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The Centers for Medicare & Medicaid Services (CMS) today announced an increase in Medicare payment rates to skilled nursing facilities that will result in an estimated $850 million increase in Medicare payments in fiscal year 2004.

The increase reflects two significant changes: a 3 percent annual update in payment rates and an additional 3.26 percent increase to address the underestimate of the market basket forecast in past years. The increases will be reflected in Medicare payment rates to nursing facilities that furnish certain skilled nursing and rehabilitation care to Medicare beneficiaries recovering from serious health problems.

"We are committed to providing high quality care to those in nursing facilities," said Tom Scully, administrator of CMS. "We are currently working with Congress to ensure that Medicare skilled nursing facilities payments provide adequate funding for the proper care of patients."

Under Medicare's skilled nursing facility prospective payment system (SNF PPS), each facility is paid a daily rate based on the relative needs of individual Medicare patients, adjusted for local labor costs. The daily rate covers the costs of furnishing all covered nursing facility services, including routine services such as room, board, nursing services, and some medical supplies; related costs such as therapies, drugs and lab services; and capital costs including land, buildings and equipment.

CMS uses a skilled nursing facility "market basket" to measure inflation in the prices of an appropriate mix of goods and services included in covered skilled nursing facility stays. The price of items in the market basket is measured each year, and Medicare payments are adjusted accordingly. For fiscal year 2004, a 3 percent increase in the "market basket" will increase rates by more than $400 million.

Today's adjustment reflects a 3.26 percent cumulative adjustment of the market basket percentage change since the inception of SNF PPS in 1998. The use of this adjustment increases rates by an additional $450 million for fiscal year 2004.

The payment updates are included in a final rule that will be published in the August 4 Federal Register.

The rule also reflects the decision by CMS to retain the current classification system that establishes daily payment rates to skilled nursing facilities based on the needs of Medicare beneficiaries. This decision will result in nursing homes continuing to receive an estimated $1 billion in temporary add-on payments next year. The individual classification groups are known as the Resource Utilization Groups or RUGs.

CMS continues to work to refine the classification, or case-mix, system, in order to more accurately reimburse nursing homes. The refinements ultimately would help to ensure that Medicare pays appropriately for patients that require more complicated care. However, after careful review of the available data, CMS determined that the research is not sufficiently advanced at the present time to implement refinements this year. CMS continues to work with the Urban Institute, a non-partisan economic and social policy research group, to develop appropriate case mix refinements.

Today's notice also incorporates CMS' plan that the forecast adjustment factor be calculated each year and included in the annual rate updates for both upward and downward adjustments.