Title of Regulation: 12VAC30-90. Methods and Standards for Establishing Payment Rates for Long-Term Care (amending 12VAC30-90-44).

Statutory Authority: § 32.1-325 of the Code of Virginia; 42 USC § 1396 et seq.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: November 16, 2016.

Effective Date: December 1, 2016.

Agency Contact: Emily McClellan, Regulatory Supervisor, Policy Division, Department of Medical Assistance Services, 600 East Broad Street, Suite 1300, Richmond, VA 23219, telephone (804) 371-4300, FAX (804) 786-1680, or email emily.mcclellan@dmas.virginia.gov.

Basis: Section 32.1-325 of the Code of Virginia grants to the Board of Medical Assistance Services the authority to administer and amend the Plan for Medical Assistance and to make, adopt, promulgate, and enforce regulations to implement the state plan. Section 32.1-324 of the Code of Virginia authorizes the Director of the Department of Medical Assistance Services (DMAS) to administer and amend the Plan for Medical Assistance according to the board's requirements. The Medicaid authority as established by § 1902(a) of the Social Security Act (42 USC § 1396a) provides governing authority for payments for services.

The elimination of inflation for nursing facilities is required by Item 301 IIII of Chapter 665 of the 2015 Acts of Assembly, which states that DMAS "shall amend the State Plan for Medical Assistance to eliminate nursing facility inflation for fiscal year 2016. This shall apply to nursing facility operating rates."

The implementation of the "hold harmless provision" is required by Item 301 KKK 6 of Chapter 665 of the 2015 Acts of Assembly, which states that DMAS "shall amend the State Plan for Medical Assistance to reimburse the price-based operating rate rather than the transition operating rate to any nursing facility whose licensed bed capacity decreased by at least 30 beds after 2011 and whose occupancy increased from less than 70 percent in 2011 to more than 80 percent in 2013."

Purpose: The purpose of this action is to prevent additional Medicaid expenditures for nursing facility inflation costs beginning on July 1, 2015, and to implement the "hold harmless provision," which allows nursing facilities with decreased bed capacity but increased demand to be reimbursed at a price-based rate rather than the lower transition operating rate. This regulation is essential to protect the health, safety, and welfare of the public in that it seeks to maintain access to nursing facility providers by creating the fairest distribution of the limited funds that are available for nursing facility reimbursement. This regulatory action seeks to prevent a decrease in the number of nursing facility providers in the Medicaid program, which would cause Medicaid members to have difficulty accessing the health care services that they need.

Rationale for Using Fast-Track Rulemaking Process: This regulatory action was mandated by Chapter 665 of the 2015 Acts of Assembly. The changes have been reviewed and approved by the Centers for Medicare and Medicaid Services, and the changes have been in effect since July 1, 2015. DMAS has not received any comments, concerns, or other indicators of controversy from providers, members, or the public since the changes went into effect. As a result, this regulatory action is being promulgated via the fast-track rulemaking process because it is not expected to be controversial.

Substance: The amendments eliminate inflation for nursing facilities for the period between July 1, 2015, and June 30, 2016, and allow nursing facilities with decreased bed capacity but increased demand to be reimbursed at a price-based rate rather than the lower transition operating rate. This carve-out for facilities that meet the requirements for bed capacity and occupancy was designed with substantial input from a nursing facility stakeholder group.

Issues: The primary advantages of these changes are that they reduce additional Medicaid expenditures for nursing facility inflation and implement a stakeholder group's recommendation related to reimbursement for nursing facilities with a decrease in the number of beds and an increase in occupancy. There are no disadvantages to the public or the Commonwealth as a result of these changes.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Director of the Department of Medical Assistance Services (DMAS) proposes two changes to its regulation governing payment rates for long term care. The Board proposes to add language to reflect that the inflation adjustment for nursing facility operating rates was set to zero percent for fiscal year 2016 (July 1, 2015 through June 30, 2016) and to allow nursing homes with specified decreased bed capacity, but increased demand, to be reimbursed at a higher, price-based rate¹ rather than at the lower transition operating rate.²

Result of Analysis. Benefits likely outweigh costs for this proposed change.

Estimated Economic Impact. Item 301 IIII of Chapter 665, 2015 Acts of the Assembly, required DMAS to "amend the State Plan for Medical Assistance to eliminate nursing facility inflation [adjustments to payments] for fiscal year 2016." Item 301 KKK(6) of this Chapter required the DMAS to "amend the State Plan for Medical Assistance to reimburse the price-based operating rate rather than the transition operating rate to any nursing facility whose licensed bed capacity decreased by at least 30 beds after 2011 and whose occupancy increased from less than 70 percent in 2011 to more than 80 percent in 2013." DMAS submitted these two changes to the Centers for Medicare and Medicaid Services (CMS) and they have been approved. Now the Director of DMAS, acting on behalf of the Board of Medical Assistance Services, proposes to amend this regulation to harmonize it with Chapter 665.

As the elimination of the inflation adjustment for nursing facilities was only in effect from July 1, 2015 to June 30, 2016, no nursing facilities are likely to incur any costs or reduced reimbursements³ after June 30, 2016. Board staff reports that nursing facility reimbursements in fiscal year were reduced by $19.6 million⁴ on account of the elimination of inflation adjustments for that year. Board staff reports that one nursing facility has thus far seen an increased reimbursement from the expedited changeover to price-based operating rate reimbursement required by Item 301 KKK(6) of Chapter 665. This nursing facility received $320,000 more in reimbursements in fiscal year 2016 than they would have seen under transition operating rate reimbursement. Board staff reports that they know of no other nursing facilities that would be affected by Item 301 KKK(6) before all nursing facilities would move to 100 percent price-based operating rate reimbursement at the beginning of fiscal year 2018 (July 1, 2017). All affected entities will benefit from this regulation being harmonized with relevant requirements in Chapter 665 as this will eliminate any confusion as to what standards have to be followed.

Businesses and Entities Affected. Board staff reports there are approximately 265 nursing facilities that are affected by changes in reimbursement. Board staff further reports that 220 of these nursing facilities are part of a chain or hospital and would likely not be small businesses. The remaining approximately 40 nursing facilities likely are small businesses.

Localities Particularly Affected. No locality will be particularly affected by these regulatory changes.

Projected Impact on Employment. These proposed regulatory changes are unlikely to have any impact on employment in the Commonwealth.

Effects on the Use and Value of Private Property. This proposed regulation is unlikely to have any impact on the use or value of private property.

Real Estate Development Costs. This proposed regulation is unlikely to affect real estate development costs.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. No small business is likely to incur ongoing costs on account of these proposed regulatory changes. In fiscal year 2016, nursing facilities were reimbursed $19.6 million less on account of the elimination of an inflation adjustment for that year. One small business nursing facility thus far has benefited from the early change to price-based reimbursement for nursing homes that experienced reductions in capacity of at least 30 beds after 2011 but whose occupancy increased (from less than 70 percent to greater than 80%) between 2011 and 2013.

Alternative Method that Minimizes Adverse Impact. No small business is likely to incur compliance costs on account of these proposed regulatory changes.

Adverse Impacts:

Businesses. No business is likely to incur compliance costs on account of these proposed regulatory changes. In fiscal year 2016, nursing facilities were reimbursed $19.6 million less on account of the elimination of an inflation adjustment for that year. One nursing facility thus far has benefited from the early change to price-based reimbursement for nursing homes that experienced reductions in capacity of at least 30 beds after 2011 but whose occupancy increased (from less than 70 percent to greater than 80%) between 2011 and 2013.

Localities. No locality is likely to be adversely affected by these proposed regulatory changes.

Other Entities. No other entities are likely to suffer any adverse impact on account of this proposed regulation.

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¹ Price-based nursing facility reimbursement methodology is described in 12VAC30-90-44 (A) at http://law.lis.virginia.gov/admincode/title12/agency30/chapter90/section44/.

² Transition operating rate reimbursement is described in 12VAC30-90-44 (B) at http://law.lis.virginia.gov/admincode/title12/agency30/chapter90/section44/. This transition rate will be phased completely out at the end of fiscal year 2017 as all nursing facility will be reimburse 100% at an adjusted price-based rate starting in fiscal year 2018.

³Reduced from what they would have been had they been subject to an inflation adjustment.

⁴This represents a savings of $9.8 million in state general fund expenditures.

Agency's Response to Economic Impact Analysis: The agency has reviewed the economic impact analysis prepared by the Department of Planning and Budget; the agency concurs with this analysis.

Summary:

The amendments (i) eliminate inflation for nursing facilities, pursuant to Item IIII of Chapter 665 of the 2015 Acts of Assembly, to prevent additional Medicaid expenditures for these inflation costs and (ii) implement the "hold harmless provision" for nursing facilities, pursuant to Item KKK 6 of Chapter 665, which allows nursing facilities with decreased bed capacity but increased demand to be reimbursed at a price-based rate rather than the lower transition operating rate.

12VAC30-90-44. Nursing facility price-based reimbursement methodology.

A. Effective July 1, 2014, DMAS shall convert nursing facility operating rates in 12VAC30-90-41 to a price-based methodology. The department shall calculate prospective operating rates for direct and indirect costs in the following manner:

1. The department shall calculate the cost per day in the base year for direct and indirect operating costs for each nursing facility. The department shall use existing definitions of direct and indirect costs.

2. The initial base year for calculating the cost per day shall be cost reports ending in calendar year 2011. The department shall rebase prices in fiscal year 2018 and every three years thereafter using the most recent, reliable calendar year cost-settled cost reports for freestanding nursing facilities that have been completed as of September 1. No adjustments will be made to the base year data for purposes of rate setting after that date.

3. Each nursing facility's direct cost per day shall be neutralized by dividing the direct cost per day by the raw Medicaid facility case-mix that corresponds to the base year by facility.

4. Costs per day shall be inflated to the midpoint of the fiscal year rate period using the moving average Virginia Nursing Home inflation index for the fourth quarter of each year (the midpoint of the fiscal year). Costs in the 2011 base year shall be inflated from the midpoint of the cost report year to the midpoint of fiscal year 2012 by prorating fiscal year 2012 inflation and annual inflation after that. Annual inflation adjustments shall be based on the last available report prior to the beginning of the fiscal year and corrected for any revisions to prior year inflation. Effective July 1, 2015, through June 30, 2016, the inflation adjustment for nursing facility operating rates shall be 0.0%.

5. Prices will be established for the following peer groups described in this section using a combination of Medicare wage regions and Medicaid rural and bed size modifications based on similar costs.

6. The following definitions shall apply to direct peer groups. The Northern Virginia peer group shall be defined as localities in the Washington DC-MD-VA MSA as published by the Centers for Medicare and Medicaid Services (CMS) for skilled nursing facility rates. The Other MSA peer group includes localities in any MSA defined by CMS other than the Northern Virginia MSA and non-MSA designations. The Rural peer groups are non-MSA areas of the state divided into Northern Rural and Southern Rural peer groups based on drawing a line between the following points on the Commonwealth of Virginia map with the coordinates: 37.4203914 Latitude, 82.0201219 Longitude and 37.1223664 Latitude, 76.3457773 Longitude. Direct peer groups are:

a. Northern Virginia,

b. Other MSAs,

c. Northern Rural, and

d. Southern Rural.

7. The following definitions shall apply to indirect peer groups. The indirect peer group for Northern Virginia is the same as the direct peer group for Northern Virginia. Rest of State peer groups shall be defined as any localities other than localities in the Northern Virginia peer group for nursing facilities with greater than 60 beds or 60 beds or less. Rest of State - Greater than 60 Beds shall be further subdivided into Other MSA, Northern Rural and Southern Rural peer groups using the locality definitions for direct peer groups. Indirect peer groups are:

a. Northern Virginia MSA,

b. Rest of State - Greater than 60 Beds,

c. Other MSAs,

d. Northern Rural, and

e. Southern Rural.

Rest of State - 60 Beds or Less.

8. Any changes to peer group assignment based on changes in bed size or MSA will be implemented for reimbursement purposes the July 1 following the effective date of the change.

9. The direct and indirect price for each peer group shall be based on the following adjustment factors:

a. Direct adjustment factor - 105.000% of the peer group day-weighted median neutralized and inflated cost per day for freestanding nursing facilities.

b. Indirect adjustment factor - 100.735% of the peer group day-weighted median inflated cost per day for freestanding nursing facilities.

10. Facilities with costs projected to the rate year below 95% of the price shall have an adjusted price equal to the price minus the difference between the facility's cost and 95% of the unadjusted price. Adjusted prices will be established at each rebasing. New facilities after the base year shall not have an adjusted price until the next rebasing.

11. Individual claim payment for direct costs shall be based on each resident's Resource Utilization Group (RUG) during the service period times the facility direct price.

12. Resource Utilization Group (RUG) is a resident classification system that groups nursing facility residents according to resource utilization and assigns weights related to the resource utilization for each classification. The department shall use RUGs to determine facility case-mix for cost neutralization as defined in 12VAC30-90-306 in determining the direct costs used in setting the price and for adjusting the claim payments for residents.

a. The department shall neutralize direct costs per day in the base year using the most current RUG grouper applicable to the base year.

b. The department shall utilize RUG-III, version 34 groups and weights in fiscal years 2015 through 2017 for claim payments.

c. Beginning in fiscal year 2018, the department shall implement RUG-IV, version 48 Medicaid groups and weights for claim payments.

d. RUG-IV, version 48 weights used for claim payments will be normalized to RUG-III, version 34 weights as long as base year costs are neutralized by the RUG-III 34 group. In that the weights are not the same under RUG-IV as under RUG-III, normalization will ensure that total direct operating payments using the RUG-IV 48 weights will be the same as total direct operating payments using the RUG-III 34 grouper.

B. Transition. The department shall transition to the price-based methodology over a period of four years, blending the adjusted price-based rate with the facility-specific case-mix neutral cost-based rate calculated according to 12VAC30-90-41 as if ceilings had been rebased for fiscal year 2015. The cost-based rates are calculated using the 2011 base year data, inflated to 2015 using the inflation methodology in 12VAC30-90-41 and adjusted to state fiscal year 2015. In subsequent years of the transition, the cost-based rates shall be increased by inflation described in this section.

1. Based on a four-year transition, the rate will be based on the following blend:

a. Fiscal year 2015 - 25% of the adjusted price-based rate and 75% of the cost-based rate.

b. Fiscal year 2016 - 50% of the adjusted price-based rate and 50% of the cost-based rate.

c. Fiscal year 2017 - 75% of the adjusted price-based rate and 25% of the cost-based rate.

d. Fiscal year 2018 - 100% of the adjusted price-based (fully implemented).

2. During the first transition year for the period July 1, 2014, through October 31, 2014, DMAS shall case-mix adjust each facility's direct cost component of the rates using the average facility case-mix from the two most recent finalized quarters (September and December 2013) instead of adjusting this component claim by claim.

3. Cost-based rates to be used in the transition for facilities without cost data in the base year but placed in service prior to July 1, 2013, shall be determined based on the most recently settled cost data. If there is no settled cost report at the beginning of a fiscal year, then 100% of the price-based rate shall be used for that fiscal year. Facilities placed in service after June 30, 2013, shall be paid 100% of the price-based rate.

4. Effective July 1, 2015, nursing facilities whose licensed bed capacity decreased by at least 30 beds after 2011 and whose occupancy increased from less than 70% in 2011 to more than 80% in 2013 shall be reimbursed the price-based operating rate rather than the transition operating rate.

C. Prospective capital rates shall be calculated in the following manner:

1. Fair rental value (FRV) per diem rates for the fiscal year shall be calculated for all freestanding nursing facilities based on the prior calendar year information aged to the fiscal year and using RS Means factors and rental rates corresponding to the fiscal year as prescribed in 12VAC30-90-36. There will be no separate calculation for beds subject to or not subject to transition.

2. Nursing facilities that put into service a major renovation or new beds may request a mid-year fair rental value per diem rate change.

a. A major renovation shall be defined as an increase in capital of $3,000 per bed. The nursing facility shall submit complete pro forma documentation at least 60 days prior to the effective date, and the new rate shall be effective at the beginning of the month following the end of the 60 days.

b. The provider shall submit final documentation within 60 days of the new rate effective date, and the department shall review final documentation and modify the rate if necessary effective 90 days after the implementation of the new rate. No mid-year rate changes shall be made for an effective date after April 30 of the fiscal year.

3. These FRV changes shall also apply to specialized care facilities.

4. The capital per diem rate for hospital-based nursing facilities shall be the last settled capital per diem.