Tenn. Comp. R. & Regs. 1200-13-02-.06 - REIMBURSEMENT METHODOLOGY FOR NURSING FACILITIES

(1) Effective July 1, 2018, Medicaid participating NFs will be reimbursed using a case mix reimbursement system with quality informed rate components, and a stand-alone quality based component. The initial base-year cost report data used to establish the case mix rates will be the most recently audited or desk reviewed NF cost reports covering a period greater than six (6) months, with an end date on or before December 31, 2015.

(2) The base-year annualized Medicaid resident day-weighted median costs and prices shall be rebased at an interval no longer than three (3) years after a new base year period has been established. The new base year median costs and prices will be established using the most recently audited or desk reviewed cost reports that have a cost reporting period greater than six (6) months, with a cost report end date eighteen (18) months or more before the start of the rebase period.

(a) Cost reports issued a disclaimer of opinion during the audit process or cost reports containing substantial issues (including incomplete filing) during the desk review process, as solely determined by the Comptroller, will be excluded from the median and price calculations.

(b) Only audited or reviewed cost reports available prior to the July 1 rate setting will be considered in the median and price calculations.

(3) For rate periods between rebasing, an index factor shall be applied to the following:

(a) Direct care base year annualized Medicaid resident-day-weighted medians;

(b) Administrative and Operating base year annualized Medicaid resident-day-weighted medians; and

(c) The provider's cost-based component.

(4) Each NF provider's reimbursement rate will be determined through the sum of the following cost components:

(a) The sum of the NF provider's direct care case mix adjusted cost component, direct care non-case mix adjusted cost component, and the direct care spending floor adjustment;

(b) The statewide administrative and operating cost component;

(c) The NF provider's capital cost component (FRV);

(d) The NF provider's cost-based component; and

(e) Adjustments to the rate.

(5) Determination of Rate Components.

(a) The NF provider's direct care portion of the reimbursement rate is calculated as the sum of the direct care case mix adjusted cost component, the direct care non-case mix adjusted cost component, and the direct care spending floor adjustment.

1. The direct care case mix adjusted cost component reimbursement rate shall be determined as follows:

(i) The per diem direct care case mix adjusted cost for each NF is determined by dividing the facility's direct care case mix adjusted cost from the base year cost reporting period by the NF's actual total resident days during the cost reporting period. These costs shall be trended forward from the midpoint of the NF provider's base year cost reporting period to the midpoint of the rate year using the index factor.

(ii) The per diem neutralized direct care case mix adjusted cost is calculated by dividing each NF provider's inflated direct care case mix adjusted cost per diem by the NF provider's NF cost report period case mix index.

(iii) The per diem neutralized inflated direct care case mix adjusted cost, for each Medicaid participating NF that meets the criteria to be included in the cost component median, is arrayed from low to high and the annualized Medicaid resident-day-weighted median cost is determined.

(iv) The statewide direct care case mix adjusted price is established at one hundred six percent (106.00%) of the direct care case mix adjusted annualized Medicaid resident-day-weighted median cost.

(v) The statewide direct care case mix adjusted price is then multiplied by each NF's own Medicaid NF-wide semi-annual average case mix index for the rate period to establish the direct care case mix adjusted cost component.

2. The direct care non-case mix adjusted cost component reimbursement rate shall be determined as follows:

(i) The per diem inflated direct care non-case mix adjusted cost for each NF provider is determined by dividing the facility's direct care non-case mix adjusted cost during the base year cost reporting period by the NF provider's actual total resident days during the cost reporting period. These costs shall be trended forward from the midpoint of the NF's base year cost reporting period to the midpoint of the rate year using the index factor.

(ii) The per diem inflated direct care non-case mix adjusted cost, for each NF that meets the criteria to be included in the cost component median, is arrayed from low to high and the annualized Medicaid resident-day-weighted median cost is determined.

(iii) The statewide direct care non-case mix adjusted price is established at one hundred six percent (106.00%) of the direct care non-case mix adjusted annualized Medicaid resident-day-weighted median cost.

(iv) The statewide direct care non-case mix adjusted price is then multiplied by each NF provider's direct care non-case mix adjusted quality incentive multiplier to establish the NF provider's direct care non-case mix adjusted cost component.

(v) The direct care non-case mix adjusted quality incentive multiplier is determined by the NF provider's Quality Tier. The quality incentive multiplier is determined as follows:

(I) Quality Tier 1 - One hundred five percent (105.00%) multiplier

(II) Quality Tier 2 - One hundred two and one-half percent (102.50%) multiplier

(III) Quality Tier 3 - One hundred percent (100.00%) multiplier

3. The direct care spending floor adjustment is calculated as follows:

(i) The sum of the NF provider's direct care case mix adjusted and direct care non-case mix adjusted cost components calculated above are multiplied by the NF provider specific spending floor percentage to determine the direct care spending floor threshold.

(ii) The direct care spending floor percentage for each NF provider is determined by the NF provider's Quality Tier. The spending floor percentage is determined as follows:

Effective Date of Quality Tier Floor Percentage	Quality Tier 1	Quality Tier 2	Quality Tier 3
July 1, 2018	82.50%	85.00%	87.50%
July 1, 2019	85.00%	87.50%	90.00%
July 1, 2020	87.50%	90.00%	92.50%
July 1, 2021	90.00%	92.00%	94.00%

(iii) The direct care spending floor adjustment is calculated as the lesser of the Medicaid direct care cost per diem minus the direct care spending floor threshold, or zero.

(iv) The Medicaid direct care cost per diem used in the direct care spending floor calculation is established as follows:

(I) Utilize the most recently audited or desk reviewed cost reports covering a period of six (6) months or more, with an end date eighteen (18) months or more prior to each July 1 rate setting period.

(II) The per diem inflated direct care non-case mix adjusted cost for each NF provider is determined by dividing the facility's direct care non-case mix adjusted cost during the applicable cost reporting period by the NF provider's actual total resident days during the cost reporting period. These costs shall be trended forward from the midpoint of the applicable cost reporting period to the midpoint of the rate year using the index factor.

(III) The per diem direct care case mix adjusted cost for each NF is determined by dividing the facility's direct care case mix adjusted cost from the applicable cost reporting period by the NF provider's actual total resident days during the cost reporting period. These costs shall be trended forward from the midpoint of the cost reporting period to the midpoint of the rate year using the index factor.

(IV) The per diem neutralized inflated direct care case mix adjusted cost is calculated by dividing each NF provider's inflated direct care case mix adjusted cost per diem by the NF provider's NF cost report period case mix index.

(V) The per diem neutralized inflated direct care case mix adjusted cost is then multiplied by each NF provider's own Medicaid NF-wide semi-annual average case mix index for the rate period to create the Medicaid direct care case mix adjusted cost per diem.

(VI) The Medicaid direct care case mix adjusted cost per diem is then added to the inflated direct care non-case mix adjusted cost per diem to create the Medicaid direct care cost per diem.

(b) The statewide administrative and operating cost component will be determined as follows:

1. The per diem administrative and operating cost for each NF provider is determined by dividing the provider's administrative and operating cost during the base year cost reporting period by the NF provider's actual total resident days during the cost reporting period. These costs shall be trended forward from the midpoint of the NF provider's base year cost reporting period to the midpoint of the rate year using the index factor.

2. The per diem administrative and operating cost, for each NF that meets the criteria to be included in the cost component median, is arrayed from low to high and the annualized Medicaid resident-day-weighted median cost is determined.

3. The statewide administrative and operating cost component is established at one hundred one percent (101.00%) of the administrative and operating annualized Medicaid resident-day-weighted median cost.

4. Every NF provider will receive the statewide administrative and operating cost component as reimbursement in full for its administrative and operating expenditures.

(c) The capital cost component of the reimbursement rate shall be based on a fair rental value (FRV) appraisal based reimbursement system, in lieu of reimbursement for capital specific costs such as depreciation, amortization, interest, rent/lease expense, etc. The capital cost component will be determined as follows:

1. Each NF provider will receive an appraisal from TennCare's certified appraisal contractor. TennCare's certified appraisal contractor must be selected through a formal procurement process for a single statewide contract.

2. NF appraisal values will be subject to a statewide mandatory reappraisal process in conjunction with the second (2nd) rebase following the implementation of new statewide appraisal values.

3. A NF provider may apply for a voluntary reappraisal. The voluntary NF reappraisal will be effective for rate setting purposes beginning with the semiannual rate period directly following the completion of the reappraisal process. The reappraisal process will not be determined complete until the reappraisal is final. To obtain a voluntary reappraisal, the NF must meet all of the following criteria:

(i) The NF satisfies one of the following conditions:

(I) NF provider has moved its certificate of need/operations to a new permanent location. The new location is not required to be new construction. However, if the new location is one that has a current active appraisal or reappraisal valuation, the provider will be given the active appraisal value for rate setting purposes.

(II) NF provider has moved more than ten percent (10%) of its total licensed bed capacity to a new location on the current NF campus, and the new location was not previously included in any appraisal or reappraisal process.

(III) NF provider has performed and placed into service within the last 12 months a renovation/improvement greater than or equal to fifteen percent (15%) of its current net depreciated facility appraisal value (excluding land, but including site improvements). The total cost of the renovation shall only consider the cost of fixed assets as defined in this Chapter.

(IV) Any renovation/improvement included in a previous appraisal/reappraisal process must not be considered when determining if the reappraisal participation criteria has been met.

(ii) The NF has provided sufficient documentation to TennCare to support it has satisfied one of the conditions in subpart (i) above.

(iii) The NF agrees to utilize the certified appraisal firm and appraisal methodology designated by TennCare.

(iv) The NF agrees to be responsible for the cost of the appraisal.

(v) The NF agrees that all semi-annual capital improvement updates submitted prior to the reappraisal request will be considered as part of the new reappraisal, and removed from being separately considered in the rate setting process.

4. TennCare's appraisal contractor will utilize the Marshall and Swift (Boeckh) Building Valuation System for Nursing Facilities, or its successor, to calculate the fee simple replacement cost (undepreciated and depreciated) of the building(s), site improvements and the market value of land for each NF provider.

(i) The fee simple replacement cost of buildings and site improvements is calculated using the cost approach appraisal method.

(ii) Only physical deterioration is considered. The appraisals are performed under the assumption that the NF is financially and functionally viable and economic obsolescence is not considered.

(iii) Land values are determined using the sales comparison approach.

5. Determination of the Building(s) fee simple replacement cost.

(i) The comparative unit method (calculator method) from Marshall and Swift section 15, or its successor, is utilized for this calculation.

(I) All costs, multipliers, and economic lives are directly pulled from the Marshall and Swift Commercial Estimator 7, or its successor.

(II) Only physical depreciation is considered, and assumptions are made that no obsolescence is present.

(III) Physical depreciation is determined based on the certified appraiser's opinion of effective age based on the actual age of the facility and renovations and updates over time.

(IV) Only fixed assets are determined through the appraisal process. Moveable equipment values are determined separately.

(ii) First, an actual weighted age of the facility is determined based on the age of building improvements, and the square footage of each section. Separate buildings or additions to original buildings may be separately valued by the appraiser, if determined necessary. The weighted age will then be grouped into the following ranges:

Actual Age	Implied Age for Depreciation
0 - 10 years	Actual Age
11 - 15 years	13 years
16 - 20 years	18 years
21 - 25 years	23 years
26 - 30 years	28 years
31 - 35 years	33 years
35 years +	10 years remaining life

(iii) After the determination of implied age, recent NF provider capital improvements will be considered to determine whether the implied age needs to be adjusted for depreciation purposes. Capital improvements submitted by the NF provider during the appraisal process are considered for effective age purposes. The allowed range of placed in service dates of capital improvements allowed for submission will be determined by TennCare.

(iv) The final calculated effective age (implied age less improvement considerations) will be divided into an economic life based on Marshall and Swift guidelines as detailed in the table below. At no time will remaining economic life (economic life less effective age) be less than 10 years.

Class	Low Cost and Average	Good and Excellent
A	45	50
B	45	50
C	40	45
D	35	40

(v) The following is a listing of the description of the class of construction:

Class	Description
A	Fireproofed structural steel
B	Reinforced concrete columns/beams
C	Masonry bearing walls
D	Wood or steel studs

(vi) The following is a listing of the rank, or estimate of construction quality based on the Marshall and Swift definition of quality:

Rank	Description
1	Low Cost
2	Average
3	Good
4+	Excellent

6. Determination of Site Improvement fee simple replacement cost. Site improvement cost estimates are based on Marshall and Swift section 66, or its successor. The site improvements will be depreciated based on a 15 year economic life.

7. Determination of Land Market Value. Land values are determined through the sales comparison approach.

(i) Sales and listings of vacant land comparable to the subject property are collected and analyzed.

(ii) The appraiser adjusts the prices to some common unit of comparison, and then adjusts the prices for market conditions, location, physical characteristics, available utilities, zoning, highest and best use, and other relevant variations.

(iii) From this information the appraiser derives a unit value applicable to the NF. This unit value is then utilized to establish the market value of land as if it was vacant.

(iv) The maximum value of land used in determining FRV per diem rates will be $7,500.00 per licensed bed. Licensed beds used in this calculation will be total current NF licensed beds as of the April 1 prior to each July 1 rate setting.

(v) The lesser of the maximum land value or the appraised land value will be the allowable land value utilized for FRV calculation purposes.

8. Fair Rental Value Per Diem Calculation.

(i) The undepreciated and depreciated values of the NF provider's building(s), site improvements, and land (which is not depreciated) are determined through the appraisal process.

(ii) The depreciated values are subtracted from the undepreciated values to determine the total value of depreciation.

(iii) The calculated depreciation is then modified in the following manner to determine the total modified depreciation to be applied to the fair rental value system:

(I) NF providers with a weighted construction year age less than thirty (30) years will have calculated depreciation multiplied by fifty percent (50%) to determine their total modified depreciation to be applied to the fair rental value system.

(II) NF providers with a weighted construction year age of thirty (30) years or more will have their calculated depreciation multiplied by seventy percent (70%) to determine their total modified depreciation to be applied to the fair rental value system.

(iv) Total modified depreciation is subtracted from the undepreciated facility values (buildings, site improvements, and allowable land) and the value of NF provider fixed asset additions is added to the totals to determine total base facility value.

(v) The total base facility value is then compared to a maximum allowable base value threshold.

(vi) The maximum allowable base facility value threshold is established by multiplying the NF provider total licensed beds by $75,000. NF providers may increase the per licensed bed threshold of $75,000 based on their specific Medicaid private room resident day percentage. The Medicaid private room resident day percentage is calculated from base year cost report Medicaid private room resident days divided by total base year bed days available. Each NF provider is then compared to the thresholds established in the table below to determine any additions to the total per licensed bed value.

Quality Incentive Tier	Total Addition to Per Bed Value	Medicaid Private Room Resident Day Percentage Threshold
1	$3,000	10%
2	$1,500	5%
3	$0	Less than 5%

(vii) A moveable equipment value will be determined for each provider by multiplying total licensed beds by $7,500.

(viii) The lesser of the maximum allowable base facility value threshold or the actual total base facility value calculated above will be added to the total moveable equipment value to determine the total facility value.

(ix) The total facility value will be multiplied by a rental factor to establish an annual fair rental value. The rental factor will vary depending on the NF provider's quality tier. The rental factor will be established as follows:

(I) Quality Tier 1 - Eight and seven-tenths percent (8.70%)

(II) Quality Tier 2 - Eight and thirty-five hundredths percent (8.35%)

(III) Quality Tier 3 - Eight percent (8.00%)

(x) The annual fair rental value will be divided by the greater of total annualized actual resident days, or the minimum occupancy percentage threshold of eighty-five percent (85%) of annualized licensed beds capacity of the provider to establish the provider's fair rental value per diem.

(xi) The licensed beds utilized for fair rental value purposes will be recognized once annually. Total NF licensed beds will be determined using the current facility licensed beds as of the April 1 prior to each July 1 rate setting.

(xi) No depreciation or inflation factors will be applied to the appraisal totals in non-appraisal years.

9. Modification of Total Facility Value between Appraisal Periods.

(i) In order to continue to incentivize providers to perform capital improvement in non-appraisal years, TennCare will allow each NF provider to modify its total facility value on a semi-annual basis for capitalized fixed assets by meeting the requirements set out below in items (I) through (V). A facility may request a waiver of one or more of the requirements by submitting a written request to TennCare detailing the requirement(s) requested to be waived and the reasons supporting the request.

(I) The request for modification of total facility value is submitted at a minimum three (3) months prior to the July 1 or January 1 rate setting periods, and the modification is reported on the applicable form designated by TennCare.

(II) The total capitalized fixed assets are greater than $1,000 per licensed bed. Licensed bed totals will be determined as of the April 1 following the submission for modification.

(III) The cost must be capitalized according to CMS Publication 15-1, The Provider Reimbursement Manual - Part 1, and have been placed into service within the previous 12 months prior to the submission date of the modification request.

(IV) Capitalized assets must contain only fixed assets as defined by CMS Publication 15-1, The Provider Reimbursement Manual - Part 1, sections 104.2 and 104.3. Major movable equipment that has been capitalized must not be included for modification purposes.

(V) The capitalized assets must be reported to TennCare net of any grant monies or insurance proceeds associated with the purchasing of the asset.

(ii) Qualifying capitalized fixed asset expenditures will be added to the total facility base value portion of the FRV per diem calculation.

(iii) No inflation or depreciation will be applied to the qualifying items.

(iv) A NF statewide mandatory appraisal or voluntary reappraisal will eliminate all previously submitted and accepted fixed asset addition amounts from the FRV per diem calculation.

(v) Request for modification will not be accepted during a statewide mandatory appraisal year, as it is assumed the provider will have received credit for these items within the appraisal process, regardless of whether or not the provider actually submitted the information to TennCare's certified appraisal firm.

(d) Cost-Based Component. The NF provider's cost-based component is the sum of the provider's NF related real estate tax per diem calculation and the provider assessment cost-based reimbursement rate determined by TennCare. The cost-based component is determined as follows:

1. The NF provider's NF real estate tax cost reported on the Medicaid supplemental cost report is divided by the greater of actual base year cost report resident days or eighty-five percent (85%) of base year cost report licensed beds capacity of the provider. These costs shall be trended forward from the midpoint of the NF provider's base year cost reporting period to the midpoint of the rate year using the index factor.

2. The provider assessment cost-based reimbursement rate is determined by TennCare for only the Medicaid share of the provider assessment cost incurred by NF providers. NF providers will receive their cost-based reimbursement rate based on their specific provider class. The provider class will be determined for each NF provider from the cost report year information utilized in the calculation of the provider assessment. The provider class criteria and associated provider assessment cost-based reimbursement rate are determined as follows:

(i) NF providers with 50,000 or more annual Medicaid patient days. The reimbursement rate is calculated as the total assessment fee collected from this class of NF providers divided by total class resident days (all payer types).

(ii) NF providers that are designated as Continuing Care Retirement Center (CCRC), or NF providers with 50 or fewer licensed beds. The reimbursement rate is calculated as the total assessment fee collected from this class of NF providers divided by total class resident days (all payer types).

(iii) New NF providers. The reimbursement rate is calculated as $2,225 divided by the number of calendar days in the rate year.

(iv) All other Medicaid participating NF providers that do not meet the criteria for subparts (i), (ii) or (iii) above. The reimbursement rate is calculated as the total assessment fee collected from this class of NF providers divided by total class resident days (all payer types).

(e) Adjustments to the Reimbursement Rate.

1. Adjustments to the Medicaid daily rate may be made when changes occur that will eventually be recognized in updated cost report data, for example an increase in the federal minimum wage rate. These adjustments would be effective until the next rebasing of cost report data or until such time as the cost reports fully reflect the change. Adjustments to the rate will be made solely at the discretion of TennCare.

2. Budget Adjustment Factor (BAF). For the beginning of each state rate year effective July 1st TennCare will establish a NF program budget target and compare that to the annual expected Medicaid expenditures on nursing facility days for the upcoming rate year using established rate setting mechanics. TennCare will establish the BAF to adjust the annual expected Medicaid expenditures to meet the program's NF budget target. The BAF may be positive or negative and will be applied as an across the board percentage adjustment to all providers reimbursement rate components calculated according to this rule. The following is the detailed calculation of the BAF:

(i) Rate System Expected Cost

(I) Projected July 1 Provider Reimbursement Rates Calculated Using All Applicable Reimbursement Provisions Specified within this Chapter (prior to application of the BAF)

(II) X New Cost Report Medicaid Days (From Most Recent Comptroller Reviewed Cost Report data, or paid claims data if TennCare determines this data source to be more appropriate)

(III) = Expected Cost of NF Reimbursement System.

(ii) NF Budget Target

(I) Projected July 1 Provider Reimbursement Rates Calculated Using All Applicable Reimbursement Provisions Specified within this Chapter (prior to application of the BAF)

(II) X New Cost Report Medicaid Days (From Most Recent Comptroller Reviewed Cost Report data, or paid claims data if TennCare determines this data source to be more appropriate)

(III) = Target Cost of NF reimbursement System Prior to Adjustments

(IV) +/- State Budgetary Adjustments

(V) = Final Budget Target of NF Reimbursement System.

(iii) BAF Calculation

(I) NF Budget Target / Rate System Expected Cost = BAF % to apply to all provider rates.

(II) For each non-July 1 rate setting period, TennCare will recalculate the BAF to accommodate changes to the reimbursement system from new CMI, new facilities, legislative mandates, and other factors. The BAF is applied to all provider reimbursement rate components, and will be adjusted to ensure the state will continue to meet the NF budget target. The BAF adjustment may be positive or negative depending on circumstance.

3. For rate setting periods from July 1, 2018, to June 30, 2020, a phase-in of provider reimbursement rates will occur in an effort to ease the transition for providers to the case mix reimbursement system. The phase-in process will be calculated as follows:

(i) A NF provider's base reimbursement rate will be established as the Medicaid day weighted average of the Level 1 and Level 2 NF reimbursement rate in effect for each NF provider on July 1, 2017, as determined on January 1, 2018. The Medicaid day weighted average will also consider the NF provider's quarterly bridge payments for acuity and quality. The base reimbursement rate will be the starting point for all phase-in calculations.

(ii) For each July 1 rate setting, the current base reimbursement rates shall be trended forward from the midpoint of the previous rate year to the midpoint of the new rate year using the index factor.

(iii) The providers case mix system reimbursement rate will be determined according to the rate calculation procedures identified in this rule.

(iv) The reimbursement rate differential will be determined by subtracting the NF provider's base reimbursement rate from the applicable case mix system reimbursement rate.

(v) If the calculated reimbursement rate differential exceeds a positive or negative TennCare determined corridor amount, then a rate adjustment will be applied to the NF provider's case mix system reimbursement rate in an amount equal to the difference between the rate differential total and the corridor amount, in order to ensure the NF provider's reimbursement rate is not increased or decreased more than the corridor amount from the calculated base reimbursement rate.

(vi) Effective for rate periods beginning July 1, 2018, the corridor amount will be a floor of minus six dollars (-$6) from the base reimbursement rate, with the ceiling being determined at an amount above the base reimbursement rate necessary to achieve statewide budget neutrality.

(vii) Effective for rate periods beginning July 1, 2019, the corridor amount will be a floor of minus twelve dollars (-$12) from the base reimbursement rate, with the ceiling being determined at an amount above the base reimbursement rate necessary to achieve statewide budget neutrality.

(viii) Effective for rate periods beginning July 1, 2020, the case mix system reimbursement rate will no longer be subjected to a phase-in.

Notes

Tenn. Comp. R. & Regs. 1200-13-02-.06

(Formerly numbered as 1200-13-02-.05.) Original rule filed January 18, 1979; effective March 5, 1979. Amendment filed June 2, 1988; effective July 17, 1988. Repeal filed May 5, 2009; effective July 19, 2009. New rules filed May 1, 2018; effective July 30, 2018. Amendments filed January 28, 2021; effective April 28, 2021. Amendments filed July 6, 2022; effective 10/4/2022.

Authority: T.C.A. §§ 4-5-202, 14-1905, 71-5-105, 71-5-109, and 71-5-1413.