include posthospital services for which benefits are provided under Part A, as well as those items and services (other than physician and certain other services specifically excluded under the BBA) which, before July 1, 1998, had been paid under Part B but furnished to Medicare beneficiaries in a SNF during a covered Part A stay. A comprehensive discussion of these provisions appears in the May 12, 1998 interim final rule (63 FR 26252).

1. Payment ProvisionsFederal Rate

The PPS uses per diem Federal payment rates based on mean SNF costs in a base year (FY 1995) updated for inflation to the first effective period of the PPS. We developed the Federal payment rates using allowable costs from hospitalbased and freestanding SNF cost reports for reporting periods beginning in FY 1995. As discussed previously in section I.A of this final rule, the data used in developing the Federal rates also incorporated a ``Part B addon,'' an estimate of the amounts that would be payable under Part B in the base year for covered SNF services furnished to individuals during the course of a covered Part A SNF stay.

In developing the rates for the initial period, we updated costs to the first effective year of the PPS (the 15month period beginning July 1, 1998) using a SNF market basket index, and then standardized for the costs of facility differences in casemix and for geographic variations in wages. In compiling the database used to compute the Federal payment rates, we excluded those providers that received new provider exemptions from the routine cost limits, as well as costs related to payments for exceptions to the routine cost limits. Using the formula that the BBA prescribed, 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 (hospitalbased 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 wagerelated costs by a wage index.

The Federal rate also incorporates adjustments to account for facility casemix, using a classification system that accounts for the relative resource utilization of different patient types. The RUGIII classification system uses beneficiary assessment data from the Minimum Data Set (MDS) completed by SNFs to assign beneficiaries to one of 53 RUGIII groups. The original RUGIII casemix classification system included 44 groups. However, under incremental refinements that became effective on January 1, 2006, we added nine new groupscomprising a new Rehabilitation plus Extensive Services categoryat the top of the RUG hierarchy. The May 12, 1998 interim final rule (63 FR 26252) included a detailed description of the original 44group RUGIII case mix classification system. A comprehensive description of the refined 53group RUGIII casemix classification system (RUG53) appeared in the proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 FR 45026, August 4, 2005).

Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, the Federal rates in this final rule reflect an update to the rates that we published in the final rule for FY 2009 (73 FR 46416, August 8, 2008) and the associated correction notice (73 FR 56998, October 1, 2008), equal to the full change in the SNF market basket index. A more detailed discussion of the SNF market basket index and related issues appears in sections I.F.2 and III.F of this final rule. 2. FY 2010 Rate Updates Using the 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 covered SNF services. We use the SNF market basket index to update the Federal rates on an annual basis. In the SNF PPS final rule for FY 2008 (72 FR 43425 through 43430, August 3, 2007), we revised and rebased the market basket, which included updating the base year from FY 1997 to FY 2004. The FY 2010 market basket increase is 2.2 percent, which is based on IHS Global Insight, Inc. second quarter 2009 forecast with historical data through the first quarter 2009.

In addition, as explained in the final rule for FY 2004 (66 FR 46058, August 4, 2003) and in section III.F.2 of this final rule, the annual update of the payment rates includes, as appropriate, an adjustment to account for market basket forecast error. As described in the final rule for FY 2008, the threshold percentage that serves to trigger an adjustment to account for market basket forecast error is 0.5 percentage point effective for FY 2008 and subsequent years. This adjustment takes into account the forecast error from the most recently available FY for which there is
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final data, and applies whenever the difference between the forecasted and actual change in the market basket exceeds a 0.5 percentage point threshold. For FY 2008 (the most recently available FY for which there is final data), the estimated increase in the market basket index was 3.3 percentage points, while the actual increase was 3.6 percentage points, resulting in a difference of 0.3 percentage point. Accordingly, as the difference between the estimated and actual amount of change does not exceed the 0.5 percentage point threshold, the payment rates for FY 2010 do not include a forecast error adjustment. Table 1 shows the forecasted and actual market basket amounts for FY 2008. Table 1Difference Between the Forecasted and Actual Market Basket Increases for FY 2008 Forecasted FY 2008 Actual FY 2008 FY 2008 difference Index increase * increase ** *** SNF........................................ 3.3 3.6 0.3 * Published in Federal Register; based on second quarter 2007 IHS Global Insight Inc. forecast (2004based index).
** Based on the second quarter 2009 IHS Global Insight forecast (2004based index). *** The FY 2008 forecast error correction for the PPS Operating portion will be applied to the FY 2010 PPS update recommendations. Any forecast error less than 0.5 percentage points will not be reflected in the update recommendation.

II. Summary of the Provisions of the FY 2010 Proposed Rule

In the FY 2010 proposed rule (74 FR 22208), we proposed to update the payment rates used under the SNF PPS for FY 2010. We also proposed to recalibrate the casemix indexes so that they more accurately reflect parity in expenditures related to the implementation of case mix refinements in January 2006. We also discussed the results of our ongoing analysis of nursing home staff time measurement (STM) data collected in the Staff Time and Resource Intensity Verification (STRIVE) project, and proposed a new RUGIV casemix classification model that would use the updated Minimum Data Set (MDS) 3.0 resident assessment for casemix classification effective FY 2011. In addition, we requested public comment on a possible requirement for the quarterly reporting of nursing home staffing data, and also on applying the quality monitoring mechanism in place for all other SNF PPS facilities to rural swingbed hospitals. Finally, we proposed to revise the regulations to incorporate certain technical corrections.
III. Analysis and Response to Public Comments on the FY 2010 Proposed Rule

In response to the publication of the FY 2010 proposed rule, we received over 112 timely items of correspondence from the public. The comments originated primarily from various trade associations and major organizations, but also from individual providers, corporations, government agencies, and private citizens.

Brief summaries of each proposed provision, a summary of the public comments that we received, and our responses to the comments appear below.

A. General Comments on the FY 2010 Proposed Rule

In addition to the comments that we received on the proposed rule's discussion of specific aspects of the SNF PPS (which we address later in this final rule), commenters also submitted the following, more general observations on the payment system.

Comment: Some commenters noted that while the proposed rule's SNF PPS rate updates would be effective for FY 2010, its proposed conversion of the Resource Utilization Groups (RUGs) from version 3 (RUGIII) to version 4 (RUGIV) would not take effect until FY 2011. The commenters argued that it is unprecedented to publish such a proposal so far in advance of its anticipated effective date, and that the 60day public comment period would not afford sufficient time to analyze and comment meaningfully on it. The commenters then suggested that we withdraw the current RUG conversion proposal and reissue it at a later date with a ``more reasonable'' comment period.

Response: While it is true that the RUG conversion proposal would not become effective until FY 2011, our decision to include a discussion of it in the FY 2010 proposed rule and to propose to finalize it well in advance of its actual implementation date represents a response to specific requests from the nursing home industry for us to provide as much advance notification as possible of the nature of the proposed RUGIV revisions, and to provide adequate time for system updates and training necessary to implement any proposed changes that are finalized. Thus, rather than arbitrarily deferring our discussion of this proposal until the FY 2011 rulemaking cycle (which, in any event, would have provided for exactly the same 60day duration for the public comment period), we decided to include the discussion in the current proposed rule, in order to ensure that providers, States, and other stakeholders and interested parties would have the maximum time available to familiarize themselves with the broad outlines of the new model and to prepare for its implementation. Moreover, even after the close of the FY 2010 proposed rule's public comment period, we fully intend to continue our analysis of the proposed changes that are finalized in this rule, in order to consider the most current data as it becomes available. As an essential part of this ongoing analysis, we will, of course, also continue to welcome input from the various stakeholders and interested parties as we move closer to actual implementation.

Comment: We received comments similar to those discussed previously in the August 3, 2007 SNF PPS final rule for FY 2008 (72 FR 43415 through 43416) regarding the need to address certain perceived inadequacies in payment for nontherapy ancillary (NTA) services, including those services relating to the provision of ventilator care in SNFs. We also received comments recommending that we continue to monitor ongoing research, and that we consider alternative casemix methodologies such as the recent MedPAC proposal that appears on the MedPAC Web site (see http://www.MedPAC.gov).

Response: As we noted in the proposed rule for FY 2010, we are conducting the analyses preparatory to developing a separate classification method for NTAs. For these analyses, we are using data developed through STRIVE, as well as alternative models such as the conceptual design released first by the Urban Institute and then by MedPAC. However, as noted in our December 2006 Report to Congress (available online at http:// [[Page 40293]]
www.cms.hhs.gov/SNFPPS/Downloads/RC_2006_PCPPSSNF.pdf), our analysis of NTA utilization has been hindered by a lack of data. Almost all other Medicare institutional providers submit more detailed billing than SNFs on the ancillary services furnished during a Medicarecovered stay. SNFs may currently submit summary data that shows total dollar amounts for each ancillary service category, such as radiology and pharmacy, but are not required to submit more detailed data on drugs and biologicals, the most costly NTA expense category. As we examine the NTA analyses discussed in detail in the FY 2010 proposed rule, we will reevaluate whether our current data requirements are sufficient to move forward with additional program enhancements. We will also consider whether collecting more detailed claims information on a regular basis will allow us to establish more accurate payment rates for NTA services.

We also believe it is important to monitor ongoing research activities, and work with all stakeholders, including MedPAC, to identify opportunities for future program enhancements. At the same time, we note that the SNF PPS reimbursement structure will be completely examined as part of the Post Acute Care Payment Reform Demonstration (PACPRD) project. Under this major CMS initiative, we intend to analyze the costs and outcomes across all postacute care providers, and the data collected in this demonstration will enable us to evaluate the possibility of establishing an integrated payment model centered on beneficiary needs and service utilization (including the use of nontherapy ancillaries) across settings. In considering future changes to the SNF PPS, it will be important to evaluate how shorter term enhancements contribute to our integrated post acute care strategy.

A discussion of the public comments that we received on the STRIVE project itself appears in section III.C.1 of this final rule. B. Annual Update of Payment Rates Under the Prospective Payment System for Skilled Nursing Facilities

1. Federal Prospective Payment System

This final rule sets forth a schedule of Federal prospective payment rates applicable to Medicare Part A SNF services beginning October 1, 2010. The schedule incorporates per diem Federal rates that provide Part A payment for almost all costs of services furnished to a beneficiary in a SNF during a Medicarecovered stay.

a. Costs and Services Covered by the Federal Rates

In accordance with section 1888(e)(2)(B) of the Act, the Federal rates apply to all costs (routine, ancillary, and capitalrelated) of covered SNF services other than costs associated with approved educational activities as defined in Sec. 413.85. Under section 1888(e)(2)(A)(i) of the Act, covered SNF services include posthospital 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 through 26297)).
b. Methodology Used for the Calculation of the Federal Rates

The FY 2010 rates reflect an update using the full amount of the latest market basket index. The FY 2010 market basket increase factor is 2.2 percent. A complete description of the multistep process used to calculate Federal rates initially appeared in the May 12, 1998 interim final rule (63 FR 26252), as further revised in subsequent rules. We note that in accordance with section 101(c)(2) of the BBRA, the previous temporary increases in the per diem adjusted payment rates for certain designated RUGs, as specified in section 101(a) of the BBRA and section 314 of the BIPA, are no longer in effect due to the implementation of casemix refinements as of January 1, 2006. However, the temporary increase of 128 percent in the per diem adjusted payment rates for SNF residents with AIDS, enacted by section 511 of the MMA (and discussed previously in section I.E of this final rule), remains in effect.

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 FY beginning October 1, 2008, and ending September 30, 2009, and the midpoint of the Federal FY beginning October 1, 2009, and ending September 30, 2010, to which the payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, we would update the payment rates for FY 2010 by a factor equal to the full market basket index percentage increase. We further adjust the rates by a wage index budget neutrality factor, described later in this section. Tables 2 and 3 reflect the updated components of the unadjusted Federal rates for FY 2010.
Table 2FY 2010 Unadjusted Federal Rate Per Diem Urban Nursing case Therapy case Therapy non Rate Component mix mix casemix Noncasemix Per Diem Amount..................... $155.23 $116.93 $15.40 $79.22 Table 3FY 2010 Unadjusted Federal Rate Per Diem Rural Nursing case Therapy case Therapy non Rate component mix mix casemix Noncasemix Per Diem Amount..................... $148.31 $134.83 $16.45 $80.69 2. CaseMix Adjustments

a. Background

Section 1888(e)(4)(G)(i) of the Act requires the Secretary to make an adjustment to account for casemix. The statute specifies that the adjustment is to reflect both a resident classification system that the Secretary establishes to account for the relative resource use of different patient types, as well as resident assessment and other data that the Secretary considers appropriate. In first implementing the SNF PPS (63 FR 26252, May 12, 1998), we developed the
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RUGIII casemix classification system, which tied the amount of payment to resident resource use in combination with resident characteristic information. The STM studies conducted in 1990, 1995, and 1997 provided information on resource use (time spent by staff members on residents) and resident characteristics that enabled us not only to establish RUGIII, but also to create casemix indexes.

Although the establishment of the SNF PPS did not change Medicare's fundamental requirements for SNF coverage, there is a correlation between level of care and provider payment. One of the elements affecting the SNF PPS per diem rates is the RUGIII casemix adjustment classification system based on beneficiary assessments using the MDS 2.0. RUGIII classification is based, in part, on the beneficiary's need for skilled nursing care and therapy. As discussed previously in section I.F.1 of this final rule, the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 2005) refined the casemix classification system effective January 1, 2006, by adding nine new Rehabilitation Plus Extensive Services RUGs at the top of the original, 44group system, for a total of 53 groups. This ninegroup addition was designed to better account for the higher costs of beneficiaries requiring both rehabilitation and certain high intensity medical services. When we developed the refined RUG53 system, we constructed new casemix indexes, using the STM study data that was collected during the 1990s and originally used in creating the SNF PPS casemix classification system and casemix indexes. In addition, the RUGIII system was standardized with the intent of ensuring parity in payments under the 44group and 53group models. In section III.B.2.b of this final rule, we discuss further adjustments to those new casemix indexes.

The RUGIII casemix classification system uses clinical data from the MDS 2.0, and wageadjusted STM data, to assign a casemix group to each patient record that is then used to calculate a per diem payment under the SNF PPS. The existing RUGIII grouper logic was based on clinical data collected in 1990, 1995, and 1997. As discussed in section III.C.1, we have recently completed a multiyear data collection and analysis under the STRIVE project to update the RUGIII casemix classification system for FY 2011. As discussed later in this preamble, we are introducing a revised casemix classification system, the RUGIV, based on the data collected in 20062007 during the STRIVE project. At the same time, we plan to introduce an updated new resident assessment instrument, the MDS 3.0, to collect the clinical data that will be used for casemix classification under RUGIV. We believe that the coordinated introduction of the RUGIV and MDS 3.0 reflects current medical practice and resource use in SNFs across the country, and will enhance the accuracy of the SNF PPS. Further, we plan to defer implementation of the RUGIV and MDS 3.0 until October 1, 2010, to allow all stakeholders adequate time for the systems updates and staff training needed to assure a smooth transition. We discuss the RUGIV methodology, the MDS 3.0, and the stakeholder comments in greater detail in sections III.C and III.D, respectively.

Under the BBA, each update of the SNF PPS payment rates must include the casemix classification methodology applicable for the coming Federal FY. As indicated in section I.F.1 of this final rule, the FY 2010 payment rates set forth herein reflect the use of the refined RUG53 system that we discussed in detail in the proposed and final rules for FY 2006.

b. Development of the CaseMix Indexes

In the FY 2010 proposed rule (74 FR 22208, 22214, May 12, 2009), we discussed the incremental refinements to the casemix classification system that we introduced effective January 1, 2006. We also discussed the accompanying adjustment that was intended to ensure that estimated total payments under the refined 53group model would be equal to those payments that would have been made under the 44group model that it replaced. We then explained that actual utilization patterns under the refined casemix system differed significantly from the initial projections, and as a consequence, rather than simply achieving parity, this adjustment inadvertently triggered a significant increase in overall payment levels under the refined model, representing substantial overpayments to SNFs. Accordingly, the FY 2010 proposed rule included a proposal to recalibrate the parity adjustment in order to restore the intended parity to the 2006 casemix refinements on a prospective basis. The comments that we received on this proposal, and our responses, appear below.

Comment: Most commenters opposed our proposal to recalibrate the casemix weights put into place for the refined RUG53 system. Some commenters expressed the belief that we have overstated the amount of the proposed parity adjustment, by incorrectly identifying increased payments related to treatment of higher casemix patients with an overpayment related to the use of an incorrect budget neutrality adjustment factor applied in January 2006. They believed that the recalibration proposal should be either withdrawn or significantly reduced to eliminate the effect of real acuity changes. One commenter conducted a detailed analysis of MDS clinical data that included changes in reported activities of daily living (ADLs), infections, falls, medication use, and other clinical conditions to support their conclusions that patient acuity has increased since the start of the SNF PPS and that our recalibration proposal incorrectly ignored the impact of these changes. Another commenter believed that the proposed recalibration could be more accurately calculated using either 2005 data or a combination of 2005 and 2006 data.

Response: We agree that, on average, the casemix indexes for current SNF patients are higher than they were in 2001. In fact, our primary reason for implementing the STRIVE project was to identify changes in patient characteristics, and to adjust the RUG casemix classification system to reflect the staff time and resource costs needed to reimburse fairly for the type of patients currently being treated in nursing homes. Moreover, in the STRIVE study, we collected 20062007 patient and facility staff data in order to update the case mix classification system. As indicated in detail in the proposed rule, STRIVE data also show significant changes in patient characteristics and facility practice patterns that need to be incorporated into the casemix methodology to reimburse facilities more accurately.

However, we do not agree that changes in patient acuity levels skewed the results of our recalibration analysis. When we introduced nine new Rehabilitation Plus Extensive Care groups to create the RUG53 model in January 2006, we made a small, focused adjustment to the case mix classification of patients receiving both Extensive Care and Rehabilitation services. Under RUG44, patients receiving both services would be classified into the highest paying group for which they qualifiedeither Extensive Care or Rehabilitation. Under RUG53, we created a separate category for this subgroup of patients. As explained in the FY 2006 proposed rule (70 FR 29070, 29077, May 19, 2005), we took the nursing minutes used to create the original RUGIII system, and resorted the records to create three hierarchy categories (Rehabilitation, Extensive Care, and Rehabilitation Plus Extensive) from the two categories that were used
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in the RUG44 model. In making these changes, we did not change any other part of the casemix classification model. Thus, patient clinical characteristics including ADL scores (used to assign a Rehabilitation RUG group) calculated under the RUG53 model would be exactly the same as the patient characteristics, including ADL scores, calculated under the RUG44 model. As we used the same 2006 data set to test for budget neutrality between the two models, ADLs and other components of the casemix model reflected the same 2006 level of acuity.

In addition, we believe this concern may erroneously equate the introduction of a new classification model with the regular SNF PPS annual update process. Normally, changes in case mix are accommodated as the classification model identifies changes in case mix and assigns the appropriate RUG group. Actual payments will typically vary from projections since casemix changes, which occur for a variety of reasons, cannot be anticipated in an impact analysis.

However, in January 2006, we did not just update the payment rates, but introduced a new classification model, the RUG53 casemix system. As discussed above, the purpose of this refined model was to redistribute payments across the 53 groups while maintaining the same total expenditure level that we would have incurred had we retained the original 44group RUG model.

In testing the two models, we used 2001 data because it was the best data we had available, and found that using the raw weights calculated for the RUG53 model, we could expect aggregate payments to decrease as a result of introducing the refinement. To prevent this expected reduction in overall Medicare expenditures, we applied an adjustment to the RUG53 casemix weights as described earlier in this section. Later analysis using actual 2006 data showed that, rather than achieving budget neutrality between the two models, expenditures under the RUG53 model were significantly higher than intended. For FY 2010, we estimate expenditures to be $1.05 billion higher than intended.

As noted previously, we do not agree that updating our analysis using CY 2006 data captured payments related to increased case mix rather than establishing budget neutrality between the two models. First, by using 2006 data to estimate expenditures under both models, we incorporate the same casemix changes into the estimated expenditure levels for RUG44 as well as for RUG53. Second, we believe it is appropriate to standardize the new model for the time period in which it is being introduced. The only reason we used 2001 data in the original calculation is that it was the best data available at the time. The CY 2006 data allowed us to calibrate the RUG53 model more precisely for its first year of operation.

One commenter recommended using alternative time periods in calculating the budget neutrality adjustment. However, while it might be possible to use some or all of CY 2005 rather than CY 2006 data, using CY 2005 data still requires us to use a projection of the distributional shift to the nine new groups in the RUG53 group model. We believe that using actual instead of projected data is the most appropriate approach. We also looked at a second recommended alternative, which involved averaging data periods directly before and after implementation of the RUG53 model; 2005 for the RUG44 model and 2006 for the RUG53 model. Again, we believe that using actual utilization data for CY 2006 is more accurate, as actual case mix during the calibration year is the basis for computing the casemix adjustment. We have determined that using the 2006 data instead of the suggested alternatives is the most appropriate data to adopt.

Comment: A few commenters stated that CMS failed to make public all information needed to provide sufficient explanation of the basis for the recalibration. The commenters indicated that the negative $1.05 billion impact of the recalibration should be similar to that proposed in the 2009 proposed rule, and questioned the reasons for the change. Further, the commenters suggested that CMS has failed to provide the public with the aggregate baseline spending values that CMS used in making the initial FY 2006 ``parity'' adjustment and the one that is currently being used in the FY 2010 proposed rule.

Response: In the FY 2009 rule, actual data were used to compare payments in 2006 under RUG44 and RUG53. At that time it was decided that an adjustment was necessary to recalibrate the CMIs because the adjustments in place since FY 2006, which were supposed to be budget neutral, actually resulted in a 3.3 percent overpayment to SNFs. It was also determined that the adjustment necessary to attain the appropriate 3.3 percent reduction in payments was a 9.68 percent increase to the unadjusted RUG53 casemix indexes (73 FR 46422, August 8, 2008), to replace the 17.90 percent adjustment that was in place since 2006. To determine the dollar impact ($780 million) for the FY 2009 rule, the 3.3 percent was applied to the estimated Medicare reimbursement to SNFs in FY 2008, which is net of beneficiary costsharing. For the FY 2010 rule, the same data and methodology were used as in the FY 2009 rule, which determined that an overpayment of 3.3 percent has been in place since 2006, requiring an adjustment to the nursing casemix indexes of 9.68 percent (74 FR 22214, May 12, 2009) to replace the 17.90 percent adjustment. However, we believe that the presentation of the dollar impact would be more accurately reflected by applying the overpayment percentage to total SNF payments, including beneficiary costsharing amounts. The reason for using these higher payments to determine the dollar impact is because this is how the impact will play out in actual practice. Specifically, the revised 9.68 percent adjustment to the nursing CMIs is used to calculate total payments to SNFs, which reflect a combination of reimbursement from Medicare along with beneficiary costsharing. However, as the daily coinsurance amount for days 21100 in the SNF is set by law (in section 1813(a)(3) of the Act) at one eighth of the current calendar year's inpatient hospital deductible amount, the beneficiary costsharing is unaffected by the change in payments resulting from the recalibration. This point is best illustrated by way of an example: Total payments to SNFs in FY 2009 are estimated at approximately $31.3 billion, consisting of $25.9 billion in Medicare reimbursement and $5.4 billion in beneficiary costsharing.

The impact of the recalibration lowers total payments to SNFs by approximately $1 billion (or 3.3 percent), to about $30.3 billion. Of this $30.3 billion, beneficiary costsharing (as determined by the statutory formula) remains unchanged at $5.4 billion, while Medicare reimbursement is reduced to $24.8 billion. Thus, although the determination of the total dollar impact changed, the methodology used to determine the need to recalibrate the CMIs did not change from FY 2009 to FY 2010. The total payments to SNFs that are used to determine the dollar impacts are not explicitly published anywhere, but can be easily estimated by dividing the dollar impacts by the percentage impact. These results can be confirmed by contacting the CMS Office of the Actuary.

Comment: Some commenters believed that CMS failed to provide sufficient information for a third party to reproduce CMS's conclusions with regard to the recalibrated parity
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adjustment, noting the following specific elements: The baseline used for FY 2010, the CY 2006 days of service for both the RUG44 and RUG53 systems, and the separate values for the recalibrated parity adjustment factor and the NTA cost adjustment factor for FY 2010.

Response: We do not agree with the commenters' assertion. The methodology used to establish the casemix adjustments is the same as that described in detail in the FY 2006 SNF PPS proposed rule (70 FR 29077 through 29079, May 19, 2005), the FY 2009 SNF PPS proposed rule (73 FR 25923, May 7, 2008) and the FY 2009 SNF PPS final rule (73 FR 4642122, August 8, 2008). In addition, the data used to calculate the adjustments are publicly available on the CMS Web site, as explained below. We used the CY 2006 days of service (available in the Downloads section of our Web site at http://www.cms.hhs.gov/SNFPPS/02_ Spotlight.asp) for both the RUG44 and RUG53 systems. We multiplied the CY 2006 days of service by the FY 2008 unadjusted Federal per diem payment rate components (72 FR 43416, August 3, 2007) multiplied by the unadjusted casemix indexes (available in the Downloads section of our Web site at http://www.cms.hhs.gov/SNFPPS/09_RUGRefinement.asp) to establish expenditures under the RUG44 and RUG53 systems. The budget neutrality adjustment was determined as the percentage increase necessary for the nursing CMIs to generate estimated expenditure levels under the RUG53 system that were equal to estimated expenditure levels under the RUG44 system. We then calculated a second adjustment factor to increase the baseline by an amount that served to offset the variability in NTA utilization.

The separate recalibrated parity adjustment factor and the NTA cost adjustment factor were considered in the calculation of the combined parity adjustment factor of 9.68 in the FY 2009 SNF PPS proposed rule (73 FR 25923, May 7, 2008), the FY 2009 SNF PPS final rule (73 FR 4642122, August 8, 2008), and the FY 2010 SNF PPS proposed rule (74 FR 22214, May 12, 2009). We presented the total adjustment to the nursing casemix indexes of 9.68 percent because this reflects all changes to the payment system with respect to the recalibration. The percentage adjustment to the nursing CMIs to maintain parity between the 44group and 53group models is a 2.43 percent increase. The adjustment to account for the variability in the nontherapy ancillary utilization is a 7.08 percent increase. The separate adjustments represent interim steps in the calculations, and the final result of 9.68 percent represents the complete change to aggregate payments.

Although the SNF baseline is not explicitly published, the baseline used can be determined by dividing the dollar impacts by the percentage impact. Many commenters used this approach to conduct their own analyses. Some of the commenters contacted CMS to confirm the baseline in use, and this information was provided or verified.

Comment: A few commenters believe that CMS failed to explain fully the evaluation done since the FY 2009 final rule to support the decision to proceed with the recalibration for FY 2010.

Response: The analytic methodology and calculations were explained in detail in the FY 2009 proposed and final rules. In the final rule, we explained that we were deferring rather than withdrawing the recalibration proposal. After the publication of the FY 2009 final rule, we worked with CMS staff and contractors, and reviewed the entire methodology with our actuaries. We reviewed the recalibration approach with the CMS actuaries, asked for an independent review by one of our contractors, and met with an industry representative to discuss the methodology. The calculations were determined to be mathematically correct. The approach was reconsidered along with alternative approaches that we presented in our FY 2009 final rule (73 FR 46423, 4643940) and those offered by industry. Based on our results from these steps, we determined that our methodology was appropriate and reissued the proposal for FY 2010. In addition, we further considered the effects of the recalibration on beneficiaries, SNF clinical staff, and quality of care, and as explained in the FY 2010 proposed rule (74 FR 22214), we determined that it is appropriate to proceed with the recalibration in FY 2010. As we explained in the FY 2010 proposed rule (74 FR 22214), by recalibrating the CMIs under the 53group model, we expect to restore SNF payments to their appropriate level by correcting an inadvertent increase in overall payments. Because the recalibration would simply remove an unintended overpayment rather than decrease an otherwise appropriate payment amount, we do not believe that the recalibration should negatively affect beneficiaries, clinical staff, or quality of care, or create an undue hardship on providers. The purpose of the FY 2006 refinements was to reallocate payments so that they more accurately reflect resources used, not to increase or decrease overall expenditures. Thus, we believe that it is appropriate to proceed with the recalibration in order to ensure that we correctly accomplish the purpose of the FY 2006 casemix refinements and restore payments to their appropriate level.

Comment: Several commenters stated that the need for the recalibration arose because CMS initial projections of utilization under the refined casemix system proved to be inaccurate once actual utilization data became available. They then asserted that in view of this, the proposed recalibration represents a ``forecast error adjustment'' that is not covered under the statutory authority to provide for an appropriate adjustment to account for case mix (section 1888(e)(4)(G)(i) of the Act).

Response: It would be incorrect to characterize the proposed recalibration as a ``forecast error adjustment,'' as that term refers solely to an adjustment that compensates for an inaccurate forecast of the annual inflation factor in the SNF market basket, as described in section III.F.2 of this final rule (see 42 CFR 413.337(d)(2)). By contrast, the proposed recalibration would serve to ensure that the 2006 casemix refinements are implemented as intended. As such, it would be integral to the process of providing ``* * * for an appropriate adjustment to account for case mix'' that is based upon appropriate data in accordance with section 1888(e)(4)(G)(i) of the Act.

Comment: A number of comments included references to the discussion of the 2006 casemix refinements in the SNF PPS proposed rule for FY 2006 (70 FR 29079, May 19, 2005), in which we explained that we were ``* * * advancing these proposed changes under our authority in section 101(a) of the BBRA to establish casemix refinements, and that the changes we are hereby proposing will represent the final adjustments made under this authority'' (emphasis added). The commenters stated that this earlier description of the 2006 casemix refinements as ``final'' effectively precludes CMS from proceeding with a recalibration, which they characterized as representing a further refinement. Similarly, several commenters also questioned our authority to recalibrate the casemix system prior to the completion of the STRIVE STM project. In addition, several commenters questioned whether CMS has the authority to impose a budget neutrality requirement on the introduction of a new classification model.

Response: We wish to clarify that the actual ``refinement'' that we proposed and implemented in the FY 2006
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rulemaking cycle consisted of our introduction of the 9 new Rehabilitation plus Extensive Services groups at the top of the previous, 44group RUG hierarchy, along with the adjustment recognizing the variability of NTA use, which together fulfilled the provisions of section 101(a) of the BBRA. The accompanying adjustment to the casemix indexes (CMIs) was merely a vehicle through which we implemented that refinement. Rather than representing a new or further ``refinement'' in itself, the proposed recalibration merely serves to ensure that we correctly accomplish a revision to the CMIs that accompanied the FY 2006 casemix refinements.

In the FY 2006 final rule (70 FR 45033, August 4, 2005), we addressed the introduction of the refinements within the broader context of ensuring payment accuracy and beneficiary access to care. We pointed out that
* * * this incremental change is part of this ongoing process that will also include update activities such as the upcoming STM study and investigation of potential alternatives to the RUG system itself. However, the commitment to long term analysis and refinement should not preclude the introduction of more immediate

methodological and policy updates.

Finally, the budget neutrality factor was applied to the unadjusted RUG53 casemix weights that were introduced in January 2006. As stated above, our initial analyses indicated that payments would be lower under the RUG53 model. As the purpose of the refinement was to reallocate payments, and not to reduce expenditures, we believe that increasing the casemix weights to equalize payments under the two models is an appropriate exercise of our broad authority to establish an appropri

FOR FURTHER INFORMATION CONTACT

Ellen Berry, (410) 786-4528 (for information related to clinical issues). Trish Brooks, (410) 7864561 (for information related to Resident Assessment Protocols (RAPs) under the Minimum Data Set (MDS)). Jeanette Kranacs, (410) 7869385 (for information related to the development of the payment rates and case mix indexes). Abby Ryan, (410) 7864343 (for information related to the STRIVE project). Jean Scott, (410) 7866327 (for information related to the request for comment on the possible quarterly reporting of nursing home staffing data). Bill Ullman, (410) 7865667 (for information related to level of care determinations, consolidated billing, and general information).