On July 29, 2011, the Centers for Medicare & Medicaid Services (CMS) released its final update to Medicare skilled nursing facility (SNF) prospective payment system (PPS) rates and policies for fiscal year (FY) 2012. Under the final rule, SNF rates would be reduced by 11.1% -- or $3.87 billion – compared to FY 2011 levels. The rate reduction results from adoption of a controversial plan to “recalibrate” SNF PPS rates to correct what CMS characterizes as an “unexpected spike” in payments in FY 2011, when CMS implemented the Resource Utilization Groups, version four (RUG-IV) patient classification system. Although CMS intended implementation of RUG-IV to be budget-neutral, CMS maintains that claims under the updated system show a significant increase in Medicare expenditures, primarily due to changes in therapy use under the new classification system. CMS declined to phase in the reductions over several years, as had been recommended by commenters, since it “would continue to reimburse facilities at levels that significantly exceed intended SNF payments.” Instead, CMS is applying a 12.6% recalibration reduction, which is partially offset by a 1.7% standard rate update (which represents a 2.7% market basket update reduced by a 1.0% percentage point “multifactor productivity adjustment” mandated by the Affordable Care Act, or ACA). CMS observes that despite the recalibration, payments in FY 2012 will be 3.4% higher than in 2010, before the adoption of RUG-IV. In addition to these payment policies, the final rule establishes a standard for group therapy, defined as therapy provided simultaneously to four patients, regardless of payer source, who are performing the same or similar activities and are supervised by a therapist or assistant who is not supervising any other individuals. The rule also adopts policies related to the reporting and allocation of group therapy minutes, and requires new reporting when changes occur in the intensity of therapy. CMS also has adopted other modifications to the schedule for completing the MDS 3.0 patient assessment instrument. In addition, CMS has revised its policy regarding supervision of therapy students to provide that a therapy student working in an SNF will no longer be required to be in the supervising therapist’s “line of sight.” Note that CMS is deferring the adoption of the proposed rule to implement an ACA provision requiring Medicare SNFs and Medicaid nursing facilities to disclose certain information regarding the ownership and organizational structure of their facilities; these requirements will be finalized in a separate rule early in CY 2012.  The official version of the rule will be published on August 8, 2011.