The Balanced Budget Refinement Act was passed as the 106th Congress ended its first session. With the bill’s passage came relief for the entire skilled nursing facility industry. The future of SNF long-term care pharmacy service and other ancillary providers looks ripe for developing even stronger partnerships with their SNF clients to provide necessary medication services.

President Clinton signed into law the Balanced Budget Refinement Act of 1999 on November 29. Now, skilled nursing facilities (SNFs), long-term care pharmacy service providers, and other ancillary service providers will enjoy some relief from the financial pressures and uncertainty that they faced over the past 18 months. The new legislation will infuse $2.6 billion into the entire SNF industry over five years, with a substantial portion of this new revenue intended to provide additional funding for the medication component of nontherapy ancillary services.

When the SNF prospective payment system (PPS) was first implemented in July 1998, as mandated by the Balanced Budget Act (BBA) of 1997, long-term care pharmacy providers had virtually no data to use to set case mix–adjusted per diems or other pricing methodologies. Nevertheless, SNFs were demanding all-inclusive per diems as a means of controlling pharmacy costs. In order to be responsive to their customers, long-term care pharmacy service providers reluctantly offered all-inclusive per diems, but without the benefit of knowing the Resource Utilization Group (RUG) profile of each SNF customer or the typical “drug spend” by RUG group. For the sake of simplicity, offering a single SNF medication per diem, with limited exclusions, became a common contracting mechanism.

SNF Provisions of the Balanced Budget Refinement Act of 1999 After months of aggressive debate, Congress finally reached a budget agreement that includes substantial budget relief for SNFs. In total, the budget agreement will infuse $2.6 billion to SNFs over five years. These provisions are highlighted below: Add-on for Medically Complex Patients The legislation provides an adjustment to the federal payment amounts for medically complex patients. The federal portion of the per diem increases by 20% for patients in the RHC, RMC, RMB, SE1, SE2, SE3, SSA, SSB, SSC, CA1, CA2,CB1, CB2, CC1, and CC2, groups. This adjustment is effective on April 1, 2000, and will continue until HCFA refines the case mix payment methodology. Temporary Increase in PPS Rates The legislation provides for a 4% increase in PPS payment rates in fiscal years 2001 and 2002 (October 1, 2000—September 30, 2002). This increase is in lieu of the market basket adjustment increase and occurs in addition to the market basket increase already contained in the original legislation. The legislation explicitly states that the additional payments will not fold into the base. Federal Rate Option The legislation allows SNFs to choose between the higher of current law or 100% of the federal rate for PPS payments. Elections can be made for cost reporting periods beginning on or after January 1, 2000, and can be made up to 30 days after the start of the cost reporting period. Carve-outs for Certain Services The legislation provides for a carve-out from the PPS rates of ambulance services to transport dialysis patients, certain prostheses, certain radioisotope services, and certain chemotherapy drugs from the PPS rates, as of April 1, 2000. Part B Add-On for SNFs Participating in NHCMQ Demonstration The legislation corrects a technical drafting error in the original legislation implementing SNF PPS and provides for a Part B add-on to SNFs that had participated in the Nursing Home Case Mix and Quality (NHCMQ) demonstration. The demonstration operated in the states of New York, South Dakota, Mississippi, Texas, Kansas, and Maine. This provision is retroactive to the start of SNF PPS for each affected SNF. Part B $1,500 Therapy Caps The legislation places a 2-year moratorium on implementing the two $1,500 therapy caps effective January 1, 2000—December 31, 2001. Conference Report Language on Market Basket Index for Medications In addition to specific modifications to the legislative language, the conference agreement includes the following language promoted by ASCP, which instructs the HHS Secretary to modify the SNF market basket index (MBI) with respect to new medications. Section 1888(e)(5)(A) of the Social Security Act directed the Secretary to establish a SNF market basket index (“MBI”) that “reflects the changes over time in the prices of an appropriate mix” of goods and services. The parties to the agreement believe that the Secretary should ensure the current SNF MBI, as developed by HCFA based on fiscal year 1992 costs, fulfills this mandate. The parties to the agreement recognize that the Secretary revised and rebased the 1992 costs when developing the MBI; however, the Secretary should ensure these types of modifications adequately reflect the costs of the efficient delivery of medically necessary new medications developed since 1992. Innovative medical research techniques, combined with significant technological advances, have led to the development of numerous new medications over the past seven years. The Secretary should ensure that these types of changes are represented in the current SNF MBI. Accordingly, Congress expects the Secretary to: (1) evaluate the appropriateness of the SNF MBI with respect to medications used in the SNF population based on data from the first fiscal year after full implementation of the SNF PPS when they become available; (2) consider modification of the current SNF MBI as appropriate; and (3) ensure that the MBI continues to be responsive to new medications used by the SNF population.

In the months following the implementation of SNF PPS, providers lobbied the Health Care Financing Administration (HCFA) and Congress for relief on the nontherapy ancillary component. Policy makers soon weighed in with support as well. According to Gail Wilensky, a former head of HCFA, “The problem was not PPS by itself, but a mismatch between payment and costs for patients who require relatively high levels of nontherapy ancillary services and supplies…. There may be a need for targeted relief for some providers, including SNFs….”

Additional Dollars Available To Meet the Medication Needs of SNF Patients

To follow are various estimates and approaches a long-term care pharmacy service provider could consider in developing RUG-specific medication per diems for use in contracting. The data contained in these tables could be used as a comparison benchmark for setting per diems that are based upon a SNF’s historical utilization, projected utilization, and the long-term care pharmacy service provider’s costs within a competitive marketplace.

Analysis and Data Sources

For the current federal fiscal year, SNF rates will be adjusted as follows:

• Period 1: From October 1, 1999–March 31, 2000, SNFs will receive the current PPS payments (although beginning January 1, 2000, SNFs may elect to move immediately to the federal rate with their cost reporting periods).
• Period 2: From April 1–September 30, 2000, SNFs will receive a 20% adjustment to the federal rate to 15 RUGs.

The adjustment in the selected RUGs will remain in effect until HCFA refines the case mix methodology. Explicitly accounting for the medication use of SNF patients should drive substantial refinements in the case mix methodology.

If all goes on schedule, HCFA intends to reveal the refined case mix methodology in a proposed rule in the spring of 2000, with a final rule to be implemented on October 1, 2000. However, should HCFA be delayed in issuing these regulations, the adjustment would continue.

The following data sources were used to develop the tables in this article:

• HCFA data on nontherapy ancillary costs—HCFA has published data on nontherapy ancillary costs as a proportion of the nursing component. In addition, HCFA data were analyzed to determine medication costs (including I.V. costs) as a proportion of total nontherapy ancillary costs.
• ASCP data on nontherapy ancillary costs—In order to provide national estimates of nontherapy ancillary costs by RUG, including medication costs, ASCP commissioned an analysis of a national database that is believed to be generally representative of the universe of SNFs. Based upon this analysis, ASCP has obtained costs for each nontherapy ancillary component by RUG, including I.V. costs and medication costs.
• HCFA RUG profile—In developing contracts when PPS commenced, long-term care pharmacy service providers could not establish medication per diems based upon the RUG profile of each SNF because the data were not available. These analyses use a national estimate of the RUG profile of the “average” SNF. This profile was obtained from HCFA data on all claims submitted between October 1998–June 1999.

Calculating Case Mix–Adjusted Medication Per Diems:
Three Estimates

Tables 1 and 2

• Estimates using HCFA data applied to federal per diems—Applies an estimate of the proportion of medication costs to total nontherapy ancillary costs (based upon HCFA data) to determine a weighted per diem for total medication costs.
• Estimates using ASCP data applied to federal per diems—Applies the ASCP estimate of the proportion of total medication costs to HCFA’s estimate of the nontherapy ancillary portion of the federal per diem to determine a weighted per diem for total medication costs.

Table 3

• Estimates using ASCP data on medication costs, I.V. costs, and nontherapy ancillary costs—This table uses the ASCP analysis exclusively and does not apply the estimates to the federal rate or other HCFA data. The table reports total nontherapy ancillary costs, medication costs, and I.V. costs by RUG. Medication per diems (excluding I.V. costs) and I.V. per diems were calculated by RUG and weighted for total medication costs.

All data described above were combined to develop illustrative estimates of per-diem medication costs by RUG group for the “average SNF” that receives the full federal rate. The tables calculate an illustrative medication per diem for the two rate periods of the current federal fiscal year.

Some conclusions that can be drawn from a careful look at the three versions of analysis include:

• The tables show substantially higher medication costs in the extensive care category, in which the majority of I.V. patients are classified. (From this finding, it is reasonable to expect substantial refinements in the case mix methodology for I.V. patients when HCFA publishes its regulation in the spring of 2000.)
• Comparing data within Tables 1 and 2 shows how medication costs vary across RUG categories. Consequently, there is a much wider range in medication per diems in the ASCP analyses, which use RUG-specific medication proportions applied to federal nontherapy ancillary components to calculate the medication per diems. Ultimately, RUG-specific analyses must be undertaken to calculate accurate medication per diem costs for each SNF.
• Table 3, which is based upon an estimate of costs in the post-PPS period, shows a per diem that is weighted according to the “average” SNF and that is in line with the estimates in Tables 1 and 2. Congress intended this adjustment to compensate for the actual costs incurred for providing nontherapy ancillary services.

Moving Forward

These analyses are presented solely so that any party interested in per diem pricing of medications to SNFs for Medicare-covered SNF residents can examine illustrative examples based on nationwide data and averages. In developing a pricing strategy, all ancillary suppliers are advised to be aware of the anti-kickback statute and the associated risk if discounts on PPS business are intended to induce non-PPS business. The Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) has described as “suspect” price discounts on PPS-covered services that do not make “business sense ‘standing alone’” without reference to other business the supplier may receive from the SNF (see OIG advisory opinion).

PPS Prescription Discounts as Kickbacks? The OIG Offers Guidance Many long-term care pharmacy service providers and consultant pharmacists have questioned the “legality” of discounting prescription services for Medicare Part A patients in skilled nursing facilities (SNFs) since the implementation of PPS. A recent advisory opinion issued by the OIG in a related SNF-supplier circumstance should provide clear guidance on this issue to long-term care pharmacy service providers and consultant pharmacists. The text of the advisory opinion follows. It is available on ASCP’s Web site, www.ascp.com, and at http://www.dhhs.gov/progorg/oig/ak/rs.htm. OIG Advisory Opinion [Date Issued—September 22, 1999] By Facsimile and Regular Mail [Name and address redacted] Re: Discount Arrangements Between Clinical Laboratories and SNFs Dear [Name redacted]: I write in response to your letter dated September 14, 1999, in which you asked several questions regarding certain arrangements between clinical laboratories and skilled nursing facilities (“SNFs”) paid under the Prospective Payment System (“PPS”) for patients covered under Medicare Part A. In particular, you have inquired about the applicability of OIG Advisory Opinion 99-2 (Feb. 26, 1999), which addressed a discount arrangement involving ambulance services, to similar arrangements involving laboratories, and you seek clarification with respect to the kinds of discounts that are prohibited under the anti-kickback statute. An advisory opinion applies only to the specific arrangement about which the opinion is sought and is only binding on the party or parties requesting the opinion. We do not provide formal legal guidance about such arrangements outside the scope of the advisory opinion process. We issue advisory opinions regarding the anti-kickback statute’s application to specific arrangements pursuant to procedures set forth in regulations at 42 C.F.R. Part 1008. The regulations are also available on our web page at http://www.hhs.gov/oig. Requests must be submitted by parties actually participating in the arrangement or by parties who certify a good faith intent to enter into the arrangement if a favorable advisory opinion is issued. Notwithstanding, we can make some general observations about Advisory Opinion 99-2. In general, the analytical framework set forth in Advisory Opinion 99-2 would apply to arrangements between SNFs and any ancillary services provider, including, but not limited to, clinical laboratories. At issue in Advisory Opinion 99-2 were ambulance service contracts that joined discounts to the SNFs for ambulance services for PPS-covered patients with referrals of lucrative Part B business that the ambulance company could bill directly to Medicare at an undiscounted rate. The arrangements fell squarely within the anti-kickback statute: the ambulance provider was giving something of value to the SNF (a discount on PPS-covered business) that was tied to referrals of the SNF’s Part B ambulance business. In such circumstances, an unscrupulous provider may have an incentive to overutilize services or to increase Federal costs by improper billing (such as, in the case of ambulances, billing for more expensive forms of transport than are necessary) to make up potential losses on the discounted PPS business. These are some of the very evils that the anti-kickback statute is designed to prevent. As explained in the opinion, a key inquiry under the anti-kickback statute is whether the discount on the PPS-covered business is intended to induce the referral of Part B business. Neither the size nor structure of the discount is determinative of an anti-kickback violation. Rather, the appropriate question to ask is whether the discount—regardless of its size or structure—is tied or linked directly or indirectly to referrals of other Federal health care program business. When evaluating whether an improper connection exists between a discount on PPS-covered business and referrals of Part B business, we look for indicia that the discount on the PPS-covered business is not commercially reasonable in the absence of other, non-discounted business. In other words, we look to see whether the discount on the PPS-covered services makes business sense “standing alone” without reference to any other business the provider may receive from the SNF. Advisory Opinion 99-2 identified two examples of discounts that are suspect: discounts that are below the supplier’s fully loaded costs, and discounts that are lower than the prices that the supplier offers to a buyer that (i) generates a volume of business for the supplier that is the same or greater than the volume of Part A business generated by the PPS SNF, but (ii) does not have any potentially available Part B or other Federal health care program business. In the absence of other facts to the contrary, these kinds of discounts suggest that the supplier and the SNF may be “swapping” discounts on PPS-covered business in exchange for profitable non-discounted Part B business, from which the supplier can recoup losses incurred on the discounted business, potentially through overutilization or abusive billing practices. These two discount arrangements were intended as examples of suspect discounts. Other suspect practices include, but are not limited to, discounts that are coupled with exclusive provider agreements and discounts or other pricing schemes (such as capitation arrangements) made in conjunction with explicit or implicit agreements to refer other facility business. In sum, if any direct or indirect link exists between a price offered to a SNF for PPS-covered services and referrals of Part B business, the anti-kickback statute would be implicated. Finally, you asked whether a laboratory may pass along to a SNF cost savings (if any) resulting from billing a SNF directly under the PPS system if the intent of providing this cost savings discount is to induce the referral of Part B services. In general, the anti-kickback statute, 42 U.S.C. º 1320a-7b(b), makes it a criminal offense knowingly and wilfully to offer, pay, solicit, or receive any remuneration (i.e., anything of value) to induce, or in return for, the referral of items or services for which payment may be made in whole or in part by a Federal health care program. In other words, the statute prohibits payments made purposefully to induce referrals of business paid for by a Federal health care program, including Medicare and Medicaid. The statute has been interpreted by courts to cover any arrangement where one purpose of the remuneration is to induce referrals. Because the anti-kickback statute is an intent-based statute, the determination whether a particular payment practice violates the statute can only be made on a case-by-case basis after reviewing all potentially relevant facts to determine the intent of the parties. We are continuing to monitor the situation with respect to potentially unlawful contracts between SNFs and services providers, as well as the potential ramifications of these arrangements under the prohibition on charging Medicare or Medicaid amounts substantially in excess of a provider’s usual charge (section 1128(b)(6) of the Social Security Act). I hope this information is helpful. If you have further questions or comments, please feel free to contact me at 202-619-0335.       Sincerely,       Kevin G. McAnaney       Chief, Industry Guidance       Branch

Jade Gong, RN, MBA, is Principal, Health Strategy Associates, Arlington, Virginia, and a consultant to ASCP on Medicare prospective payment issues.