[Federal Register: August 4, 2003 (Volume 68, Number 149)]
[Rules and Regulations]               
[Page 46035-46072]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04au03-10]                         


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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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41 CFR Parts 409, 411, et al.



Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities--Update; Final Rule


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 411, 413, 440, 483, 488, and 489

[CMS-1469-F]
RIN 0938-AL90

 
Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities--Update

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule updates the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2004. Annual updates to the PPS rates are required 
by section 1888(e) of the Social Security Act (the Act), as amended by 
the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), and the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA), relating to Medicare payments and 
consolidated billing for SNFs.

DATES: Effective Date: This regulation becomes effective on October 1, 
2003.

FOR FURTHER INFORMATION CONTACT: John Davis, (410) 786-0008 (for 
information related to the Wage Index, and for information related to 
swing-bed providers).
    Ellen Gay, (410) 786-4528 (for information related to the case-mix 
classification methodology, and for information related to swing-bed 
providers).
    Sheila Lambowitz, (410) 786-7605 (for information related to the 
SNF Market Basket Index and forecast error).
    Bill Ullman, (410) 786-5667 (for information related to level of 
care determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, PO Box 371954, Pittsburgh, PA 15250-7954. 
The cost for each copy is $10. Please specify the date of the issue 
requested and enclose a check or money order payable to the 
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and expiration date. Credit card orders can also be placed by calling 
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faxing to (202) 512-2250. As an alternative, you can also view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
libraries throughout the country that receive the Federal Register.
    To assist readers in referencing sections contained in this 
document, we are providing the following Table of Contents.

Table of Contents

I. Background
    A. Current System for Payment of SNF Services Under Part A of 
the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 (the BBA) for 
Updating the SNF PPS
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (the BBRA)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (the BIPA)
    E. General Overview of the SNF PPS
    1. Payment Provisions--Federal Rates
    2. Payment Provisions--Initial Transition Period
    F. Use of the SNF Market Basket Index
II. Provisions of the Proposed Rule and the Supplemental Proposed 
Rule
III. Analysis of and Response to Public Comments
    A. Update of Federal Payment Rates Under the SNF PPS
    1. Costs and Services Covered by the Federal Rates
    2. Methodology Used for the Calculation of the Federal Rates
    B. Case-Mix Adjustment
    C. Wage Index Adjustment to Federal Rates
    1. Selecting the Most Appropriate Wage Index
    2. Determining the Labor-Related Portion of the SNF PPS
    3. Calculating the Budget Neutrality Factor
    D. Publication of Updates to the Federal Rates
    E. Relationship of RUG-III Classification System to Existing SNF 
Level-of-Care Criteria
    F. Expiration of Initial Three-Year Transition Period
    G. Example of Computation of Adjusted PPS Rates and SNF Payment
    H. SNF Market Basket Index
    1. Background
    2. Use of the SNF Market Basket Percentage
    3. Market Basket Forecast Error Adjustment
    4. Federal Rate Update Factor
    I. Consolidated Billing
    J. Application of the SNF PPS to SNF Services Furnished by 
Swing-Bed Hospitals
    K. Distinct Part Definition
    L. Quality of Care Efforts under the SNF PPS
IV. Provisions of the Final Rule
V. Waiver of Proposed Rulemaking
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered
    D. Conclusion

Regulation Text

    In addition, because of the many terms to which we refer by 
abbreviation in this final rule, we are listing these abbreviations and 
their corresponding terms in alphabetical order below:

AHE Average Hourly Earnings
ARD Assessment Reference Date
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 
1999 (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (Pub. L. 106-554)
CAH Critical Access Hospital
CFR Code of Federal Regulations
CMS Centers for Medicare & Medicaid Services
ECEC Employer Cost for Employee Compensation
ECI Employment Cost Index
FI Fiscal Intermediary
FR Federal Register
FY Fiscal Year
GAO General Accounting Office
HCPCS Healthcare Common Procedure Coding System
IFC Interim Final Rule with Comment Period
MDS Minimum Data Set
MedPAC Medicare Payment Advisory Commission
MEDPAR Medicare Provider Analysis and Review File
MSA Metropolitan Statistical Area
NF Nursing Facility
PPI Producer Price Indices
PPS Prospective Payment System
QIO Quality Improvement Organization
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act (Pub. L. 96-354)
RIA Regulatory Impact Analysis
RUG Resource Utilization Groups
SCHIP State Children's Health Insurance Program
SNF Skilled Nursing Facility
UMRA Unfunded Mandates Reform Act (Pub. L. 104-4)

I. Background

    On May 16, 2003, we published a proposed rule (hereinafter referred 
to as the ``proposed rule'') in the Federal Register (68 FR 26758), 
setting forth the proposed updates to the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for FY 2004. Annual updates to the PPS rates are required by

[[Page 46037]]

section 1888(e) of the Social Security Act (the Act), as amended by the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
(Pub. L. 106-113) (the BBRA) and the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) (the 
BIPA), relating to Medicare payments and consolidated billing for SNFs. 
In the proposed rule, we invited public comments on a number of 
proposed revisions and technical corrections to the associated 
regulations. Following the publication of that proposed rule, we then 
published a supplemental proposed rule (hereinafter referred to as the 
``supplemental proposed rule'') on June 10, 2003 (68 FR 34768), in 
which we invited public comments on possibly revising the annual update 
methodology by establishing an adjustment to account for forecast 
error. In addition, we also invited comments on ways to ensure that 
additional payments that could result from such an adjustment would be 
used to promote quality of care in the SNF setting (including direct 
care services to residents).

A. Current System for Payment of SNF Services Under Part A of the 
Medicare Program

    Section 4432 of the Balanced Budget Act of 1997 (Pub. L. 105-33) 
(the BBA) amended section 1888 of the Act to provide for the 
implementation of a per diem PPS for SNFs, covering all costs (routine, 
ancillary, and capital-related) of covered SNF services furnished to 
beneficiaries under Part A of the Medicare program, effective for cost 
reporting periods beginning on or after July 1, 1998. We are updating 
the per diem payment rates for SNFs for FY 2004. Major elements of the 
SNF PPS include:
    [sbull] Rates. Per diem Federal rates were established for urban 
and rural areas using allowable costs from FY 1995 cost reports. These 
rates also included an estimate of the cost of services that, before 
July 1, 1998, were paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay. The rates were 
adjusted annually using a SNF market basket index. Rates were case-mix 
adjusted using a classification system (Resource Utilization Groups, 
version III (RUG-III)) based on beneficiary assessments (using the 
Minimum Data Set (MDS) 2.0). The rates were also adjusted by the 
hospital wage index to account for geographic variation in wages. (In 
section III.C of this final rule, we discuss the wage index adjustment 
in detail.) A correction notice was published on December 27, 2002 (67 
FR 79123) that announced corrections to several of the wage factors. 
Additionally, as noted in the July 31, 2002 update notice (67 FR 
49798), section 101 of the BBRA and certain sections of the BIPA also 
affect the payment rate.
    [sbull] Transition. The SNF PPS included an initial 3-year, phased 
transition that blended a facility-specific payment rate with the 
Federal case-mix adjusted rate. For each cost reporting period after a 
facility migrated to the new system, the facility-specific portion of 
the blend decreased and the Federal portion increased in 25 percentage 
point increments. For most facilities, the facility-specific rate was 
based on allowable costs from FY 1995; however, since the last year of 
the transition was FY 2001, all facilities were paid at the full 
Federal rate by the following fiscal year (FY 2002). Therefore, we are 
no longer including adjustment factors related to facility-specific 
rates for the coming fiscal year.
    [sbull] Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the RUG-III classification is based, in part, on the beneficiary's need 
for skilled nursing care and therapy, we have attempted, where 
possible, to coordinate claims review procedures involving level of 
care determinations with the outputs of beneficiary assessment and RUG-
III classifying activities. We discuss this coordination in greater 
detail in section III.E of this final rule. Another SNF benefit 
requirement is that the SNF must be certified by Medicare as meeting 
the requirements for program participation contained in section 1819 of 
the Act. This provision of the law defines a SNF as ``* * * an 
institution (or a distinct part of an institution). * * *'' In section 
III.K of this final rule, we discuss a clarification that we are making 
in defining the term ``distinct part'' with respect to SNFs.
    [sbull] Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills for almost all of the services that the resident receives during 
the course of a covered Part A stay. (In addition, this provision 
places with the SNF the Medicare billing responsibility for physical, 
occupational, and speech-language therapy that the resident receives 
during a noncovered stay.) The statute excludes from the consolidated 
billing provision a few services--primarily those of physicians and 
certain other types of practitioners--which remain separately billable 
to Part B by the outside entity that furnishes them. We discuss this 
provision in greater detail in section III.I of this final rule.
    [sbull] Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical access hospitals (CAHs), Part A pays on a 
reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, in accordance with section 1888(e)(7) of the Act, 
these services furnished by non-CAH rural hospitals are paid under the 
SNF PPS, effective with cost reporting periods beginning on or after 
July 1, 2002. A more detailed discussion of this provision appears in 
section III.J of this final rule.
    [sbull] Technical corrections. We are also taking this opportunity 
to make a number of technical corrections in the text of the 
regulations, as discussed in greater detail in section IV of this final 
rule.

B. Requirements of the Balanced Budget Act of 1997 (the BBA) for 
Updating the SNF PPS

    Section 1888(e)(4)(H) of the Act requires that we publish in the 
Federal Register:
    1. The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the fiscal year.
    2. The case-mix classification system to be applied with respect to 
these services during the fiscal year.
    3. The factors to be applied in making the area wage adjustment 
with respect to these services.
    In the July 30, 1999 final rule (64 FR 41670), we indicated that we 
would announce any changes to the guidelines for Medicare level of care 
determinations related to modifications in the RUG-III classification 
structure (see section III.E of this final rule).

C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (the BBRA)

    There were several provisions in the BBRA that resulted in 
adjustments to the SNF PPS. These provisions were described in detail 
in the final rule that we published in the Federal Register on July 31, 
2000 (65 FR 46770). In particular, section 101 of the BBRA provided for 
a temporary 20 percent increase in the per diem adjusted payment rates 
for 15 specified RUG-III groups (SE3, SE2, SE1, SSC, SSB, SSA, CC2, 
CC1, CB2, CB1, CA2, CA1, RHC, RMC, and RMB). Under the statute, this 
temporary increase remains in effect

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until the later of October 1, 2000, or the implementation of case-mix 
refinements in the PPS. Section 101 also included a 4 percent across-
the-board increase in the adjusted Federal per diem payment rates each 
year for FYs 2001 and 2002, exclusive of the 20 percent increase. 
Accordingly, this 4 percent temporary increase has now expired.
    We included further information on all of the provisions of the 
BBRA that affect the SNF PPS in Program Memoranda A-99-53 and A-99-61 
(December 1999), and Program Memorandum AB-00-18 (March 2000). In 
addition, for swing-bed 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 July 31, 2001 
final rule (66 FR 39562), we made conforming changes to the regulations 
in 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 (the BIPA)

    The BIPA included several provisions that resulted in adjustments 
to the PPS for SNFs. These provisions were described in detail in the 
final rule that we published in the Federal Register on July 31, 2001 
(66 FR 39562) as follows:
    [sbull] Section 203 of the BIPA exempted critical access hospital 
(CAH) swing-beds from the SNF PPS; we included further information on 
this provision in Program Memorandum A-01-09 (January 16, 2001).
    [sbull] Section 311 of the BIPA eliminated the one percent 
reduction in the SNF market basket that the statutory update formula 
had previously specified for FY 2001, and changed the one percent 
reduction specified for FYs 2002 and 2003 to a 0.5 percent reduction. 
This section also required us to conduct a study of alternative case-
mix classification systems for the SNF PPS, and to submit a report to 
the Congress by January 1, 2005.
    [sbull] Section 312 of the BIPA provided for a temporary 16.66 
percent increase in the nursing component of the case-mix adjusted 
Federal rate for services furnished on or after April 1, 2001, and 
before October 1, 2002. Accordingly, this temporary increase has now 
expired.
    [sbull] Section 313 of the BIPA repealed the consolidated billing 
requirement for services (other than physical, occupational, and 
speech-language therapy) furnished to SNF residents during noncovered 
stays, effective January 1, 2001. This provision also specified that 
consolidated billing applies only to services furnished to those 
individuals residing in an institution (or portion of an institution) 
that is actually certified by Medicare as a SNF.
    [sbull] Section 314 of the BIPA adjusted the payment rates for all 
of the rehabilitation RUGs to correct an anomaly under which the 
existing payment rates for the RHC, RMC, and RMB rehabilitation groups 
were higher than the rates for some other, more intensive 
rehabilitation RUGs.
    [sbull] Section 315 of the BIPA authorized us to establish a 
geographic reclassification procedure that is specific to SNFs, but 
only after collecting the data necessary to establish a SNF wage index 
that is based on wage data from nursing homes.
    We included further information on several of these provisions in 
Program Memorandum A-01-08 (January 16, 2001).

E. General Overview of the SNF PPS

    We implemented the Medicare SNF PPS for cost reporting periods 
beginning on or after July 1, 1998. Under the PPS, we pay SNFs through 
prospective, case-mix adjusted per diem payment rates applicable to all 
covered SNF services. These payment rates cover all the costs of 
furnishing covered skilled nursing services (routine, ancillary, and 
capital-related costs) other than costs associated with approved 
educational activities. Covered SNF services include post-hospital 
services for which benefits are provided under Part A and all items and 
services that, before July 1, 1998, had been paid under Part B (other 
than physician and certain other services specifically excluded under 
the BBA) but furnished to Medicare beneficiaries in a SNF during a 
covered Part A stay. A complete discussion of these provisions appears 
in the May 12, 1998 interim final rule (63 FR 26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year updated for inflation to the first effective period of 
the PPS. We developed the Federal payment rates using allowable costs 
from hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be 
payable under Part B for covered SNF services furnished to individuals 
during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of PPS (the 15-month period beginning July 1, 
1998) using a SNF market basket, and then standardized for the costs of 
facility differences in case-mix and for geographic variations in 
wages. The database used to compute the Federal payment rates excluded 
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. In accordance with the formula prescribed in the 
BBA, 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 (hospital-based 
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 
wage-related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix, using a classification system that accounts for the 
relative resource utilization of different patient types. This 
classification system, Resource Utilization Groups, version III (RUG-
III), uses beneficiary assessment data from the Minimum Data Set (MDS) 
completed by SNFs to assign beneficiaries to one of 44 RUG-III groups. 
The May 12, 1998 interim final rule (63 FR 26252) included a complete 
and detailed description of the RUG-III classification system, and a 
further discussion appears in section III.B of this final rule.
    The Federal rates in this final rule reflect an update to the rates 
that we published in the July 31, 2002 Federal Register (67 FR 49798) 
equal to the full change in the SNF market basket index. According to 
section 1888(e)(4)(E)(ii)(IV) of the Act, for FY 2004, we have adjusted 
the current rates by the full SNF market basket index. In addition, the 
FY 2004 rates will be adjusted by an additional 3.26 percent to reflect 
the cumulative forecast error since the start of the SNF PPS on July 1, 
1998.
2. Payment Provisions--Initial Transition Period
    The SNF PPS included an initial, phased transition from a facility-
specific rate (which reflected the individual facility's historical 
cost experience) to the Federal case-mix adjusted rate. The transition 
extended through the

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facility's first three cost reporting periods under the PPS, up to, and 
potentially including, the one that began in FY 2001. Furthermore, 
according to section 102 of BBRA, a facility could nonetheless elect to 
be paid entirely under the Federal rates. Accordingly, starting with 
cost reporting periods beginning in FY 2002, we base payments entirely 
on the Federal rates and, as mentioned previously in this final rule, 
we no longer include adjustment factors related to facility-specific 
rates for the coming fiscal year.

F. Use of the SNF 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 the covered SNF 
services. The SNF market basket index is used to update the Federal 
rates on an annual basis, and is discussed in greater detail in section 
III.H of this final rule.

II. Provisions of the Proposed Rule and the Supplemental Proposed Rule

    The proposed rule that we published in the Federal Register on May 
16, 2003 (68 FR 26758) included proposed FY 2004 updates to the Federal 
payment rates used under the SNF PPS. In accordance with section 
1888(e)(4)(E)(ii)(IV) of the Act, the updates reflect the full SNF 
market basket percentage change for the fiscal year. The proposed rule 
also proposed introducing a one-year lag in the wage index data, 
similar to the PPS methodologies already being used for home health and 
inpatient rehabilitation facility services. This one-year lag would 
avoid the problems associated with multiple mid-year corrections in the 
hospital wage data. We also proposed clarifying the distinct part 
criteria to be used, in part, to help identify those SNFs that are 
hospital-based rather than freestanding. Further, we invited public 
comments on additional HCPCS codes that could represent the type of 
``high-cost, low probability'' services within certain service 
categories (that is, chemotherapy and its administration, radioisotope 
services, and customized prosthetic devices) that section 103 of the 
BBRA has authorized us to exclude from the SNF consolidated billing 
provision.
    In addition to discussing these general issues in the proposed 
rule, we also proposed making the following specific revisions to the 
existing text of the regulations:
    [sbull] In Sec.  409.20, we would make a technical correction to 
the cross-reference in paragraph (c).
    [sbull] We would revise Sec.  483.5 to include specific definitions 
of the terms ``distinct part'' and ``composite distinct part.'' This 
revision would also involve making conforming changes elsewhere in 
subpart B of part 483 of the regulations, as well as in parts 413 and 
440. In addition, we proposed correcting a typographical error that 
currently appears in the regulations text at Sec.  483.20(k)(1).
    In the supplemental proposed rule that we published in the Federal 
Register on June 10, 2003 (68 FR 34768), we invited public comments on 
the advisability of amending the regulations text at Sec.  
413.337(d)(2), to include an adjustment to the annual update of the 
previous fiscal year's rate that would account for forecast error in 
the SNF market basket, beginning with FY 2004. In addition, we also 
invited comments on methods for ensuring that additional payments that 
could result from that adjustment would be used to promote quality of 
care in the SNF setting (including direct care services to residents). 
We also proposed to make a technical correction to the second sentence 
of the regulations text in Sec.  413.345, in order to correct the 
spelling of the word ``standardized.''
    More detailed information on each of these issues, to the extent 
that we received public comments on them, appears in the discussion 
contained in the following section of this preamble.

III. Analysis of and Responses to Public Comments

    In response to the publication of the proposed rule on May 16, 2003 
(68 FR 26758) and the supplemental proposed rule on June 10, 2003 (68 
FR 34768), we received over 400 comments. Many consisted of form 
letters, in which we received multiple copies of an identically worded 
letter that had been signed and submitted by different individuals. 
Further, we received numerous comments from various trade associations 
and major organizations. Comments originated from nursing homes, 
hospitals, and other providers, suppliers, and practitioners, nursing 
home resident advocacy groups, health care consulting firms and private 
citizens. The following discussion, arranged by subject area, includes 
a description of the comments that we received, along with our 
responses.
    Comment: A few commenters expressed concern about the abbreviated 
comment periods available for the proposed rule and the supplemental 
proposed rule. They asserted that the shorter timeframes were 
burdensome, and affected their ability to furnish comprehensive 
responses. They asked us to provide the full 60-day comment period in 
the future.
    Response: While the proposed rule was not actually published until 
May 16, 2003, we note that this document went on public display at the 
Office of the Federal Register several days earlier, on May 10, 2003. 
Accordingly, the contents of the proposed rule were, in fact, publicly 
available for the full 60-day comment period. Further, we note that in 
contrast to the proposed rule, the supplemental proposed rule did not 
attempt to address the SNF PPS in a comprehensive manner, but instead 
focused exclusively on a single issue--the possibility of introducing 
an adjustment to account for forecast error. As noted in the preamble 
to the supplemental proposed rule (68 FR 34772), given the extremely 
narrow scope of this document, we believe that even a comment period of 
less than 60 days provided interested parties with sufficient 
opportunity to comment adequately on it.

A. Update of Federal Payment Rates Under the SNF PPS

    This final rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2003. The schedule incorporates per diem Federal rates that 
provide Part A payment for all costs of services furnished to a 
beneficiary in a SNF during a Medicare-covered stay.
1. Costs and Services Covered by the Federal Rates
    The Federal rates apply to all costs (routine, ancillary, and 
capital-related costs) of covered SNF services other than costs 
associated with approved educational activities as defined in Sec.  
413.85. Under section 1888(e)(2) of the Act, covered SNF services 
include post-hospital 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)).
2. Methodology Used for the Calculation of the Federal Rates
    The FY 2004 rates reflect an update using the full amount of the 
latest market basket index. The FY 2004 market basket increase factor 
is 3.0

[[Page 46040]]

percent. A complete description of the multi-step process is delineated 
in the May 12, 1998 interim final rule (63 FR 26252). We note that in 
accordance with section 101(a) of the BBRA and section 314 of the BIPA, 
the existing, temporary increase in the per diem adjusted payment rates 
of 20 percent for certain specified RUGs (and 6.7 percent for certain 
others) remains in effect until the implementation of case-mix 
refinements. As we discuss elsewhere in this final rule, while we are 
proceeding with our ongoing research in this area, we are not 
implementing case-mix refinements in this final rule.
    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 fiscal year beginning October 1, 2002, and 
ending September 30, 2003, and the midpoint of the Federal fiscal year 
beginning October 1, 2003, and ending September 30, 2004, to which the 
payment rates apply. In accordance with section 1888(e)(4)(E)(ii)(IV) 
of the Act, the payment rates for FY 2004 are updated by a factor equal 
to the full market basket index percentage increase to determine the 
payment rates for FY 2004. In addition, the FY 2004 rates will be 
adjusted by an additional 3.26 percent to reflect the cumulative 
forecast error since the start of the SNF PPS on July 1, 1998. The 
rates are further adjusted by a wage index budget neutrality factor, 
described later in this section. Tables 1 and 2 reflect the updated 
components of the unadjusted Federal rates for FY 2004.

                            Table 1.--FY 2004 Unadjusted Federal Rate Per Diem Urban
----------------------------------------------------------------------------------------------------------------
                                                      Nursing--case-  Therapy--case-  Therapy--non-   Non-case-
                   Rate component                           mix             mix          case-mix        mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.....................................        $129.96          $97.89         $12.89        $66.32
----------------------------------------------------------------------------------------------------------------


                            Table 2.--FY 2004 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                                      Nursing--case-  Therapy--case-  Therapy--non-   Non-case-
                   Rate component                           mix             mix          case-mix        mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.....................................        $124.16         $112.89         $13.77        $67.55
----------------------------------------------------------------------------------------------------------------

B. Case-Mix Adjustment

    Under the BBA, we must publish the SNF PPS case-mix classification 
methodology applicable for the next Federal fiscal year before August 1 
of each year. As noted in the following discussion, we are proceeding 
with our ongoing research regarding possible refinements in the 
existing case-mix classification system, but we are not implementing 
the refinements in this final rule.
    As discussed previously in this final rule, section 101(a) of the 
BBRA provided for a temporary 20 percent increase in the per diem 
adjusted payment rates for 15 specified RUG-III groups. This 
legislation specified that the 20 percent increase would be effective 
for SNF services furnished on or after April 1, 2000, and would 
continue until the later of: (1) October 1, 2000, or (2) implementation 
of a refined case-mix classification system under section 
1888(e)(4)(G)(i) of the Act that would better account for medically 
complex patients.
    In the SNF PPS proposed rule for FY 2001 (65 FR 19190, April 10, 
2000), we proposed making an extensive, comprehensive set of 
refinements to the existing case-mix classification system that 
collectively would have significantly expanded the existing 44-group 
structure. However, when our subsequent validation analyses indicated 
that the refinements would afford only a limited degree of improvement 
in explaining resource utilization relative to the significant increase 
in complexity that they would entail, we decided not to implement them 
at that time (see the FY 2001 final rule published July 31, 2000 (65 FR 
46773)). Nevertheless, since the BBRA provision had demonstrated a 
Congressional interest in improving the ability of the payment system 
to account for the care furnished to medically complex patients in 
SNFs, we continued to conduct research in this area.
    The Congress subsequently enacted section 311(e) of the BIPA, which 
directed us to conduct a study of the different systems for 
categorizing patients in Medicare SNFs in a manner that accounts for 
the relative resource utilization of different patient types, and to 
issue a report with any appropriate recommendations to the Congress by 
January 1, 2005. The extended timeframe for conducting the study, and 
the broad mandate in the BIPA to consider various classification 
systems and the full range of patient types, stood in sharp contrast to 
the BBRA language regarding more incremental refinements to the 
existing case-mix classification system under section 1888(e)(4)(G)(i) 
of the Act. This underscored the fact that implementing the latter type 
of refinements to the existing system in order to better account for 
medically complex patients need not await the completion of the more 
comprehensive changes envisioned in the BIPA. Accordingly, we 
considered the possibility of including these refinements as part of 
last year's annual update of the SNF payment rates.
    However, in the July 31, 2002 update notice (67 FR 49801), we 
determined that the research was not sufficiently advanced to implement 
any case-mix refinements at that time, thus leaving the current 
classification system in place. This also left in place the temporary 
add-on payments enacted in section 101(a) of the BBRA. Further, while 
we have continued with our ongoing research regarding possible 
refinements in the existing case-mix classification system, this 
research has not yet provided the basis for proceeding with those 
refinements. Accordingly, we are not implementing case-mix refinements 
in this final rule.
    As a result, the payment rates set forth in this final rule reflect 
the continued use of the 44-group RUG-III classification system 
discussed in the May 12, 1998 interim final rule (63 FR 26252). We are 
also maintaining the add-ons to the Federal rates for the specified 
RUG-III groups required by section 101(a) of the BBRA and subsequently 
modified by section 314 of the BIPA. The case-mix adjusted payment 
rates are listed separately for urban and rural SNFs in Tables 3 and 4, 
with the corresponding case-mix

[[Page 46041]]

values. These tables do not reflect the temporary add-on to the 
specified RUG-III groups provided in the BBRA, which is applied only 
after all other adjustments (wage and case-mix) have been made.
    Meanwhile, we are continuing to explore both short-term and longer-
range revisions to our case-mix classification methodology. In July 
2001, we awarded a contract to the Urban Institute for research to aid 
us in making incremental refinements to the case-mix classification 
system under section 1888(e)(4)(G)(i) of the Act and to begin the case-
mix study mandated by section 311(e) of the BIPA. The results of our 
current research will be included in the report to the Congress that 
section 311(e) of the BIPA requires us to submit by January 1, 2005. As 
we noted in the May 10, 2001 proposed rule (66 FR 23990), this research 
may also support a longer term goal of developing more integrated 
approaches for the payment and delivery system for Medicare post acute 
services in general. This broader, ongoing research project will pursue 
several avenues in studying various case-mix classification systems. 
Our preliminary research has focused on incorporating comorbidities and 
complications into the classification strategy, and we will thoroughly 
explore and evaluate this approach and other approaches (including 
procedures that might account more accurately for ancillary services) 
in our ongoing work.
    Comment: Several commenters commended our decision not to implement 
case-mix refinements in FY 2004. They expressed the belief that 
incremental refinements may only represent ``patches'' on a system that 
needs a more comprehensive redesign, and could destabilize an already 
vulnerable health care industry. Other commenters urged us to move 
quickly to identify and implement short-term incremental improvements 
to provide more appropriate reimbursement for patients with heavy non-
therapy ancillary needs.
    Response: As discussed in the proposed rule, we continue to explore 
both short-term case-mix refinements and longer-range redesign of the 
SNF PPS methodology. Our primary goal is to enhance the accuracy of our 
reimbursement system by more closely matching payment with resource 
utilization, particularly in the utilization of non-therapy 
ancillaries. We have made this issue a research priority to ensure 
continued access to quality care for this very vulnerable heavy care 
population. However, we are cautious about premature implementation of 
any policy that has not been thoroughly analyzed to allocate payment 
dollars more accurately. Therefore, we have decided not to implement 
case-mix refinements for FY 2004. However, we are proceeding with our 
research and plan to evaluate the feasibility of implementing 
refinements again next year.
    Comment: Several commenters agreed with the need for short-term 
action to stabilize the SNF PPS and suggested some alternative 
methodologies for achieving these goals, including more frequent 
updating of the SNF market basket and the development of an outlier 
pool that could address beneficiaries with heavy non-therapy ancillary 
needs. A few commenters suggested addressing the non-therapy ancillary 
needs by seeking a legislative change to redirect the 6.7 percent add-
on payments for the 14 RUG-III therapy groups to those RUG-III groups 
used for beneficiaries with complex medical conditions and high 
utilization of non-therapy ancillary services.
    Response: Each of the suggestions discussed above would require 
statutory authority that does not currently exist. However, we will 
carefully consider the comments that we received and use these comments 
to assist us in exploring potential solutions. While we will continue 
to focus on the needs of those beneficiaries who require an unusually 
heavy combination of clinical care, rehabilitation services, and 
ancillary utilization, we will also continue to consider a broad range 
of potential changes. We expect to discuss our research findings by 
January 1, 2005, in the report to the Congress that is required under 
section 311(e) of the BIPA.
    Comment: Most of the commenters supported the continuation of our 
long-term research efforts designed to identify possible alternatives 
to the existing SNF PPS. Many commenters suggested expanding 
communications with providers and other interest groups in a manner 
similar to the approach that we have adopted for Open Door meetings. 
Most commenters recommended that we also enhance communications by 
sharing our research findings, and by including a detailed analysis in 
the 2005 report to the Congress.
    Response: We appreciate the interest shown by providers and other 
stakeholders in our continuing research. We plan to consider all of the 
comments that we have received regarding potential changes to the 
classification system, as well as to other components of the SNF PPS, 
as we continue our analysis and prepare the required report to the 
Congress. As we pursue our research effort and evaluate our options, we 
will seek appropriate means to establish ongoing communication with, 
and input from, all stakeholder groups.
    Comment: Most commenters urged us to minimize provider burden by 
providing adequate lead time for comment and for implementation of any 
significant changes. One commenter also suggested that we improve our 
coordination of related projects such as the Minimum Data Set (MDS) 3.0 
implementation and the SNF PPS redesign, so that providers can 
incorporate changes smoothly and provide necessary staff training with 
minimal disruption to staff and patients.
    Response: We recognize the inherent difficulties in coordinating 
potential changes to the MDS with potential changes to the SNF PPS. In 
fact, our staff in the payment, quality monitoring, and survey and 
certification areas have addressed this issue by establishing an in-
house work group to share information and coordinate activities. By 
working together, we believe that we enhance our effectiveness and can 
introduce changes with minimal disruption and burden to providers. In 
addition, the introduction of the MDS 3.0 and any case-mix refinement 
changes to the SNF PPS would be accomplished through established 
administrative processes that will solicit stakeholder input. Finally, 
we fully agree that providers and other stakeholders will need adequate 
lead time to implement significant policy and operational changes.
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BILLING CODE 4120-01-C

C. Wage Index Adjustment to Federal Rates

    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs. We are continuing that practice for FY 2004.
    Section 315 of the BIPA authorizes us to establish a 
reclassification system for SNFs, similar to the hospital methodology. 
This geographic reclassification system cannot be implemented until we 
have collected the data necessary to establish an area wage index for 
SNFs based on SNF wage data. We presented a comprehensive discussion of 
this wage data in the May 10, 2001 proposed rule (66 FR 23984) and the 
July 31, 2001 final rule (66 FR 39562).
1. Selecting the Most Appropriate Wage Index
    In the May 10, 2001 proposed rule, we published a wage index 
prototype based on SNF data, along with the wage index based on the 
hospital wage data that were used in the preceding year's final rule 
(July 31, 2000, 65 FR 46770). In addition, we included a discussion of 
the wage index computations for the SNF prototype. We also indicated 
our concern about the reliability of the existing data used in 
establishing a SNF wage index, in view of the significant variations in 
the SNF-specific wage data and the large number of SNFs that are unable 
to provide adequate wage and hourly data. Accordingly, we expressed the 
belief that a wage index based on hospital wage data remains the best 
and most appropriate to use in adjusting payments to SNFs, since both 
hospitals and SNFs compete in the same labor markets.
    In the July 31, 2001 final rule (66 FR 39579), we indicated that we 
had decided not to adopt the SNF-specific wage index prototype from the 
proposed rule, citing concerns such as the significant amount of 
volatility in the data. In addition, while we acknowledged that 
auditing all SNFs would provide more accurate and reliable data, we 
observed that this would place a burden on providers in terms of 
recordkeeping and completion of the cost report worksheet. We also 
noted that adopting such an approach would require a significant 
commitment of resources by us and by our contractors.
    As we noted in the May 16, 2003 proposed rule (68 FR 26767), while 
we continue to believe that the development of a SNF-specific wage 
index potentially could improve the accuracy of SNF payments, we do not 
regard an undertaking of this magnitude as being feasible within the 
current level of programmatic resources. However, we remain willing to 
consider the adoption of a SNF-specific wage index should sufficient 
staffing and budgetary resources to support it become available in the 
future.
    In the May 16, 2003 rule, we proposed continuing to use the final 
FY 2003 hospital wage index to adjust SNF PPS payments beginning 
October 1, 2003. Then, for future rate years, we proposed continuing to 
use the most recently published wage index values (that is, the final 
FY 2003 wage index data) final wage index values rather than following 
our current practice of using the most recent available data. The 
impact of this change would have been to establish a one-year lag 
between the wage index values used in the hospital PPS (that is, FY 
2004 wage index) and the data used in the SNF PPS. As explained in our 
responses to the comments shown later in this section, we have decided 
not to implement this one-year lag. Therefore, the wage index values in 
Tables 7 and 8 reflect the most recent available data; that is, the 
same FY 2004 wage data that will be used for the FY 2004 inpatient 
hospital PPS rates.
    Comment: A substantial number of commenters expressed concern about 
the appropriateness of using the most recently published wage index 
values to adjust the payments for SNFs, when more recent data are 
available. Many asked that we use the more recent data, even if they 
are more vulnerable to errors requiring mid-year correction. They 
pointed out that the most recently published wage index values are 
already several years old, since the data have to be reviewed and 
audited before use in a wage index. These commenters argued that 
imposing an additional 1-year lag on wage data ignores the current 
trends in the labor markets, fails to recognize fully those areas where 
severe nursing shortages necessitate paying a higher rate to attract 
nurses, and results in a less accurate reimbursement rate. In addition, 
a few commenters were concerned about the burden on hospital-based 
providers that would have to maintain two wage index systems, one for 
the hospital and another for the SNF.
    Response: Based on our review of the comments, we have determined 
to continue using the most current available wage index data in 
determining the SNF payment rates, and we are not adopting the position 
taken in the May 16, 2003 proposed rule.
    Comment: A few commenters, while opposing the use of the most 
recently published wage index values, urged us to make a retroactive 
wage index adjustment to account for errors in a prior year's reporting 
of hospital wage

[[Page 46046]]

data that lowered payments to SNFs located in the Baltimore MSA.
    Response: The SNF PPS does not include a methodology for 
retroactive adjustments to the wage index. The payment rates and wage 
indices are applied prospectively. Similarly, any corrections to the 
wage indices are also applied prospectively. We rely on the best 
available data reported by hospitals and audited by our fiscal 
intermediaries. Clearly, retroactive application of these wage index 
changes would jeopardize the prospective nature of the system and 
introduce an even higher level of instability.
    The commenters cited Sec.  412.63(x)(2) of the regulations to 
support their request for this retroactive adjustment. However, this 
section applies solely to mid-year corrections of the wage index for 
inpatient hospitals and applies only in cases where the FI or CMS made 
an error in tabulating the hospital data. In this case, the error was 
made by the providers and not by either the FI or by CMS. Moreover, the 
errors in the as-reported data were subject to public review and 
comment before adoption under the SNF PPS. In fact, this public process 
has facilitated correction of the data going forward. Unfortunately, 
the errors in this case were not identified until the data were 
audited. By that time, it was too late to make a mid-year rate 
correction. While we regret the impact on Maryland providers, we note 
that this situation is inherent in a system that uses more recent data. 
Under a policy of using the most recently published wage index values, 
the correction to the Baltimore MSA could have been incorporated in the 
published wage index and resulted in revised reimbursement to providers 
in the Baltimore MSA.
    Comment: Several commenters expressed concern that we may have 
discarded the SNF-specific wage index without further work or 
development to ensure its accuracy. Another pointed out that we already 
have the legal authority to develop and collect data necessary to 
establish an SNF wage index through the Social Security Act Amendments 
of 1994 (Pub. L. 103-432). These commenters urged us to work with the 
industry to educate SNF providers, improve the cost reporting tools we 
use to collect the data, and immediately seek funding for the full-
scale auditing of SNF data that would be needed to create and validate 
an SNF-specific wage index. A few commenters suggested that we should 
commit the resources required to implement an SNF-specific wage index 
not later than FY 2006. One commenter expressed concern that the SNF 
community does not participate in the hospital wage data collection 
process. However, a few commenters cautioned us against a precipitous 
conversion until we are sure that the SNF-specific wage index has been 
tested to ensure a high level of stability and accuracy.
    Response: As we discussed in the May 10, 2001 proposed rule (66 FR 
24010 through 24011), there is a great deal of volatility in the SNF-
specific wage index prototype--not only between it and the hospital 
wage data, but also between the 2 years of data that we used in 
developing the SNF-specific wage index prototype. As many commenters 
suggested, the data could be improved if we were to establish better 
controls, edits, and screens of the data, and insist that more of the 
provider's data be audited to ensure its accuracy. We are committed to 
a process to ensure the accuracy of the data and have already 
implemented several edits and screens to improve the quality of data 
reported. We have made several corrections and changes to the cost 
reports/edits/screens as a result of consultation with industry 
representatives. However, these changes were made prospectively, and 
the full year's data needed to evaluate these efforts are not yet 
available. Moreover, while we are proceeding with our analysis, we 
still have concerns about the accuracy of the data being reported. 
Hospitals have been reporting wage and hourly data for years, yet the 
FIs and providers must still spend a considerable amount of time 
resolving problems and changes to the data to derive the published 
hospital wage index. The problem experienced by Maryland providers in 
FY 2001 illustrates the difficulty of timely verification of wage data, 
which often results in changes being made to the wage index even after 
the update regulations are published.
    We agree that auditing all SNFs would provide more accurate and 
reliable data; however, this approach involves a significant commitment 
of our resources and our contractors and may place a significant 
recordkeeping and reporting burden on providers. Developing a desk 
review and audit program similar to what is required in the hospital 
setting would, at a minimum, require significant resources. The FIs 
that are involved in preparing the hospital wage data currently spend 
considerable resources to ensure the accuracy of the wage data 
submitted by approximately 6,000 hospitals. As we noted in the July 31, 
2001 final rule (66 FR 39579), this process involves editing, 
reviewing, auditing, and performing desk reviews of the data. Requiring 
FIs to do the same for the approximately 14,000 SNFs would nearly 
triple the contractors' workload and budgets in this area. While we 
have noted the industry concerns and funding needs, there are no funds 
currently available to develop this system to the point where we could 
rely on the data that any such system would produce. We are committed 
to continuing our investigation of an SNF-specific wage index that 
would enhance our current payment methodology.
    However, we do not expect to propose a SNF-specific wage index 
until we can demonstrate that it would significantly improve our 
ability to determine payments for facilities, and justify the resources 
required to collect the data, as well as the increased burden on 
providers. We also want to point out that the development of the 
hospital wage data can also be scrutinized and evaluated by the SNF 
industry when commenting on the hospital proposed rule that is 
published each spring. Therefore, because of the problems associated 
with the current SNF-specific data, and our inability to demonstrate 
that an SNF-specific wage index would be more reflective of the wages 
and salaries paid in a specific area, we continue to believe that 
hospital wage data are the most appropriate data for adjusting payments 
made to SNFs.
    Comment: A small number of commenters suggested that if SNFs are 
going to use the hospital wage index, several components of the 
hospital PPS should be immediately applied to SNFs. For example, one 
commenter suggested that we ensure that no MSA wage index value is 
lower than the State-wide rural wage index. Other commenters 
recommended an immediate change in SNF PPS methodology to allow 
provider reclassification.
    Response: As discussed above, the calculation of the wage indices 
must be made in a budget neutral manner. If we adopted this hospital 
PPS provision and established a wage index floor, there would be no 
change in the aggregate reimbursement for SNFs. While we are not 
convinced a state-wide floor would provide a more accurate wage index, 
we encourage input from the industry on why this could provide a more 
accurate wage index, noting that the redistribution of funds would 
reduce payments to some providers while it increased payments to 
others.
    Under section 315 of the BIPA, the Congress authorized the use of a 
reclassification methodology in the SNF PPS that would allow providers 
to seek geographic reclassification. However, the statute specifically 
noted that such reclassification could not be

[[Page 46047]]

implemented until we have collected the data necessary to establish an 
SNF-specific wage index. Accordingly, under the current legislative 
authority, we are prohibited from implementing an SNF reclassification 
system until reliable data in this area become available.
    We would also like to point out on June 6, 2003, the Office of 
Management and Budget (OMB) issued OMB Bulletin No. 03-04, announcing 
revised definitions of Metropolitan Statistical Areas, and new 
definitions of Micropolitan Statistical Areas and Combined Statistical 
Areas. A copy of the bulletin may be attained at the following Internet 
address: http://www.whitehouse.gov/omb/bulletins/b03-04.html.
    These new definitions will not be applied to the FY 2004 wage 
index. However, we will be studying the new definitions and their 
impact and, if warranted, may adopt them in the future, using 
appropriate administrative processes. To the extent these definitions 
are used, the concerns expressed by many for the use of a geographical 
reclassification system may be mitigated.

2. Determining the Labor-Related Portion of the SNF PPS Rate

    The wage index adjustment is applied to the labor-related portion 
of the Federal rate, which in FY 2004 is 76.372 percent of the total 
rate. This percentage reflects the labor-related relative importance 
for FY 2004. The labor-related relative importance is calculated from 
the SNF market basket, and approximates the labor-related portion of 
the total costs after taking into account historical and projected 
price changes between the base year and FY 2004. The price proxies that 
move the different cost categories in the market basket do not 
necessarily change at the same rate, and the relative importance 
captures these changes. Accordingly, the relative importance figure 
more closely reflects the cost share weights for FY 2004 than the base 
year weights from the SNF market basket.
    We calculate the labor-related relative importance for FY 2004 in 
four steps. First, we compute the FY 2004 price index level for the 
total market basket and each cost category of the market basket. 
Second, we calculate a ratio for each cost category by dividing the FY 
2004 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2004 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 1997) weight. Finally, we sum the FY 2004 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, nonmedical professional fees, labor-intensive 
services, and capital-related expenses) to produce the FY 2004 labor-
related relative importance. Tables 5 and 6 show the Federal rates by 
labor-related and non-labor-related components.
3. Calculating the Budget Neutrality Factor
    Section 1888(e)(4)(G)(ii) of the Act also requires that we apply 
this wage index in a manner that does not result in aggregate payments 
that are greater or lesser than would otherwise be made in the absence 
of the wage adjustment. In this sixth PPS year (Federal rates effective 
October 1, 2003), we are applying the wage index applicable to SNF 
payments using the most recent hospital wage data applicable to FY 2004 
payments (as discussed in the following comments), and applying an 
adjustment to fulfill the budget neutrality requirement. This 
requirement is met by multiplying each of the components of the 
unadjusted Federal rates by a factor equal to the ratio of the volume 
weighted mean wage adjustment factor (using the wage index from the 
previous year) to the volume weighted mean wage adjustment factor, 
using the wage index for the fiscal year beginning October 1, 2003. The 
same volume weights are used in both the numerator and denominator and 
will be derived from 1997 Medicare Provider Analysis and Review File 
(MEDPAR) data. The wage adjustment factor used in this calculation is 
defined as the labor share of the rate component multiplied by the wage 
index plus the non-labor share. The budget neutrality factor for this 
year is 1.005. In order to give the public a sense of the magnitude of 
this adjustment, last year's factor was 0.9997.
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[[Page 46050]]



                  Table 7.--Wage Index for Urban Areas
------------------------------------------------------------------------
                                                                   Wage
   Urban area  (constituent counties or  county equivalents)      index
------------------------------------------------------------------------
0040 Abilene, TX..............................................    0.7596
  Taylor, TX
0060 Aguadilla, PR............................................    0.4289
  Aguada, PR
  Aguadilla, PR
  Moca, PR
0080 Akron, OH................................................    0.9208
  Portage, OH
  Summit, OH
0120 Albany, GA...............................................    1.0819
  Dougherty, GA
  Lee, GA
0160 Albany-Schenectady-Troy, NY..............................    0.8455
  Albany, NY
  Montgomery, NY
  Rensselaer, NY
  Saratoga, NY
  Schenectady, NY
  Schoharie, NY
0200 Albuquerque, NM..........................................    0.9263
  Bernalillo, NM
  Sandoval, NM
  Valencia, NM
0220 Alexandria, LA...........................................    0.7987
  Rapides, LA
0240 Allentown-Bethlehem-Easton, PA...........................    0.9682
  Carbon, PA
  Lehigh, PA
  Northampton, PA
0280 Altoona, PA..............................................    0.8771
  Blair, PA
0320 Amarillo, TX.............................................    0.8950
  Potter, TX
  Randall, TX
0380 Anchorage, AK............................................    1.2167
  Anchorage, AK
0440 Ann Arbor, MI............................................    1.1029
  Lenawee, MI
  Livingston, MI
  Washtenaw, MI
0450 Anniston, AL.............................................    0.8058
  Calhoun, AL
0460 Appleton-Oshkosh-Neenah, WI..............................    0.8999
  Calumet, WI
  Outagamie, WI
  Winnebago, WI
0470 Arecibo, PR..............................................    0.4138
  Arecibo, PR
  Camuy, PR
  Hatillo, PR
0480 Asheville, NC............................................    0.9680
  Buncombe, NC
  Madison, NC
0500 Athens, GA...............................................    0.9778
  Clarke, GA
  Madison, GA
  Oconee, GA
0520 Atlanta, GA..............................................    1.0089
  Barrow, GA
  Bartow, GA
  Carroll, GA
  Cherokee, GA
  Clayton, GA
  Cobb, GA
  Coweta, GA
  De Kalb, GA
  Douglas, GA
  Fayette, GA
  Forsyth, GA
  Fulton, GA
  Gwinnett, GA
  Henry, GA
  Newton, GA
  Paulding, GA
  Pickens, GA
  Rockdale, GA
  Spalding, GA
  Walton, GA
0560 Atlantic City-Cape May, NJ...............................    1.0751
  Atlantic City, NJ
  Cape May, NJ
0580 Auburn-Opelika, AL.......................................    0.8460
  Lee, AL
0600 Augusta-Aiken, GA-SC.....................................    0.9587
  Columbia, GA
  McDuffie, GA
  Richmond, GA
  Aiken, SC
  Edgefield, SC
0640 Austin-San Marcos, TX....................................    0.9570
  Bastrop, TX
  Caldwell, TX
  Hays, TX
  Travis, TX
  Williamson, TX
0680 Bakersfield, CA..........................................    0.9770
  Kern, CA
0720 Baltimore, MD............................................    0.9879
  Anne Arundel, MD
  Baltimore, MD
  Baltimore City, MD
  Carroll, MD
  Harford, MD
  Howard, MD
  Queen Annes, MD
0733 Bangor, ME...............................................    0.9864
  Penobscot, ME
0743 Barnstable-Yarmouth, MA..................................    1.2904
  Barnstable, MA
0760 Baton Rouge, LA..........................................    0.8372
  Ascension, LA
  East Baton Rouge, LA
  Livingston, LA
  West Baton Rouge, LA
0840 Beaumont-Port Arthur, TX.................................    0.8390
  Hardin, TX
  Jefferson, TX
  Orange, TX
0860 Bellingham, WA...........................................    1.1710
  Whatcom, WA
0870 Benton Harbor, MI........................................    0.8835
  Berrien, MI
0875 Bergen-Passaic, NJ.......................................    1.1644
  Bergen, NJ
  Passaic, NJ
0880 Billings, MT.............................................    0.8925
  Yellowstone, MT
0920 Biloxi-Gulfport-Pascagoula, MS...........................    0.8993
  Hancock, MS
  Harrison, MS
  Jackson, MS
0960 Binghamton, NY...........................................    0.8394
  Broome, NY
  Tioga, NY
1000 Birmingham, AL...........................................    0.9175
  Blount, AL
  Jefferson, AL
  St. Clair, AL
  Shelby, AL
1010 Bismarck, ND.............................................    0.7933
  Burleigh, ND
  Morton, ND
1020 Bloomington, IN..........................................    0.8627
  Monroe, IN
1040 Bloomington-Normal, IL...................................    0.8796
  McLean, IL
1080 Boise City, ID...........................................    0.9172
   Ada, ID
  Canyon, ID
1123 Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH.........    1.1188
  Bristol, MA
  Essex, MA
  Middlesex, MA
  Norfolk, MA
  Plymouth, MA
  Suffolk, MA
  Worcester, MA
  Hillsborough, NH
  Merrimack, NH
  Rockingham, NH
  Strafford, NH
1125 Boulder-Longmont, CO.....................................    1.0008
  Boulder, CO
1145 Brazoria, TX.............................................    0.8105
  Brazoria, TX
1150 Bremerton, WA............................................    1.0537
  Kitsap, WA
1240 Brownsville-Harlingen-San Benito, TX.....................    1.0261
  Cameron, TX
1260 Bryan-College Station, TX................................    0.8983
  Brazos, TX
1280 Buffalo-Niagara Falls, NY................................    0.9565
  Erie, NY
  Niagara, NY
1303 Burlington, VT...........................................    0.9665
  Chittenden, VT
  Franklin, VT
  Grand Isle, VT
1310 Caguas, PR...............................................    0.4141
  Caguas, PR
  Cayey, PR
  Cidra, PR
  Gurabo, PR
  San Lorenzo, PR
1320 Canton-Massillon, OH.....................................    0.9034
  Carroll, OH
  Stark, OH
1350 Casper, WY...............................................    0.9058
  Natrona, WY
1360 Cedar Rapids, IA.........................................    0.8838
  Linn, IA
1400 Champaign-Urbana, IL.....................................    0.9867
  Champaign, IL
1440 Charleston-North Charleston, SC..........................    0.9294
  Berkeley, SC
  Charleston, SC
  Dorchester, SC
1480 Charleston, WV...........................................    0.8845

[[Page 46051]]


  Kanawha, WV
  Putnam, WV
1520 Charlotte-Gastonia-Rock Hill, NC-SC......................    0.9721
  Cabarrus, NC
  Gaston, NC
  Lincoln, NC
  Mecklenburg, NC
  Rowan, NC
  Stanly, NC
  Union, NC
  York, SC
1540 Charlottesville, VA......................................    0.9985
  Albemarle, VA
  Charlottesville City, VA
  Fluvanna, VA
  Greene, VA
1560 Chattanooga, TN-GA.......................................    0.9049
  Catoosa, GA
  Dade, GA
  Walker, GA
  Hamilton, TN
  Marion, TN
1580 Cheyenne, WY.............................................    0.8760
  Laramie, WY
1600 Chicago, IL..............................................    1.0848
  Cook, IL
  De Kalb, IL
  Du Page, IL
  Grundy, IL
  Kane, IL
  Kendall, IL
  Lake, IL
  McHenry, IL
  Will, IL
1620 Chico-Paradise, CA.......................................    1.0152
  Butte, CA
1640 Cincinnati, OH-KY-IN.....................................    0.9375
  Dearborn, IN
  Ohio, IN
  Boone, KY
  Campbell, KY
  Gallatin, KY
  Grant, KY
  Kenton, KY
  Pendleton, KY
  Brown, OH
  Clermont, OH
  Hamilton, OH
  Warren, OH
1660 Clarksville-Hopkinsville, TN-KY..........................    0.8211
  Christian, KY
  Montgomery, TN
1680 Cleveland-Lorain-Elyria, OH..............................    0.9632
  Ashtabula, OH
  Geauga, OH
  Cuyahoga, OH
  Lake, OH
  Lorain, OH
  Medina, OH
1720 Colorado Springs, CO.....................................    0.9793
  El Paso, CO
1740 Columbia, MO.............................................    0.8660
  Boone, MO
1760 Columbia, SC.............................................    0.8866
  Lexington, SC
  Richland, SC
1800 Columbus, GA-AL..........................................    0.8659
  Russell, AL
  Chattanoochee, GA
  Harris, GA
  Muscogee, GA
1840 Columbus, OH.............................................    0.9609
  Delaware, OH
  Fairfield, OH
  Franklin, OH
  Licking, OH
  Madison, OH
  Pickaway, OH
1880 Corpus Christi, TX.......................................    0.8486
  Nueces, TX
  San Patricio, TX
1890 Corvallis, OR............................................    1.1470
  Benton, OR
1900 Cumberland, MD-WV........................................    0.8166
  Allegany, MD
  Mineral, WV
1920 Dallas, TX...............................................    0.9934
  Collin, TX
  Dallas, TX
  Denton, TX
  Ellis, TX
  Henderson, TX
  Hunt, TX
  Kaufman, TX
  Rockwall, TX
1950 Danville, VA.............................................    0.8998
  Danville City, VA
  Pittsylvania, VA
1960 Davenport-Moline-Rock Island, IA-IL......................    0.8949
  Scott, IA
  Henry, IL
  Rock Island, IL
2000 Dayton-Springfield, OH...................................    0.9479
  Clark, OH
  Greene, OH
  Miami, OH
  Montgomery, OH
2020 Daytona Beach, FL........................................    0.9042
  Flagler, FL
  Volusia, FL
2030 Decatur, AL..............................................    0.8793
  Lawrence, AL
  Morgan, AL
2040 Decatur, IL..............................................    0.8128
  Macon, IL
2080 Denver, CO...............................................    1.0793
  Adams, CO
  Arapahoe, CO
  Denver, CO
  Douglas, CO
  Jefferson, CO
2120 Des Moines, IA...........................................    0.9069
  Dallas, IA
  Polk, IA
  Warren, IA
2160 Detroit, MI..............................................    1.0060
  Lapeer, MI
  Macomb, MI
  Monroe, MI
  Oakland, MI
  St. Clair, MI
  Wayne, MI
2180 Dothan, AL...............................................    0.7710
  Dale, AL
  Houston, AL
2190 Dover, DE................................................    0.9765
  Kent, DE
2200 Dubuque, IA..............................................    0.8850
  Dubuque, IA
2240 Duluth-Superior, MN-WI...................................    1.0130
  St. Louis, MN
  Douglas, WI
2281 Dutchess County, NY......................................    1.0890
  Dutchess, NY
2290 Eau Claire, WI...........................................    0.9027
  Chippewa, WI
  Eau Claire, WI
2320 El Paso, TX..............................................    0.9159
  El Paso, TX
2330 Elkhart-Goshen, IN.......................................    0.9744
  Elkhart, IN
2335 Elmira, NY...............................................    0.8343
  Chemung, NY
2340 Enid, OK.................................................    0.8524
  Garfield, OK
2360 Erie, PA.................................................    0.8566
  Erie, PA
2400 Eugene-Springfield, OR...................................    1.1410
  Lane, OR
2440 Evansville-Henderson, IN-KY..............................    0.8395
  Posey, IN
  Vanderburgh, IN
  Warrick, IN
  Henderson, KY
2520 Fargo-Moorhead, ND-MN....................................    0.9758
  Clay, MN
  Cass, ND
2560 Fayetteville, NC.........................................    0.8950
  Cumberland, NC
2580 Fayetteville-Springdale-Rogers, AR.......................    0.8362
  Benton, AR
  Washington, AR
2620 Flagstaff, AZ-UT.........................................    1.1287
  Coconino, AZ
  Kane, UT
2640 Flint, MI................................................    1.0814
  Genesee, MI
2650 Florence, AL.............................................    0.7716
  Colbert, AL
  Lauderdale, AL
2655 Florence, SC.............................................    0.8673
  Florence, SC
2670 Fort Collins-Loveland, CO................................    1.0067
  Larimer, CO
2680 Ft. Lauderdale, FL.......................................    1.0122
  Broward, FL
2700 Fort Myers-Cape Coral, FL................................    0.9776
  Lee, FL
2710 Fort Pierce-Port St. Lucie, FL...........................    0.9968
  Martin, FL
  St. Lucie, FL
2720 Fort Smith, AR-OK........................................    0.8390
  Crawford, AR
  Sebastian, AR
  Sequoyah, OK
2750 Fort Walton Beach, FL....................................    0.8930
  Okaloosa, FL
2760 Fort Wayne, IN...........................................    0.9546
  Adams, IN
  Allen, IN
  De Kalb, IN

[[Page 46052]]


  Huntington, IN
  Wells, IN
  Whitley, IN
2800 Fort Worth-Arlington, TX.................................    0.9321
  Hood, TX
  Johnson, TX
  Parker, TX
  Tarrant, TX
2840 Fresno, CA...............................................    1.0053
  Fresno, CA
  Madera, CA
2880 Gadsden, AL..............................................    0.8173
  Etowah, AL
2900 Gainesville, FL..........................................    0.9653
  Alachua, FL
2920 Galveston-Texas City, TX.................................    0.9242
  Galveston, TX
2960 Gary, IN.................................................    0.9372
  Lake, IN
  Porter, IN
2975 Glens Falls, NY..........................................    0.8441
  Warren, NY
  Washington, NY
2980 Goldsboro, NC............................................    0.8587
  Wayne, NC
2985 Grand Forks, ND-MN.......................................    0.8601
  Polk, MN
  Grand Forks, ND
2995 Grand Junction, CO.......................................    0.9594
  Mesa, CO.
3000 Grand Rapids-Muskegon-Holland, MI........................    0.9430
  Allegan, MI
  Kent, MI
  Muskegon, MI
  Ottawa, MI
3040 Great Falls, MT..........................................    0.8773
  Cascade, MT
3060 Greeley, CO..............................................    0.9334
  Weld, CO
3080 Green Bay, WI............................................    0.9422
  Brown, WI
3120 Greensboro-Winston-Salem-High Point, NC..................    0.9129
  Alamance, NC
  Davidson, NC
  Davie, NC
  Forsyth, NC
  Guilford, NC
  Randolph, NC
  Stokes, NC
  Yadkin, NC
3150 Greenville, NC...........................................    0.9061
  Pitt, NC
3160 Greenville-Spartanburg-Anderson, SC......................    0.9297
  Anderson, SC
  Cherokee, SC
  Greenville, SC
  Pickens, SC
  Spartanburg, SC
3180 Hagerstown, MD...........................................    0.9135
  Washington, MD
3200 Hamilton-Middletown, OH..................................    0.9176
  Butler, OH
3240 Harrisburg-Lebanon-Carlisle, PA..........................    0.9127
  Cumberland, PA
  Dauphin, PA
  Lebanon, PA
  Perry, PA
3283 Hartford, CT.............................................    1.1508
  Hartford, CT
  Litchfield, CT
  Middlesex, CT
  Tolland, CT
3285 Hattiesburg, MS..........................................    0.7278
  Forrest, MS
  Lamar, MS
3290 Hickory-Morganton-Lenoir, NC.............................    0.9205
  Alexander, NC
  Burke, NC
  Caldwell, NC
  Catawba, NC
3320 Honolulu, HI.............................................    1.1053
  Honolulu, HI
3350 Houma, LA................................................    0.7717
  Lafourche, LA
  Terrebonne, LA
3360 Houston, TX..............................................    0.9794
  Chambers, TX
  Fort Bend, TX
  Harris, TX
  Liberty, TX
  Montgomery, TX
  Waller, TX
3400 Huntington-Ashland, WV-KY-OH.............................    0.9556
  Boyd, KY
  Carter, KY
  Greenup, KY
  Lawrence, OH
  Cabell, WV
  Wayne, WV
3440 Huntsville, AL...........................................    0.9208
  Limestone, AL
  Madison, AL
3480 Indianapolis, IN.........................................    0.9875
  Boone, IN
  Hamilton, IN
  Hancock, IN
  Hendricks, IN
  Johnson, IN
  Madison, IN
  Marion, IN
  Morgan, IN
  Shelby, IN
3500 Iowa City, IA............................................    0.9510
  Johnson, IA
3520 Jackson, MI..............................................    0.8950
  Jackson, MI
3560 Jackson, MS..............................................    0.8324
  Hinds, MS
  Madison, MS
  Rankin, MS
3580 Jackson, TN..............................................    0.8948
  Chester, TN
  Madison, TN
3600 Jacksonville, FL.........................................    0.9490
   Clay, FL
  Duval, FL
  Nassau, FL
  St. Johns, FL
3605 Jacksonville, NC.........................................    0.8510
  Onslow, NC
3610 Jamestown, NY............................................    0.7730
  Chautaqua, NY
3620 Janesville-Beloit, WI....................................    0.9244
  Rock, WI
3640 Jersey City, NJ..........................................    1.1070
  Hudson, NJ
3660 Johnson City-Kingsport-Bristol, TN-VA....................    0.8220
  Carter, TN
  Hawkins, TN
  Sullivan, TN
  Unicoi, TN
  Washington, TN
  Bristol City, VA
  Scott, VA
  Washington, VA
3680 Johnstown, PA............................................    0.8125
  Cambria, PA
  Somerset, PA
3700 Jonesboro, AR............................................    0.7762
  Craighead, AR
3710 Joplin, MO...............................................    0.8646
  Jasper, MO
  Newton, MO
3720 Kalamazoo-Battle Creek, MI...............................    1.0458
  Calhoun, MI
  Kalamazoo, MI
  Van Buren, MI
3740 Kankakee, IL.............................................    1.0377
  Kankakee, IL
3760 Kansas City, KS-MO.......................................    0.9675
  Johnson, KS
  Leavenworth, KS
  Miami, KS
  Wyandotte, KS
  Cass, MO
  Clay, MO
  Clinton, MO
  Jackson, MO
  Lafayette, MO
  Platte, MO
  Ray, MO
3800 Kenosha, WI..............................................    0.9721
  Kenosha, WI
3810 Killeen-Temple, TX.......................................    0.9122
  Coryell, TX
3840 Knoxville, TN............................................    0.8784
  Anderson, TN
  Blount, TN
  Knox, TN
  Loudon, TN
  Sevier, TN
  Union, TN
3850 Kokomo, IN...............................................    0.9008
  Howard, IN
  Tipton, IN
3870 La Crosse, WI-MN.........................................    0.9210
  Houston, MN
  La Crosse, WI
3880 Lafayette, LA............................................    0.8156
  Acadia, LA
  Lafayette, LA
  St. Landry, LA
  St. Martin, LA
3920 Lafayette, IN............................................    0.8549
  Clinton, IN
  Tippecanoe, IN
3960 Lake Charles, LA.........................................    0.7809
  Calcasieu, LA
3980 Lakeland-Winter Haven, FL................................    0.8775
  Polk, FL

[[Page 46053]]


4000 Lancaster, PA............................................    0.9244
  Lancaster, PA
4040 Lansing-East Lansing, MI.................................    0.9675
  Clinton, MI
  Eaton, MI
  Ingham, MI
4080 Laredo, TX...............................................    0.8059
  Webb, TX
4100 Las Cruces, NM...........................................    0.8653
  Dona Ana, NM
4120 Las Vegas, NV-AZ.........................................    1.1481
  Mohave, AZ
  Clark, NV
  Nye, NV
4150 Lawrence, KS.............................................    0.8642
  Douglas, KS
4200 Lawton, OK...............................................    0.8234
  Comanche, OK
4243 Lewiston-Auburn, ME......................................    0.9345
  Androscoggin, ME
4280 Lexington, KY............................................    0.8650
  Bourbon, KY
  Clark, KY
  Fayette, KY
  Jessamine, KY
  Madison, KY
  Scott, KY
  Woodford, KY
4320 Lima, OH.................................................    0.9483
  Allen, OH
  Auglaize, OH
4360 Lincoln, NE..............................................    0.9992
  Lancaster, NE
4400 Little Rock-North Little Rock, AR........................    0.8887
  Faulkner, AR
  Lonoke, AR
  Pulaski, AR
  Saline, AR
4420 Longview-Marshall, TX....................................    0.9076
  Gregg, TX
  Harrison, TX
  Upshur, TX
4480 Los Angeles-Long Beach, CA...............................    1.1748
  Los Angeles, CA
4520 Louisville, KY-IN........................................    0.9205
  Clark, IN
  Floyd, IN
  Harrison, IN
  Scott, IN
  Bullitt, KY
  Jefferson, KY
  Oldham, KY
4600 Lubbock, TX..............................................    0.8238
  Lubbock, TX
4640 Lynchburg, VA............................................    0.9097
  Amherst, VA
  Bedford City, VA
  Bedford, VA
  Campbell, VA
  Lynchburg City, VA
4680 Macon, GA................................................    0.8916
  Bibb, GA
  Houston, GA
  Jones, GA
  Peach, GA
  Twiggs, GA
4720 Madison, WI..............................................    1.0222
  Dane, WI
4800 Mansfield, OH............................................    0.8210
  Crawford, OH
  Richland, OH
4840 Mayaguez, PR.............................................    0.4776
  Anasco, PR
  Cabo Rojo, PR
  Hormigueros, PR
  Mayaguez, PR
  Sabana Grande, PR
  San German, PR
4880 McAllen-Edinburg-Mission, TX.............................    0.8347
  Hidalgo, TX
4890 Medford-Ashland, OR......................................    1.0729
  Jackson, OR
4900 Melbourne-Titusville-Palm Bay, FL........................    0.9736
  Brevard, Fl
4920 Memphis, TN-AR-MS........................................    0.8973
  Crittenden, AR
  De Soto, MS
  Fayette, TN
  Shelby, TN
  Tipton, TN
4940 Merced, CA...............................................    0.9651
  Merced, CA
5000 Miami, FL................................................    0.9854
  Dade, FL
5015 Middlesex-Somerset-Hunterdon, NJ.........................    1.1320
  Hunterdon, NJ
  Middlesex, NJ
  Somerset, NJ
5080 Milwaukee-Waukesha, WI...................................    0.9947
  Milwaukee, WI
  Ozaukee, WI
  Washington, WI
  Waukesha, WI
5120 Minneapolis-St Paul, MN-WI...............................    1.0957
  Anoka, MN
  Carver, MN
  Chisago, MN
  Dakota, MN
  Hennepin, MN
  Isanti, MN
  Ramsey, MN
  Scott, MN
  Sherburne, MN
  Washington, MN
  Wright, MN
  Pierce, WI
  St. Croix, WI
5140 Missoula, MT.............................................    0.8683
  Missoula, MT
5160 Mobile, AL...............................................    0.7962
  Baldwin, AL
  Mobile, AL
5170 Modesto, CA..............................................    1.1230
  Stanislaus, CA
5190 Monmouth-Ocean, NJ.......................................    1.0912
  Monmouth, NJ
  Ocean, NJ
5200 Monroe, LA...............................................    0.7890
  Ouachita, LA
5240 Montgomery, AL...........................................    0.7875
  Autauga, AL
  Elmore, AL
  Montgomery, AL
5280 Muncie, IN...............................................    0.8739
  Delaware, IN
5330 Myrtle Beach, SC.........................................    0.9075
  Horry, SC
5345 Naples, FL...............................................    0.9750
  Collier, FL
5360 Nashville, TN............................................    0.9815
  Cheatham, TN
  Davidson, TN
  Dickson, TN
  Robertson, TN
  Rutherford TN
  Sumner, TN
  Williamson, TN
  Wilson, TN
5380 Nassau-Suffolk, NY.......................................    1.2933
  Nassau, NY
  Suffolk, NY
5483 New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT......    1.2335
  Fairfield, CT
  New Haven, CT
5523 New London-Norwich, CT...................................    1.1584
  New London, CT
5560 New Orleans, LA..........................................    0.9137
  Jefferson, LA
  Orleans, LA
  Plaquemines, LA
  St. Bernard, LA
  St. Charles, LA
  St. James, LA
  St. John The Baptist, LA
  St. Tammany, LA
5600 New York, NY.............................................    1.3913
  Bronx, NY
  Kings, NY
  New York, NY
  Putnam, NY
  Queens, NY
  Richmond, NY
  Rockland, NY
  Westchester, NY
5640 Newark, NJ...............................................    1.1471
  Essex, NJ
  Morris, NJ
  Sussex, NJ
  Union, NJ
  Warren, NJ
5660 Newburgh, NY-PA..........................................    1.1462
  Orange, NY
  Pike, PA
5720 Norfolk-Virginia Beach-Newport News, VA-NC...............    0.8584
  Currituck, NC
  Chesapeake City, VA
  Gloucester, VA
  Hampton City, VA
  Isle of Wight, VA
  James City, VA
  Mathews, VA
  Newport News City, VA
  Norfolk City, VA
  Poquoson City, VA
  Portsmouth City, VA
  Suffolk City, VA
  Virginia Beach City, VA
  Williamsburg City, VA
  York, VA

[[Page 46054]]


5775 Oakland, CA..............................................    1.4860
  Alameda, CA
  Contra Costa, CA
5790 Ocala, FL................................................    0.9689
  Marion, FL
5800 Odessa-Midland, TX.......................................    0.9290
  Ector, TX
  Midland, TX
5880 Oklahoma City, OK........................................    0.8948
  Canadian, OK
  Cleveland, OK
  Logan, OK
  McClain, OK
  Oklahoma, OK
  Pottawatomie, OK
5910 Olympia, WA..............................................    1.0919
  Thurston, WA
5920 Omaha, NE-IA.............................................    0.9705
  Pottawattamie, IA
  Cass, NE
  Douglas, NE
  Sarpy, NE
  Washington, NE
5945 Orange County, CA........................................    1.1326
  Orange, CA
5960 Orlando, FL..............................................    0.9615
  Lake, FL
  Orange, FL
  Osceola, FL
  Seminole, FL
5990 Owensboro, KY............................................    0.8340
  Daviess, KY
6015 Panama City, FL..........................................    0.8169
  Bay, FL
6020 Parkersburg-Marietta, WV-OH..............................    0.8007
  Washington, OH
  Wood, WV
6080 Pensacola, FL............................................    0.8672
  Escambia, FL
  Santa Rosa, FL
6120 Peoria-Pekin, IL.........................................    0.8699
  Peoria, IL
  Tazewell, IL
  Woodford, IL
6160 Philadelphia, PA-NJ......................................    1.0839
  Burlington, NJ
  Camden, NJ
  Gloucester, NJ
  Salem, NJ
  Bucks, PA
  Chester, PA
  Delaware, PA
  Montgomery, PA
  Philadelphia, PA
6200 Phoenix-Mesa, AZ.........................................    1.0088
  Maricopa, AZ
  Pinal, AZ
6240 Pine Bluff, AR...........................................    0.7833
  Jefferson, AR
6280 Pittsburgh, PA...........................................    0.8865
  Allegheny, PA
  Beaver, PA
  Butler, PA
  Fayette, PA
  Washington, PA
  Westmoreland, PA
6323 Pittsfield, MA...........................................    1.0234
  Berkshire, MA
6340 Pocatello, ID............................................    0.9006
  Bannock, ID
6360 Ponce, PR................................................    0.4689
  Guayanilla, PR
  Juana Diaz, PR
  Penuelas, PR
  Ponce, PR
  Villalba, PR
  Yauco, PR
6403 Portland, ME.............................................    0.9909
  Cumberland, ME
  Sagadahoc, ME
  York, ME
6440 Portland-Vancouver, OR-WA................................    1.1167
  Clackamas, OR
  Columbia, OR
  Multnomah, OR
  Washington, OR
  Yamhill, OR
  Clark, WA
6483 Providence-Warwick-Pawtucket, RI.........................    1.0932
  Bristol, RI
  Kent, RI
  Newport, RI
  Providence, RI
  Washington, RI
6520 Provo-Orem, UT...........................................    0.9936
  Utah, UT
6560 Pueblo, CO...............................................    0.8743
  Pueblo, CO
6580 Punta Gorda, FL..........................................    0.9472
  Charlotte, FL
6600 Racine, WI...............................................    0.8778
  Racine, WI
6640 Raleigh-Durham-Chapel Hill, NC...........................    0.9919
  Chatham, NC
  Durham, NC
  Franklin, NC
  Johnston, NC
  Orange, NC
  Wake, NC
6660 Rapid City, SD...........................................    0.8771
  Pennington, SD
6680 Reading, PA..............................................    0.9096
  Berks, PA
6690 Redding, CA..............................................    1.1306
  Shasta, CA
6720 Reno, NV.................................................    1.0639
  Washoe, NV
6740 Richland-Kennewick-Pasco, WA.............................    1.0566
  Benton, WA
  Franklin, WA
6760 Richmond-Petersburg, VA..................................    0.9311
  Charles City County, VA
  Chesterfield, VA
  Colonial Heights City, VA
  Dinwiddie, VA
  Goochland, VA
  Hanover, VA
  Henrico, VA
  Hopewell City, VA
  New Kent, VA
  Petersburg City, VA
  Powhatan, VA
  Prince George, VA
  Richmond City, VA
6780 Riverside-San Bernardino, CA.............................    1.1296
  Riverside, CA
  San Bernardino, CA
6800 Roanoke, VA..............................................    0.8664
  Botetourt, VA
  Roanoke, VA
  Roanoke City, VA
  Salem City, VA
6820 Rochester, MN............................................    1.1691
  Olmsted, MN
6840 Rochester, NY............................................    0.9392
  Genesee, NY
  Livingston, NY
  Monroe, NY
  Ontario, NY
  Orleans, NY
  Wayne, NY
6880 Rockford, IL.............................................    0.9627
  Boone, IL
  Ogle, IL
  Winnebago, IL
6895 Rocky Mount, NC..........................................    0.9039
  Edgecombe, NC
  Nash, NC
6920 Sacramento, CA...........................................    1.1797
  El Dorado, CA
  Placer, CA
  Sacramento, CA
A6960 Saginaw-Bay City-Midland, MI............................    0.9992
  Bay, MI
  Midland, MI
  Saginaw, MI
6980 St. Cloud, MN............................................    0.9468
  Benton, MN
  Stearns, MN
7000 St. Joseph, MO...........................................    0.9718
  Andrews, MO
  Buchanan, MO
7040 St. Louis, MO-IL.........................................    0.8996
  Clinton, IL
  Jersey, IL
  Madison, IL
  Monroe, IL
  St. Clair, IL
  Franklin, MO
  Jefferson, MO
  Lincoln, MO
  St. Charles, MO
  St. Louis, MO
  St. Louis City, MO
  Warren, MO
  Sullivan City, MO
7080 Salem, OR................................................    1.0440
  Marion, OR
  Polk, OR
7120 Salinas, CA..............................................    1.4281
  Monterey, CA
7160 Salt Lake City-Ogden, UT.................................    0.9873
  Davis, UT
  Salt Lake, UT
  Weber, UT
7200 San Angelo, TX...........................................    0.8500
  Tom Green, TX
7240 San Antonio, TX..........................................    0.8834
  Bexar, TX
  Comal, TX

[[Page 46055]]


  Guadalupe, TX
  Wilson, TX
7320 San Diego, CA............................................    1.1102
  San Diego, CA
7360 San Francisco, CA........................................    1.4455
  Marin, CA
  San Francisco, CA
  San Mateo, CA
7400 San Jose, CA.............................................    1.4567
  Santa Clara, CA
7440 San Juan-Bayamon, PR.....................................    0.4880
  Aguas Buenas, PR
  Barceloneta, PR
  Bayamon, PR
  Canovanas, PR
  Carolina, PR
  Catano, PR
  Ceiba, PR
  Comerio, PR
  Corozal, PR
  Dorado, PR
  Fajardo, PR
  Florida, PR
  Guaynabo, PR
  Humacao, PR
  Juncos, PR
  Los Piedras, PR
  Loiza, PR
  Luguillo, PR
  Manati, PR
  Morovis, PR
  Naguabo, PR
  Naranjito, PR
  Rio Grande, PR
  San Juan, PR
  Toa Alta, PR
  Toa Baja, PR
  Trujillo Alto, PR
  Vega Alta, PR
  Vega Baja, PR
  Yabucoa, PR
7460 San Luis Obispo-Atascadero-Paso Robles, CA...............    1.1383
  San Luis Obispo, CA
7480 Santa Barbara-Santa Maria-Lompoc, CA.....................    1.0399
  Santa Barbara, CA
7485 Santa Cruz-Watsonville, CA...............................    1.2890
  Santa Cruz, CA
7490 Santa Fe, NM.............................................    1.0610
  Los Alamos, NM
  Santa Fe, NM
7500 Santa Rosa, CA...........................................    1.2825
  Sonoma, CA
7510 Sarasota-Bradenton, FL...................................    0.9924
  Manatee, FL
  Sarasota, FL
7520 Savannah, GA.............................................    0.9433
  Bryan, GA
  Chatham, GA
  Effingham, GA
7560 Scranton--Wilkes-Barre--Hazleton, PA.....................    0.8378
  Columbia, PA
  Lackawanna, PA
  Luzerne, PA
  Wyoming, PA
7600 Seattle-Bellevue-Everett, WA.............................    1.1516
  Island, WA
  King, WA
  Snohomish, WA
7610 Sharon, PA...............................................    0.7719
  Mercer, PA
7620 Sheboygan, WI............................................    0.8589
  Sheboygan, WI
7640 Sherman-Denison, TX......................................    0.9661
  Grayson, TX
7680 Shreveport-Bossier City, LA..............................    0.9047
  Bossier, LA
  Caddo, LA
  Webster, LA
7720 Sioux City, IA-NE........................................    0.8956
  Woodbury, IA
  Dakota, NE
7760 Sioux Falls, SD..........................................    0.9271
  Lincoln, SD
  Minnehaha, SD
7800 South Bend, IN...........................................    0.9782
  St. Joseph, IN
7840 Spokane, WA..............................................    1.0857
  Spokane, WA
7880 Springfield, IL..........................................    0.8908
  Menard, IL
  Sangamon, IL
7920 Springfield, MO..........................................    0.8423
  Christian, MO
  Greene, MO
  Webster, MO
8003 Springfield, MA..........................................    1.0419
  Hampden, MA
  Hampshire, MA
8050 State College, PA........................................    0.8705
  Centre, PA
8080 Steubenville-Weirton, OH-WV..............................    0.8364
  Jefferson, OH
  Brooke, WV
  Hancock, WV
8120 Stockton-Lodi, CA........................................    1.0362
  San Joaquin, CA
8140 Sumter, SC...............................................    0.8210
  Sumter, SC
8160 Syracuse, NY.............................................    0.9374
  Cayuga, NY
  Madison, NY
  Onondaga, NY
  Oswego, NY
8200 Tacoma, WA...............................................    1.1071
  Pierce, WA
8240 Tallahassee, FL..........................................    0.8485
  Gadsden, FL
  Leon, FL
8280 Tampa-St. Petersburg-Clearwater, FL......................    0.9066
  Hernando, FL
  Hillsborough, FL
  Pasco, FL
  Pinellas, FL
8320 Terre Haute, IN..........................................    0.8292
  Clay, IN
  Vermillion, IN
  Vigo, IN
8360 Texarkana, AR-Texarkana, TX..............................    0.8117
  Miller, AR
  Bowie, TX
8400 Toledo, OH...............................................    0.9343
  Fulton, OH
  Lucas, OH
  Wood, OH
8440 Topeka, KS...............................................    0.9071
  Shawnee, KS
8480 Trenton, NJ..............................................    1.0474
  Mercer, NJ
8520 Tucson, AZ...............................................    0.8945
  Pima, AZ
8560 Tulsa, OK................................................    0.9148
  Creek, OK
  Osage, OK
  Rogers, OK
  Tulsa, OK
  Wagoner, OK
8600 Tuscaloosa, AL...........................................    0.8179
  Tuscaloosa, AL
8640 Tyler, TX................................................    0.9366
  Smith, TX
8680 Utica-Rome, NY...........................................    0.8369
  Herkimer, NY
  Oneida, NY
8720 Vallejo-Fairfield-Napa, CA...............................    1.3323
  Napa, CA
  Solano, CA
8735 Ventura, CA..............................................    1.1019
  Ventura, CA
8750 Victoria, TX.............................................    0.8151
  Victoria, TX
8760 Vineland-Millville-Bridgeton, NJ.........................    1.0363
  Cumberland, NJ
8780 Visalia-Tulare-Porterville, CA...........................    0.9755
  Tulare, CA
8800 Waco, TX.................................................    0.8360
  McLennan, TX
8840 Washington, DC-MD-VA-WV..................................    1.0860
  District of Columbia, DC
  Calvert, MD
  Charles, MD
  Frederick, MD
  Montgomery, MD
  Prince Georges, MD
  Alexandria City, VA
  Arlington, VA
  Clarke, VA
  Culpepper, VA
  Fairfax, VA
  Fairfax City, VA
  Falls Church City, VA
  Fauquier, VA
  Fredericksburg City, VA
  King George, VA
  Loudoun, VA
  Manassas City, VA
  Manassas Park City, VA
  Prince William, VA
  Spotsylvania, VA
  Stafford, VA
  Warren, VA
  Berkeley, WV
  Jefferson, WV
8920 Waterloo-Cedar Falls, IA.................................    0.8332
  Black Hawk, IA
8940 Wausau, WI...............................................    0.9653
  Marathon, WI

[[Page 46056]]


8960 West Palm Beach-Boca Raton, FL...........................    0.9759
  Palm Beach, FL
9000 Wheeling, OH-WV..........................................    0.7464
  Belmont, OH
  Marshall, WV
  Ohio, WV
9040 Wichita, KS..............................................    0.9200
  Butler, KS
  Harvey, KS
  Sedgwick, KS
9080 Wichita Falls, TX........................................    0.8307
  Archer, TX
  Wichita, TX
9140 Williamsport, PA.........................................    0.8125
  Lycoming, PA
9160 Wilmington-Newark, DE-MD.................................    1.0838
  New Castle, DE
  Cecil, MD
9200 Wilmington, NC...........................................    0.9524
  New Hanover, NC
  Brunswick, NC
9260 Yakima, WA...............................................    1.0330
  Yakima, WA
9270 Yolo, CA.................................................    0.9167
  Yolo, CA
9280 York, PA.................................................    0.9082
  York, PA
9320 Youngstown-Warren, OH....................................    0.9176
  Columbiana, OH
  Mahoning, OH
  Trumbull, OH
9340 Yuba City, CA............................................    1.0155
  Sutter, CA
  Yuba, CA
9360 Yuma, AZ.................................................    0.8859
  Yuma, AZ
------------------------------------------------------------------------


                  Table 8.--Wage Index for Rural Areas
------------------------------------------------------------------------
                                                                  Wage
                          Rural area                              index
------------------------------------------------------------------------
Alabama.......................................................    0.7461
Alaska........................................................    1.1838
Arizona.......................................................    0.9233
Arkansas......................................................    0.7703
California....................................................    0.9987
Colorado......................................................    0.9291
Connecticut...................................................    1.2134
Delaware......................................................    0.9518
Florida.......................................................    0.8834
Georgia.......................................................    0.8560
Guam..........................................................    0.9611
Hawaii........................................................    0.9918
Idaho.........................................................    0.8937
Illinois......................................................    0.8221
Indiana.......................................................    0.8788
Iowa..........................................................    0.8382
Kansas........................................................    0.8002
Kentucky......................................................    0.7941
Louisiana.....................................................    0.7428
Maine.........................................................    0.8776
Maryland......................................................    0.9088
Massachusetts.................................................    1.0390
Michigan......................................................    0.8848
Minnesota.....................................................    0.9293
Mississippi...................................................    0.7747
Missouri......................................................    0.7860
Montana.......................................................    0.8765
Nebraska......................................................    0.8787
Nevada........................................................    0.9767
New Hampshire.................................................    0.9989
New Jersey \1\................................................  ........
New Mexico....................................................    0.8236
New York......................................................    0.8491
North Carolina................................................    0.8424
North Dakota..................................................    0.7746
Ohio..........................................................    0.8784
Oklahoma......................................................    0.7506
Oregon........................................................    0.9953
Pennsylvania..................................................    0.8344
Puerto Rico...................................................    0.4002
Rhode Island \1\..............................................  ........
South Carolina................................................    0.8464
South Dakota..................................................    0.8162
Tennessee.....................................................    0.7854
Texas.........................................................    0.7748
Utah..........................................................    0.8937
Vermont.......................................................    0.9269
Virginia......................................................    0.8464
Virgin Islands................................................    0.7166
Washington....................................................    1.0346
West Virginia.................................................    0.7986
Wisconsin.....................................................    0.9266
Wyoming.......................................................   0.9073
------------------------------------------------------------------------
\1\ All counties within the State are classified urban.

D. Publication of Updates to the Federal Rates

    In accordance with section 1888(e)(4)(E) of the Act, the final 
payment rates listed here reflect an update equal to the full SNF 
market basket, which equals 3.0 percent. In addition, the FY 2004 rates 
will be adjusted by an additional 3.26 percent to reflect the 
cumulative forecast error since the start of the SNF PPS on July 1, 
1998. We will continue to publish the rates, wage index, and case-mix 
classification methodology in the Federal Register before August 1 
preceding the start of each succeeding fiscal year. Along with a number 
of other revisions discussed elsewhere in this preamble, this final 
rule provides the annual updates to the Federal rates as mandated by 
the Act.

E. Relationship of RUG-III Classification System to Existing SNF Level-
of-Care Criteria

    As discussed in Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. This 
designation reflects an administrative presumption under the current 
44-group RUG-III classification system. Our presumption is that any 
beneficiary who is correctly assigned to one of the upper 26 RUG-III 
groups in the initial 5-day, Medicare-required assessment is 
automatically classified as meeting the SNF level of care definition up 
to the assessment reference date (ARD) for that assessment.
    Any beneficiary assigned to any of the lower 18 groups is not 
automatically classified as either meeting or not meeting the 
definition, but instead receives an individual level of care 
determination using the existing administrative criteria. This 
presumption recognizes the strong likelihood that beneficiaries 
assigned to one of the upper 26 groups during the immediate post-
hospital period require a covered level of care, which would be 
significantly less likely for those beneficiaries assigned to one of 
the lower 18 groups.
    In this final rule, we are continuing the existing designation of 
the upper 26 RUG-III groups for purposes of this administrative 
presumption. Accordingly, we are designating the following RUG-III 
classifications:
    [sbull] All groups within the Ultra High Rehabilitation category;
    [sbull] All groups within the Very High Rehabilitation category;
    [sbull] All groups within the High Rehabilitation category;
    [sbull] All groups within the Medium Rehabilitation category;
    [sbull] All groups within the Low Rehabilitation category;
    [sbull] All groups within the Extensive Services category;
    [sbull] All groups within the Special Care category; and
    [sbull] All groups within the Clinically Complex category.
    Comment: One commenter supported the continuation of our 
presumption policy based on accurate classification into one of the 
upper 26 RUG-III groups.
    Response: We agree that this policy should be retained.

F. Expiration of Initial Three-Year Transition Period

    As noted previously in sections I.A and I.E.2 of this final rule, 
the initial three-year transition period from facility-specific to 
Federal rates under the SNF PPS has expired. Therefore, payment now 
equals 100 percent of the adjusted Federal per diem rate.

G. Example of Computation of Adjusted PPS Rates and SNF Payment

    Using the XYZ SNF described in Table 9, the following shows the 
adjustments made to the Federal per

[[Page 46057]]

diem rate to compute the provider's actual per diem PPS payment. XYZ's 
12-month cost reporting period begins October 1, 2004. XYZ's total PPS 
payment would equal $20,379. The Labor and Non-labor columns are 
derived from Table 5. In addition, the adjustments for certain 
specified RUG-III groups enacted in section 101(a) of the BBRA (as 
amended by section 314 of the BIPA) remain in effect, and are reflected 
in Table 9.

                                 Table 9.--SNF XYZ: Located in State College, PA
                                              [Wage Index: 0.8705]
----------------------------------------------------------------------------------------------------------------
                                                                                Percent    Medicare
    RUG group        Labor    Wage index  Adj. labor   Non-labor   Adj. rate  adjustment     days       Payment
----------------------------------------------------------------------------------------------------------------
RVC.............     $268.21      0.8705     $233.48      $82.98     $316.46    $337.66*          14      $4,727
RHA.............      207.28      0.8705      180.44       64.13      244.57     260.96*          16       4,175
SSC.............      172.65      0.8705      150.29       53.41      203.70    244.44**          30       7,333
IA2.............      117.07      0.8705      101.91       36.22      138.13      138.13          30       4,144
                 -------------
    Total.......  ..........  ..........  ..........  ..........  ..........  ..........          90     20,379
----------------------------------------------------------------------------------------------------------------
* Reflects a 6.7 percent adjustment from section 314 of the BIPA.
** Reflects a 20 percent adjustment from section 101(a) of the BBRA.

H. SNF Market Basket Index

1. Background
    Section 1888(e)(5)(A) of the Act requires us to establish a SNF 
market basket index (input price index) that reflects changes over time 
in the prices of an appropriate mix of goods and services included in 
the SNF PPS. This final rule incorporates the latest available 
projections of the SNF market basket index. Accordingly, we have 
developed a SNF market basket index that encompasses the most commonly 
used cost categories for SNF routine services, ancillary services, and 
capital-related expenses. In the July 31, 2001 Federal Register (66 FR 
39562), we included a complete discussion on the rebasing of the SNF 
market basket to FY 1997. There are 21 separate cost categories and 
respective price proxies. These cost categories were illustrated in 
Table 10.A, Table 10.B, and Appendix A, along with other relevant 
information, in the July 31, 2001 Federal Register.
    Each year, we calculate a revised labor-related share based on the 
relative importance of labor-related cost categories in the input price 
index. Table 10 summarizes the updated labor-related share for FY 2004.

                 Table 10.--FY 2004 Labor-Related Share
------------------------------------------------------------------------
                                              FY 2003         FY 2004
              Cost category                  Relative        Relative
                                            importance      importance
------------------------------------------------------------------------
Wages and Salaries......................          54.796          55.115
Employee Benefits.......................          11.232          11.304
Nonmedical Professional Fees............           2.652           2.651
Labor-Intensive Services................           4.124           4.130
Capital-Related.........................           3.324           3.172
      Total.............................          76.128         76.372
------------------------------------------------------------------------
 Source: (Table 10) Global Insights, Inc., DRI-WEFA, 4th Quarter, 2002.

2. Use of the SNF Market Basket Percentage
    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index, as 
described in the previous section, from the average index level of the 
prior fiscal year to the average index level of the current fiscal 
year. For the Federal rates established in this final rule, this 
percentage increase in the SNF market basket index is used to compute 
the update factor occurring between FY 2003 and FY 2004. We used the 
Global Insights, Inc. (formerly DRI-WEFA), 4th quarter 2002 forecasted 
percentage increase in the FY 1997-based SNF market basket index for 
routine, ancillary, and capital-related expenses, described in the 
previous section, to compute the update factor.
3. Market Basket Forecast Error Adjustment
    In the supplemental proposed rule, we discussed the possibility of 
developing a market basket forecast adjustment to the rates. We 
solicited comments on--
    [sbull] The appropriateness of making a cumulative market basket 
forecast adjustment reflecting underforecasts since the start of the 
SNF PPS;
    [sbull] The continued use of this forecast error adjustment in 
future rate years;
    [sbull] The appropriateness of applying a threshold to these annual 
rate adjustments; and
    [sbull] Ways that we could use our authority to encourage industry 
innovation and monitor efforts to further promote quality improvement 
efforts among SNFs (see section III.L).
4. Federal Rate Update Factor
    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2004 Federal rates be at a level equal 
to the full market basket percentage change. Accordingly, to establish 
the update factor, we determined the total growth from the average 
market basket level for the period of October 1, 2002 through September 
30, 2003 to the average market basket level for the period of October 
1, 2003 through September 30, 2004. Using this process, the market 
basket update factor for FY 2004 SNF Federal rates is 3.0 percent. In 
addition, as noted in the comments and responses shown below, the rates 
were adjusted by 3.26 percent to reflect the difference between the 
market basket forecast and the actual market basket increase from the 
start of the SNF PPS in July 1998.

[[Page 46058]]

    We used this revised update factor to compute the Federal portion 
of the SNF PPS rate shown in Tables 1 and 2.
    Comment: The majority of commenters strongly supported the proposed 
rule's provision for a full market basket adjustment for FY 2004. 
However, a few commenters cited a MedPAC analysis indicating that an 
across-the-board update may not be appropriate. These commenters 
recommended either a zero update or an update targeted to specific 
types of providers, such as hospital-based SNFs.
    Response: We are required by statute to implement a full market 
basket adjustment for FY 2004. In the proposed rule, we published a 
preliminary market basket factor of 2.9 percent, based on the Global 
Insights Inc., DRI-WEFA, 4th Quarter, 2002 update. For this final rule, 
we are using an updated market basket forecast amount of 3.0 percent, 
based on the Global Insights Inc., DRI-WEFA, 2nd Quarter, 2003 update, 
which is the most recent data available.
    Comment: The vast majority of commenters supported our proposal in 
the supplemental proposed rule to incorporate a market basket forecast 
error adjustment into the SNF PPS rate-setting system. These commenters 
urged us to implement the 3.26 percent cumulative market basket 
adjustment for the FY 2004 rates. They indicated that the cumulative 
adjustment is a necessary stabilizing factor, and reflects actual 
market conditions. A few commenters questioned the necessity of this 
cumulative adjustment, and suggested that the money could be used more 
effectively if targeted to specific programs. However, all commenters 
agreed that, if we proceeded with the cumulative market basket forecast 
error adjustment, we should apply the forecast error adjustment in 
subsequent rate years, even in situations where an overstatement of the 
forecasted market basket adjustment could result in a later downward 
adjustment.
    Response: We carefully considered the implications of adopting this 
market basket forecast error adjustment. We concluded that, in making 
the 3.26 percent adjustment, we are not providing a source of new 
industry funding. Instead, we are correcting an underforecast of 
pricing levels that resulted in lower payments than we would otherwise 
have made if actual, instead of forecast, data were used. To a great 
extent, this underforecast reflects the faster-than-expected growth in 
wages and benefits for nursing home workers since the start of the SNF 
PPS, as a result of continued rapid growth in the health sector and the 
shortage of nurses. As a result of these market conditions, SNFs have 
already incurred expenses at a higher-than-forecasted level. Our 
overarching Medicare integrity goal is to pay the appropriate amount, 
to the correct provider, for the proper service, at the right time. 
Adjusting for this difference between the forecasted and actual market 
basket values is consistent with that goal. Therefore, we will 
implement the 3.26 percent cumulative adjustment for FY 2004. For 
future years, as actual market basket data become available, we will 
apply the forecast error adjustment to subsequent rate years. As 
explained in our supplemental proposed rule, this annual adjustment 
will be applied on a two-year lag basis (that is, the time period for 
obtaining final market basket data), and will reflect both upward and 
downward adjustments, as appropriate.
    Comment: Several commenters expressed concern about the proposed 
use of a 0.25 percentage point threshold for application of the annual 
forecast adjustments. Some commenters maintained that every forecast 
error, however small, should be corrected, and that the use of a 
threshold would build over time, resulting in increasing inaccuracies 
in the rates. Other commenters said that the adjustment should be 
meaningful, and that the 0.25 percent threshold was consistent with 
similar CMS rate-setting provisions. A few commenters suggested 
increasing the threshold.
    Response: In the supplemental proposed rule, we discussed 
establishing an adjustment for forecast error that would take account 
annually a forecast error that was at least 0.25 percentage points 
above or below the actual market basket performance. For the capital 
PPS update and in the hospital PPS update framework, a forecast error 
adjustment is reflected only when the forecast and actual market basket 
percent changes differ by more than 0.25 percentage points. To apply 
this methodology to the SNF PPS would follow an established practice. 
In addition, our experience with those PPS frameworks suggests that the 
forecast errors are relatively small, and generally clustered around 
zero, so we do not anticipate an accumulation that would significantly 
affect the rates over time. We are more concerned that the forecast 
error in any given year is large enough that the SNF PPS base payment 
rate does not adequately reflect the historical price changes faced by 
SNFs. Therefore, we will use the 0.25 percentage point threshold to 
determine whether a forecast error adjustment is appropriate.
    Comment: A few commenters expressed concern about the market basket 
and its methodology and urged us to institute a thorough review of all 
of the weight and price proxy components in the market basket, 
particularly wages, capital, and malpractice insurance. These 
commenters proposed a collaborative effort between the Federal 
government and private industry to review the market basket 
methodology.
    Response: We agree that it is important to review the market basket 
weights and price proxies regularly to ensure that they adequately 
reflect the requirements of section 1888(e)(5) of the Act. It has 
always been our policy to regularly revise and update the market basket 
when appropriate, and we did so most recently in 2001, when we rebased 
the market basket to reflect 1997 cost data. In addition, we have 
discussed issues related to the market basket with interested parties 
since the implementation of the SNF PPS, and continue to do so in order 
to have a technically and conceptually sound market basket that 
satisfies the legislative requirement explained in section 1888(e)(5) 
of the Act.
    In the July 31, 2001 final rule introducing the 1997-based market 
basket, we fully explained our criteria for choosing price proxies for 
market basket cost categories. We use four criteria for this process: 
timeliness (published and available on a regular basis, preferably at 
least quarterly, with little lag), reliability (consistent historical 
time-series as well as being technically and methodologically sound), 
representativeness (reflecting or proxying actual provider experience), 
and relevance (holding non-price factors constant, such as skill mix 
and quality shifts). The current price proxy for wages and salaries, 
the Employment Cost Index (ECI) for nursing home workers, meets all 
four of these criteria. We believe that the ECI better meets our 
criteria than the two other government statistics for nursing home 
wages, the Average Hourly Earnings (AHE) for nonsupervisory workers in 
nursing homes and the Employer Cost for Employee Compensation (ECEC) 
for workers in nursing homes. Although the ECI represents total nursing 
home wages and salaries, SNFs comprise over 75 percent both of 
employment and payroll totals for the nursing home industry and, with 
this representation, SNF wages and salaries are the drivers for changes 
in the ECI for nursing home wages and salaries. Thus, given available 
data, we continue to believe that the ECI for nursing home workers is 
the most appropriate price proxy for growth in wages in SNFs, and we 
will continue to use it in the SNF market basket. It should be noted 
that the use

[[Page 46059]]

of this wage proxy should not be confused with the forecast error 
correction, which is only the difference between the actual and 
forecasted percent change in the ``same'' market basket.
    These commenters disagreed with the use of the average yield for 
AAA bonds as the price proxy for interest costs of for-profit nursing 
homes, rather than the average yield for BAA or lower rated bonds. In 
the SNF market basket, the change in the average yield for AAA bonds is 
used in calculating the SNF market basket price change of the debt held 
by for-profit SNFs. The amount of the bonds issued, the average term of 
these bonds, and the mix of bond ratings issued should all be held 
constant in a fixed-weight Laspeyres price index, such as the SNF 
market basket. The price change of interest costs associated with 
corporate bonds should reflect the change in interest rates (yield) for 
the mix of differently rated corporate bonds held in the base period. 
Our price proxy should represent the change in the interest rates 
associated with this fixed mix.
    We have conducted sensitivity analyses of the market basket using 
the change in the yield for different bond ratings, and the change in 
the long-run yields of AAA, AA, A, and BAA bonds were all very similar. 
The use of any of these bond yields would produce essentially similar 
results. For simplicity, both in the maintenance of the index and in 
the availability of forecasted data, we have chosen to use Moody's AAA 
corporate bonds. Had we used BAA corporate bonds, the resulting SNF 
market basket increases would have been identical.
    We believe that the current method for reflecting corporate bond 
prices in the SNF market basket is appropriate because it keeps the mix 
of corporate bonds issued constant at the base period proportions and 
captures the associated price change in this mix without having to 
reflect the rating on each separately issued bond, since they move 
similarly over time. While we understand the commenter's concern, our 
research and analysis indicate that our method of accounting for change 
in bond prices for for-profit SNFs in the market basket is appropriate.
    These commenters noted that the current price proxies for interest 
costs do not reflect the short-term nature of the debt funding 
currently available to the industry or the fluctuations in rate changes 
in the leasing marketplace. These are important issues and we will 
continue to conduct the necessary research on these topics to ensure 
that they are adequately considered in the market basket. Since we 
currently use a similar debt life for SNFs and hospitals when vintage 
weighting the capital components of the market basket, a movement 
towards shorter average debt terms for SNFs should be considered. 
(Vintage weighting is the process of weighting together the price 
changes of current and prior capital purchases (or debt held) based on 
the average historical acquisition pattern over the useful life of the 
asset or debt instrument.) We will review available data sources on 
this information and make a change if appropriate. While we currently 
believe that leasing costs are appropriately accounted for in the 
market basket, we will also review this issue more fully to ensure that 
this is both theoretically and empirically the case.
    When we rebased the SNF market basket in 2001, we reviewed Medicare 
cost report data on professional liability insurance, and found that 
the vast majority of SNFs did not enter their data into this section of 
the cost reports (only about 20 SNFs provided that information in 
1997). We also looked at Department of Commerce Input-Output data for 
1997, and found that insurance was less than 0.2 percent of total SNF 
expenses. Because the SNF market basket is currently based on the cost 
structure facing SNFs in 1997, it appears that professional liability 
costs are a very small portion of total costs and, thus, would likely 
not have a significant impact on the market basket percentage change. 
H