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PA Bulletin, Doc. No. 06-448



Payments to Nursing Facilities; Final Rates for State Fiscal Year 2005-2006

[36 Pa.B. 1300]

   This notice announces the Department of Public Welfare's (Department) final case-mix per diem payment rates for Medical Assistance (MA) nursing facility providers for the State Fiscal Year (FY) 2005-2006.

   The methodology that the Department used to set the final rates is contained in 55 Pa. Code Chapter 1187, Subchapter G (relating to rate setting) and the Commonwealth's approved Title XIX State Plan. Under that payment methodology, the Department establishes a new case-mix annual per diem payment rate for each MA nursing facility provider once for each fiscal year. Each provider's annual case-mix per diem rate is comprised of four cost components: (i) resident care; (ii) other resident related; (iii) administrative; and (iv) capital. For each quarter of the fiscal year, the Department adjusts the resident care cost component of each provider's rate by multiplying the resident care cost component by the provider's MA Case Mix Index (CMI) for the appropriate picture date as follows: July 1 rate--February 1 picture date; October 1 rate--May 1 picture date; January 1 rate--August 1 picture date; and April 1 rate--November 1 picture date. In addition, for each quarter of FY 2005-2006, the Department multiplies each provider's CMI-adjusted rate by .95122 to determine the provider's adjusted quarterly rate. See 55 Pa. Code § 1187.96 (relating to price and rate setting computations). The Department pays the provider for nursing facility services provided to MA recipients during that quarter using the provider's adjusted quarterly per diem rate.

   The final FY 2005-2006 annual per diem rates and adjusted quarterly rates for each MA nursing facility provider are available on the Office of Medical Assistance Programs' (OMAP) website at The rates are also available at local county assistance offices throughout this Commonwealth or by contacting Tom Jayson, Policy Unit, Bureau of Long Term Care Programs, (717) 705-3705.

   The database that the Department used to calculate the rates is available on the OMAP's website. Because some of the audited costs used in the database are taken from audit reports for fiscal periods beginning prior to January 1, 2001, the Department revised the audited costs in the database in accordance with 55 Pa. Code § 1187.91(1) (iv)(D) (relating to database) to disregard certain audit adjustments disallowing minor movable property or linen costs. The criteria that the Department used to make these revisions are available on the OMAP's website or by contacting Tom Jayson.

Public Process

   The Department published a notice announcing its proposed case-mix per diem rate payment rates for FY 2005-2006 at 35 Pa.B. 6712 (December 10, 2005) and invited interested persons to submit comments. The Department received letters from two of the nursing facility trade associations (Pennsylvania Association of Non-profit Homes for the Aging and Pennsylvania Health Care Association) commenting on the proposed FY 2005-2006 rate notice. Generally, the trade associations reiterated the same objections and concerns previously raised in comments submitted in connection with the Department's rulemaking limiting nursing facility payment rate increases Statewide in FY 2005-2006 to 2.8%. See 35 Pa.B. 6232--6239 (November 12, 2005). A summary of the associations' comments and the Department's responses are as follows:

   Comment. Both trade associations objected to the 2.8% rate increase and noted that nursing facility rates would have otherwise increased by an average of 7.9% Statewide, effective with the July 1, 2005 rates. The associations further stated that the resulting capped rates fail to provide nursing facilities with reasonable and adequate compensation needed to provide high quality care to Pennsylvania's MA nursing facility residents. One trade association stated that the capped rates result in decreases in many nursing facility rates for FY 2005-2006 compared to FY 2004-2005 and that the rates do not adequately account for increased costs due to routine inflation, nursing staff shortages and an increasingly complex nursing facility population.

   Response. The Department disagrees with the associations' suggestions that the final rates for FY 2005-2006 are inadequate and unreasonable and that the rates will impede nursing facilities' ability to provide high quality care to their residents. Research conducted by both the Kaiser Family Foundation and the American Health Care Association demonstrates that, over the last few years, the Commonwealth ranks in the top ten states for Medicaid reimbursement to nursing facility providers. The Department has determined that the average MA nursing facility per diem rate in this Commonwealth has increased by $62.85, or 59% since the case-mix methodology was implemented in January 1996. Even with the 2.8% limitation on payment rate increases, the Department estimates that, for FY 2005-2006, overall payments for MA nursing facility services will continue to increase by $130 million and that, on average, the rate to audited MA cost coverage for MA nursing facility providers will still exceed 95% in FY 2005-2006. That some nursing facilities will experience rate decreases in FY 2005-2006 does not mean that the case-mix payment rates are insufficient to assure that MA recipients continue to have access to medically necessary nursing facility services or that nursing facilities will be unable to provide quality care to their residents.

   Under the case-mix payment methodology, rate decreases for individual nursing facilities are not unusual. In each rate year since the case-mix system was implemented in 1996, there have been some nursing facilities whose rates were lower than their rates for the preceding rate year. These rate decreases occur because the case-mix rate-setting methodology is influenced by various factors including Statewide and facility acuity levels, the facility's occupancy rate, bed capacity, peer group assignment and fluctuations in a facility's costs. Historically, the most significant variable influencing a facility's payment rate has been the acuity of the facility's residents and, for FY 2005-2006, resident acuity is again the most significant factor. Most nursing facilities that have lower FY 2005-2006 per diem rates experienced a corresponding decrease in their overall resident acuity. As explained in the preamble to the nursing facility rate limitation rulemaking, however, the method chosen by the Department to cap rate increases continues to account for same variables, including resident acuity, recognized in the case-mix payment system. See 35 Pa.B. 6235. As a result, the rates of some nursing facilities, particularly those that serve higher acuity and presumably more costly residents, climb by more than 2.8% from the previous fiscal year despite the limitation on overall payment increases.

   As to the concerns relating to quality of care, the Department reiterates what it noted in the preamble to the nursing facility rate limitation rulemaking (35 Pa.B. 6236): The obligation of a provider to provide appropriate, high-quality care is a condition of participation in the MA Program, and that obligation exists independent of any particular payment rate or any feature of the rate setting methodology. The Department has mechanisms in place including inspections, investigations of complaints and monitoring, and will use those mechanisms as appropriate, and in conjunction with the Department of Health, to ensure compliance with the mandatory conditions for participation in the MA Program.

   Comment. The two associations asserted that the combined impact of the assessment program, the loss of Intergovernmental Transfer (IGT) payments and the reduced assessment supplemental payments will result in a 1.6% reduction in overall MA expenditures for nursing facility services provided during FY 2005-2006.

   Response. Historically, the Commonwealth has been very generous in increasing nursing facility payments. Payments to MA nursing facility providers have increased $400 million from FY 2002-2003 to FY 2005-2006, and per diem rates have increased an average of 59% since case-mix was implemented. In large part, these substantial increases have been financed with additional Federal revenue derived through the use of IGTs. Since 1991, the Commonwealth has used IGT funds to augment general state revenue funds to underwrite payment rate increases and to provide other discretionary payments to MA nursing facility providers. Several years ago, however, Congress enacted legislation that sharply curtailed the states' ability to utilize the IGT process to obtain Federal funds. Since the enactment of these new Federal restrictions on the use of IGTs, the Commonwealth's IGT revenues have declined significantly.

   To address the loss of IGT funds, the Department worked closely with representatives of the nursing facility industry to implement the nursing facility assessment program. By law, all revenue generated from the assessment program must be used to maintain and increase payments to MA nursing facility providers. Since FY 2003-2004, the nursing facility assessment program has produced approximately $600 million, and the Department anticipates that the program will generate more than $300 million in FY 2005-2006. This additional assessment revenue does not entirely offset the reduction of IGT funds. As a result, there is no longer sufficient revenue available to the Department to support all of the programs and initiatives previously funded with IGT revenues or to make MA payment increases to MA nursing facility providers at the same levels it has in the past.

   Moreover, the net loss of Federal funds is occurring at a time of increasing strain on the overall MA Program budget. At the same time nursing facility payments have increased so dramatically, costs associated with the MA Program overall have soared. The growth rate in the MA Program continues to outpace state revenues. In FY 2006-2007, the MA Program is projected to consume 19% of the General Fund Budget, that is, for every $5.00 the Commonwealth spends in FY 2006-2007, nearly $1.00 will go to fund the MA Program. Expenditures for MA services for the elderly and disabled of this Commonwealth, who represent 33% of the MA eligible population, will account for approximately 70% of the $15 billion MA Program budget. While the Commonwealth's situation is not unlike that faced by other states, unlike other states, the Commonwealth has not imposed drastic reductions in MA services or eligibility. To avoid reductions, the Department instead implemented, among other things, cost containment measures that moderate the rate at which provider payments increase.

   For MA nursing facility providers, the Department adopted a methodology which limits, but does not eliminate, payment rate increases to nursing facility providers. The Department estimates that the average day weighted nursing facility per diem rate for FY 2005-2006 will still increase from $166.07 to $170.77, or 2.8%. While this increase is not as high as increases in past years, the Department expects that, overall, payments for MA nursing facility services will nevertheless grow by $130 million in FY 2005-2006.

   In addition to the payment increases associated with the case-mix per diem rates, the Department will use approximately $83 million in assessment revenue and the associated Federal matching funds to make supplemental per diem rate payments of $5.17 per MA day to qualifying MA facility providers in FY 2005-2006. The Department acknowledges that the assessment supplemental per diem rate for FY 2005-2006 is lower than the rate in the prior fiscal year. The Department concluded that a reduction in the supplemental rate in FY 2005-2006 was needed to compensate for a deficit created as a result of unanticipated supplemental payments in FY 2003-2004 due to higher than projected MA days. The Department determined that, unless the excess payments made in the prior fiscal year are recovered from current assessment revenue, the Department would be forced to use general fund dollars for the prior year supplemental payments, which would result in even less funding to support case-mix payment rate increases in FY 2005-2006.

   Comment. One association asserted that the Department's decision to delay payment of the July 1, 2005, rates broke a long-standing practice of payment on publication as proposed, and by doing so, will hinder many facilities' ability to continue providing quality care.

   Response. As previously noted, the Department published the rulemaking limiting nursing facility rate increases in FY 2005-2006 at 35 Pa.B. 6232 (November 12, 2005). Several weeks later, the Department received notice from the Federal Centers for Medicare and Medicaid Services (CMS) that it had approved a corresponding amendment to the Commonwealth's Medicaid State Plan effective July 1, 2005. Shortly after it received CMS approval to implement the limitation on rate increases, the Department published a notice proposing the MA nursing facility per diem rates for FY 2005-2006 at 35 Pa.B. 6712. That notice also provided for a 30 day public comment period, which ended January 9, 2006. Given the objections it had received in response to the rulemaking adopting the nursing facility rate limitation, the Department decided that it would not adjust payments based upon the proposed rate notice until it had an opportunity to review and consider any additional comments that might be submitted through the public process. In February 2006, the Department began adjusting payments to nursing facilities in anticipation of the publication of the rates for FY 2005-2006 payment rates.

   Comment. One association urged the Department to assess the impact of the new rate policy and the adequacy of the Commonwealth's MA nursing facility rates prior to publishing an additional amendment to the rate process with the authority granted under Act 42 of 2005.

   Response. The Department has been working with the nursing facility industry to develop revisions to the current case-mix payment system. As part of this process, numerous models analyzing the impact of the changes under consideration have been shared with the industry for their review and comment. The Department will continue to actively solicit the industry's input in developing a revised payment methodology that will provide appropriate reimbursement to nursing facilities and allow the Department to maintain its fiscal responsibility to administer the program within the defined budgetary constraints.

   Comment. The two associations asserted that the proposed changes to the payment rates undermine the goals and objectives of the Commonwealth's case-mix system which was developed to provide adequate payment for efficiently and economically operated nursing facilities. The associations further asserted that the Department is not meeting its obligation to pay nursing facilities based on the case-mix system design, but instead is cutting per diem rates below the amounts established by the payment system without any careful analysis of the impact that the cuts will have on quality of care or fiscal solvency of nursing facility providers.

   Response. As described previously and in the preamble to the rulemaking adopting the nursing facility rate limitation, the Department did analyze the impact that the limited rate increase would have on nursing facility providers and their ability to continue to operate efficiently and economically while providing quality nursing facility services. In addition, before adopting the rate limitation, the Department held several meetings with the nursing facility associations and solicited their input in an effort to develop the best outcome for implementing the limited rate increase with the available dollars appropriated. The methodology for setting rates was discussed with, and consensus was sought from, the associations. Each association submitted models and/or concepts for implementing the limited rate increase. Not surprisingly, each of these models tended to benefit the particular association's membership, and the associations were unable to reach consensus on any one particular model. However, there was agreement on the basic principles--all wanted a methodology that was predictable, uniform, provided acuity adjustments, and did not cause major alterations to the existing case-mix system. After evaluating each association's proposal against these principles, and after evaluating its impact on both MA recipients and nursing facility providers, the Department ultimately decided to adopt a rate cap methodology that reflects the agreed upon principles and provides the best overall outcome for the MA Program while enabling the Department to operate within its budgetary constraints.

   Comment. One association asserted that when the General Assembly approved the General Fund Budget for FY 2005-2006, appropriations for MA payments to nursing facilities were increased by 2.8% over FY 2004-2005 expenditures with the expectation that the Department would maintain quarterly adjustments to take into account the increasing acuity levels of the nursing facility population. The association further asserted that the General Assembly intended that, despite the global cap on appropriations increases, the incentives inherent in the prospective payment system would be preserved, especially for those nursing facilities that succeeded in keeping their cost increases lower than other facilities within their respective peer groups. The association stated that the Department acted contrary to the commitments and assumptions that accompanied the adoption of the 2005-2006 General Fund Budget of the Commonwealth.

   Response. The Department disagrees with the association's comments. Initially, the Department proposed to limit nursing facilities, like other MA providers, to a 2.0% increase in FY 2005-2006. That cap on rate increases would have limited a nursing facility's rates in FY 2005-2006 based upon the average of the facility's quarterly rates in the prior fiscal year. See 35 Pa.B. 3267 (June 4, 2005). The nursing facility industry provided comments to both Department and legislative staff objecting to the proposed methodology. The industry overwhelmingly recommended that the acuity adjustments be incorporated into the rate limitation proposal. In response to these recommendations, the Department modified the rate increase proposal to recognize acuity adjustments in accordance with the existing case-mix payment methodology. Ultimately, the General Assembly appropriated additional funds, and the Department was able to increase rates on average by 2.8% over the FY 2004-2005 statewide average rate. This increase is 40% higher than both the original increase proposed for nursing facility providers and the rate increases that the managed care plans and hospitals will receive in FY 2005-2006. Contrary to the association's comments, the Department maintains that the methodology it is implementing is entirely consistent with its representations to the General Assembly, and continues to provide for rebasing and quarterly acuity adjustments in accordance with the case-mix payment methodology.

   Comment. One association asserted that the proposed nursing facility per diem rate reductions were adopted in violation of applicable requirements of Federal and State law. 42 U.S.C.A. § 1396a(a)(13)(A) (relating to state plans for medical assistance). The association stated that the proposed rates effectively were calculated under final regulations published without notice and without allowing for comment, and therefore violate Federal statutory and regulatory requirements. The association acknowledged that while Act 42 of 2005 apparently authorized the Department to adopt final rules without notice and comment, those provisions of State law cannot override what it asserts are the clear mandates of Federal law. The association also asserted that Act 42 unconstitutionally delegated unfettered discretion to the Department to adopt payment rates without establishing any standards to determine whether the payment rates were fair and adequate.

   Response. The Department disagrees with the association's contentions that Act 42 is unconstitutional and that the Department violated applicable Federal law in publishing regulations pursuant to Act 42. The amendments to the Public Welfare Code enacted by Act 42, which are presumptively constitutional, must be read and analyzed in the context of the overall authority granted to and obligations imposed upon the Department by the Public Welfare Code. The Department maintains that in exercising its rulemaking authority under the Public Welfare Code as amended by Act 42, it acted in full conformity with Federal law requirements related to the public process when proposing to change payment methodology. The Department published an advance public notice at 35 Pa.B. 3267, in which it announced its intent to amend its State Plan to change its methods and standards for payment of MA nursing facility services for FY 2005-2006 and invited interested persons to comment on the proposed change. The Department received a total of 26 comment letters in response to the notice. The Department also sought advice on its proposal at the Medical Assistance Advisory Committee (MAAC) on May 26, 2005, and the Long-Term Care Subcommittee of the MAAC on June 8, 2005. In addition, the Department met with representatives of the four nursing home associations on nine separate occasions both before and after publication of the notice to confer with, solicit and obtain input and recommendations on how the Department might best contain the steady inflation of nursing facility payment rates. As the public process took place, the Department continued to consider and make refinements in the methodology to be used to implement the limited rate increase. The Department considered and addressed all public comments and input received through this public process in the development of the final regulations promulgating the change in methodology. See 35 Pa.B. 6234--6238. At 35 Pa.B. 6712, the Department published the proposed rate notice for FY 2005-2006 and invited interested parties to comment on the proposed rates. The Department received two comment letters in response to this notice. Those comments have been reviewed and considered as part of the development of this final rate notice. Nothing more is required by Federal law.


   Following publication of this notice, the Department will send rate letters to each MA nursing facility provider notifying the provider of its final rates for FY 2005-2006. The rate letter will also advise the provider that it may file an administrative appeal if the provider believes that the Department made any errors or otherwise disagrees with its final rates for FY 2005-2006. A provider's appeal must be in writing and filed with the Department's Bureau of Hearings and Appeals, P. O. Box 2675, Harrisburg, PA 17105, within 33 days of the date of the Department's letter notifying the provider of its final rates. Providers should refer to 67 Pa.C.S. Chapter 11 (relating to medical assistance hearings and appeals) and to the Department's standing practice order at 33 Pa.B. 3053 (June 28, 2003) for more detail regarding their appeal rights and the requirements related to their written appeals.

Fiscal Impact

   The estimated increase in annual aggregate expenditures for MA nursing facility services for FY 2005-2006 is $40.127 million ($18.159 million in State funds).

Public Comment

   Interested persons are invited to submit written comments regarding this notice to Gail Weidman, Chief, Program Analysis and Review Section, Department of Public Welfare, P. O. Box 2675, Harrisburg, PA 17105. Persons with a disability who require an auxiliary aid or service may submit comments using the AT&T Relay Services at (800) 654-5984 (TDD users) or (800) 654-5988 (voice users).


   Fiscal Note:  14-NOT-467. (1) General Fund; (2) Implementing Year 2005-06 is $18.159 million; (3) 1st Succeeding Year 2006-07 is $19.809 million; 2nd Succeeding Year 2007-08 is $19.809 million; 3rd Succeeding Year 2008-09 is $19.809 million; 4th Succeeding Year 2009-10 is $19.809 million; 5th Succeeding Year 2010-11 is $19.809 million; (4) 2004-05 Program--$476.116 million; 2003-04 Program--$588.528 million; 2002-03 Program--$250.568 million; (7) Medical Assistance--Long-Term Care; (8) recommends adoption. Funds have been included in the Department's budget to cover this increase.

[Pa.B. Doc. No. 06-448. Filed for public inspection March 17, 2006, 9:00 a.m.]

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