17-1739.2

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1739.2-1
HAWAII ADMINISTRATIVE RULES
TITLE 17
DEPARTMENT OF HUMAN SERVICES
SUBTITLE 12
MED-QUEST DIVISION
CHAPTER 1739.2
AUTHORIZATION, PAYMENT, AND CLAIMS IN THE FEE-FOR-
SERVICE MEDICAL ASSISTANCE PROGRAM - LONG TERM CARE
PROSPECTIVE PAYMENT SYSTEM
§17-1739.2-1 	Definitions
§17-1739.2-2 	General provisions purpose and
objective
§17-1739.2-3 	Reimbursement principles
§17-1739.2-4 	Services included in the basic PPS rate
§17-1739.2-5 	Classification of long-term care
providers into peer groups
§17-1739.2-6 	Basic PPS rate calculation methodology
§17-1739.2-7 	Data sources for rate calculation
§17-1739.2-8 	Calculation of component per diem costs
by reference to each provider's base
year cost report
§17-1739.2-9 	Application of component rate ceilings
§17-1739.2-10 	Treatment of new providers without
historical costs
§17-1739.2-11 	Treatment of new beds without
historical costs
§17-1739.2-12 	Transition of new providers and new
beds into the PPS
§17-1739.2-13 	Treatment of providers who provide
acuity level D care
§17-1739.2-14 	Application of inflation and other
adjustments to establish provider-
specific prospective payment rates
§17-1739.2-15 	Limitations on long-term care provider

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reimbursement
§17-1739.2-16 	Adjustments to base year cost
§17-1739.2-17 	Rebasing the basic PPS rates
§17-1739.2-18 	Adjustments to the basic PPS rates
§17-1739.2-19 	Administrative review - rate
reconsideration
§17-1739.2-20 	Cost report requirements
§17-1739.2-21 	Acuity based reimbursement system
§17-1739.2-22 	Audit requirements
§17-1739.2-23 	Bed-hold requirements for long-term
care
§17-1739.2-24 	Public process
Historical Note: 	This chapter is based substantially
upon chapter 17-1739, subchapter 2. 	[Eff 11/13/95, am
11/25/96; R 09/01/03 	]
§17-1739.2-1 	REPEALED. 	[R 09/30/13]
§17-1739.2-2 	General provisions - purpose and
objective. 	(a) 	The purpose of this chapter is to
establish a prospective payment reimbursement system
for long-term care facilities that complies with the
Social Security Act and the Code of Federal
Regulations. 	This chapter describes principles to be
followed by providers in making financial reports and
describes procedures to be followed by the department
in setting rates, making adjustments to those rates,
and auditing cost reports.
(b) 	Pursuant to the requirements of the Balanced
Budget Act of 1997, the objective of this chapter is
to establish rates for long-term care facilities in
conformity with applicable State and Federal laws and
regulations and include Medicaid provisions for the
Rural Hospital Flexibility Program.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59; 42 U.S.C.
§1396a(13)(A)) 	(Imp: 	42 C.F.R. §447.250(a))

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§17-1739.2-3 	Reimbursement principles. 	(a)
Except as noted herein, the Hawaii medical assistance
program shall reimburse providers based on the number
of days of care that the provider delivers to the
resident, the acuity level that is medically necessary
for each day of care, and the provider's PPS rate.
The provider shall receive payment at the level A rate
for residents who require care at acuity level A, at
the level B rate for residents who require care at
acuity level B, at the level C rate for residents who
require care at acuity level C, and at level D rate
for residents who require care at the acuity level D.
Any payments made by residents or other third parties
on behalf of residents shall be deducted from the
reimbursement paid to providers.
(b) 	Except as noted herein, the Medicaid program
shall pay for institutional long-term care services
through the use of a facility-specific prospective per
diem rate.
(c) 	The basic PPS rate shall be developed based
on each provider's historical costs (as reflected in
its base year cost report) and allocated to three
components, which are subject to component cost
ceilings.
(d) 	A proprietary provider shall receive the GET
and ROE adjustments to its basic PPS rate to account
for gross excise taxes and return on equity.
(e) 	Rates for acute facilities with federally
designated swing beds shall be established according
to 42 C.F.R. §447.280.
(f) 	Changes in ownership, management, control,
operation, and leasehold interests which result in
increased costs for the successor owner, management,
or leaseholder shall be recognized for reimbursement
purposes only to the following extent: 	Pursuant to
the provisions of Pub. L. No. 99-272, section
9509(a)(4)(C), the valuation of capital assets shall
not be increased (as measured from the date of
acquisition by the seller to the date of the change of
ownership), solely as a result of a change of
ownership, by more than the lesser of:
(1) 	One-half of the percentage increase (as

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measured over the same period of time, or,
if necessary, as extrapolated
retrospectively by the Secretary) in the
Dodge Construction Systems Costs for Nursing
Homes, applied in the aggregate with respect
to those facilities which have undergone a
change of ownership during the fiscal year;
or
(2) 	One-half of the percentage increase (as
measured over the same period of time) in
the Consumer Price Index for all urban
consumers (United States city average).
(g) 	The department shall pay the providers
separately for ancillary services based on a fee
schedule or through an ancillaries payment.
(h) 	Nursing facilities that have G&A or capital
costs below the median for their peer group are
rewarded with an incentive payment. 	A formula to
determine the G&A incentive adjustment is defined in
section 17-1739.2-1.
(i) 	The department may contract with providers
to provide acuity level D care to selected residents.
(j) 	The department shall reimburse level A and
level C services of a Medicare and Medicaid certified
CAH on a reasonable cost basis following Medicare
principles of reimbursement. 	Reimbursement for level
A and level C routine services provided in a long term
care distinct part by a CAH will be actual costs up to
two hundred per cent of each provider’s Medicaid
routine cost limit. 	However, for CAH providers whose
routine costs exceed the routine cost limit,
reimbursement of costs will be limited to two hundred
per cent of each provider's routine cost limit, and
only when a routine cost limit exception request has
been filed and only up to the amounts approved by the
State.
(k) 	Members of the public may obtain the data
and methodology used in establishing payment rates for
providers by following the procedures defined in the
Uniform Information Practices Act, chapter 92F, HRS.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59; 42 U.S.C.
§1396a) 	(Imp: 	42 C.F.R. §447.252)

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§17-1739.2-4 	Services included in the basic PPS
rate. 	(a) 	The reasonable and necessary costs of
providing the following items and services shall be
included in the basic PPS rate and shall not be
separately reimbursable, unless specifically excluded
under subsection (b):
(1) 	Room and board;
(2) 	Administration of medication and treatment
and all nursing services;
(3) 	Development, management, and evaluation of
the written patient care plan based on
physician orders that necessitate the
involvement of skilled technical or
professional personnel to meet the
recipient's care needs, promote recovery,
and ensure the recipient's health and
safety;
(4) 	Observation and assessment of the
recipient's unstable condition that requires
the skills and knowledge of skilled
technical or professional personnel to
identify and evaluate the recipient's need
for possible medical intervention,
modification of treatment, or both, to
stabilize the recipient's condition;
(5) 	Health education services, such as gait
training and training in the administration
of medications, provided by skilled
technical or professional personnel to teach
the recipient self-care;
(6) 	Provision of therapeutic diet and dietary
supplements as ordered by the attending
physician;
(7) 	Laundry services, including items of
recipient's washable personal clothing;
(8) 	Basic nursing and treatment supplies, such
as soap, skin lotion, alcohol, powder,
bandages, applicators, tongue depressors,
cotton balls, gauze, adhesive tape,
incontinent pads,
V-pads, thermometers, blood pressure
apparatus, plastic or rubber sheets, enema

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equipment, and douche equipment;
(9) 	Non-customized durable medical equipment and
supplies used by individual recipients, but
which are reusable. 	Examples include items
such as ice bags, hot water bottles,
urinals, bedpans, commodes, canes, crutches,
walkers, wheelchairs, and side-rail and
traction equipment;
(10) 	Activities of the patient's choice
(including religious activities) that are
designed to provide normal pursuits for
physical and psychosocial well being;
(11) 	Social services provided by qualified
personnel;
(12) 	Maintenance therapy; provided, however, that
only the costs that would have been incurred
if nursing staff had provided the
maintenance therapy will be included in
calculating the basic PPS rates;
(13) 	A review of the drug regimen of each
resident at least once a month, by a
licensed pharmacist, as required for a
nursing facility to participate in Medicaid.
(14) 	Provision of and payment for, through
contractual agreements with appropriate
skilled technical or professional personnel,
other medical and remedial services ordered
by the attending physician which are not
regularly provided by the provider. 	The
contractual agreement shall stipulate the
responsibilities, functions, objectives,
services fee, and other terms agreed to by
the provider and the person or entity that
contracts to provide the service; and
(15) 	Recurring, reasonable and incremental
costs incurred to comply with OBRA 87.
(b) 	The costs of providing the following items
and services shall be specifically excluded from
reimbursement under this chapter, and shall be billed
separately to the department by the providers:
(1) 	Physician services, except those of the
medical director and quality assurance or

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drug use review board, or all three;
(2) 	Drugs that are provided to residents in
accordance with Title XIX policy;
(3) 	Laboratory, x-ray, and EKG;
(4) 	Ambulance and any other transportation for
medical reasons that is not provided by the
provider and not included in the costs used
to calculate the basic PPS rates;
(5) 	Optical;
(6) 	Audiology;
(7) 	Podiatry;
(8) 	Physical therapy, excluding maintenance
therapy;
(9) 	Occupational therapy, excluding
maintenance therapy;
(10) Speech, hearing, and respiratory
therapies;
(11) Customized durable medical equipment and
such other equipment or items that are
designed to meet special needs of a resident
and are authorized by the department; and
(12) Charges for ancillary services are not
included in calculating the basic PPS rates
and shall be paid as follows:
(A) 	Providers that have the capability
shall bill the department separately
for ancillary services;
(B) 	The department shall make an
ancillaries payment to providers that
it designates as incapable of billing
for ancillary services on an itemized
basis;
(C) 	In order to receive an ancillaries
payment, the provider must make
assurances satisfactory to the
department that it is committed to
acquiring the ability to bill on an
itemized basis for ancillaries, and is
pursuing that goal with all deliberate
speed;
(D) 	As part of the FY 98 rebasing, the
department shall identify ancillary

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services for which a provider lacks the
ability to bill separately and
calculate a per diem amounts as an
ancillaries payment;
(E) 	No provider that receives an
ancillaries payment shall otherwise
bill the department separately on
behalf of a Title XIX resident for any
type of ancillary service that is
included in calculating its ancillaries
payment. 	A provider that receives an
ancillaries payment must also implement
procedures and assure the department
that no other person or entity will
bill separately for any type of
ancillary service that is included in
calculating the ancillaries payment;
(F) 	The provider shall provide to the
department upon request the progress
that it is making in its efforts to
acquire the ability to bill separately
for ancillary services. 	If and when
the provider acquires that ability,
then it shall promptly notify the
department in writing;
(G) 	Once the department determines that a
provider is capable of billing for some
or all ancillary services on an
itemized basis, then it shall provide
advance written notice to that provider
of a date upon which it will either
cease making or reduce the ancillaries
payment. 	If the provider acquires the
capability of billing for some (but not
all) ancillary services that were
included in calculating its ancillaries
payment, then the department shall
reduce the ancillaries payment
accordingly; and
(H) 	The department shall make available all
necessary data to ensure the
appropriate accounting for ancillary

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services.
(c) 	The personal funds of medical assistance
recipients may not be charged any costs for routine
personal hygiene items and services provided by the
provider. [Eff 09/01/03; am 05/05/05] 	(Auth: 	HRS
§346-59; 42 U.S.C. §1396a) 	(Imp: 	42 C.F.R. §447.252)
§17-1739.2-5 	Classification of long-term care
providers into peer groups. 	For the purpose of
establishing the basic PPS rates, providers and costs
shall be grouped into the following five mutually
exclusive classifications or peer groups:
(1) 	The costs of delivering care to acuity level
A patients in free-standing nursing
facilities;
(2) 	The costs of delivering care to acuity level
C patients in free-standing nursing
facilities;
(3) 	The costs of delivering care to acuity level
A patients in hospital-based nursing
facilities;
(4) 	The costs of delivering care to acuity level
C patients in hospital-based nursing
facilities; and
(5) 	The costs of delivering care to acuity level
B patients in an ICF/MR. 	[Eff 09/01/03 	]
(Auth: 	HRS §346-59; 42 U.S.C. §1396a(30))
(Imp: 	42 C.F.R. 	§447.252)
§17-1739.2-6 	Basic PPS rate calculation
methodology. 	Unless otherwise noted, the basic PPS
rates shall be calculated using the methodology set
forth in this chapter. 	[Eff 09/01/03 	] 	(Auth:
HRS §346-59; 42 U.S.C. §1396a) 	(Imp: 	42 C.F.R.
§447.252)
§17-1739.2-7 	Data sources for rate calculation.
(a) 	The department shall select the base year. 	The
base year selected shall be the most recent state

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fiscal year for which cost reports for the significant
majority of providers are available. 	The department
shall select the most recent year for which cost
reports for the significant majority of providers are
available but are not finally settled (i.e., the "as
filed" cost reports). 	The department shall identify
and apply an audit adjustment factor to the "as filed"
cost reports.
(b) 	Cost and census day data to be used in the
development of the basic PPS rates shall be abstracted
from the uniform cost report that is submitted to the
Medicaid agency by each provider. If the department
determines that additional data is required, then
additional cost and census data shall be solicited
from the provider. 	[Eff 09/01/03 	] 	(Auth: 	HRS
§346-59; 42 U.S.C. 	§1396a) 	(Imp: 	42 C.F.R.
§447.252)
§17-1739.2-8 	Calculation of component per diem
costs by reference to each provider's base year cost
report. 	(a) 	Cost data shall be abstracted from the
base year cost report and categorized into the
following three components:
(1) 	Direct nursing costs shall include all
allowable costs involved in the direct care
of the patient. 	Examples of such costs
include the following:
(A) 	Salaries for nurses' aides, registered
nurses, and licensed practical nurses
not involved in administration;
(B) 	The portion of employee fringe benefits
that are properly allocated to those
salaries;
(C) 	Physician-ordered maintenance therapy,
which is not billed directly to the
department. 	The cost of maintenance
therapy services provided by persons
other than nursing staff shall be
limited to an amount equivalent to the
cost if performed by nursing staff or a
physical therapy aide; and

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(D) 	Costs of nursing supplies and medical
supplies not separately billable to
patients.
(2) 	Capital costs shall include all allowable
capital related operating costs under
Medicare reasonable cost principles of
reimbursement, as defined in 42 CFR Chapter
413 of the long-term care facility or
distinct part unit. 	Examples of such costs
include the following:
(A) 	Rent;
(B) 	Interest;
(C) 	Depreciation;
(D) 	Equipment or lease rental;
(E) 	Property taxes; and
(F) 	Insurance relating to capital assets.
(3) 	G&A costs shall include all additional
allowable costs incurred in providing care
to long-term care patients. 	Examples of
such costs shall include the following:
(A) 	Dietary;
(B) 	Housekeeping;
(C) 	Laundry and linen;
(D) 	Operation of plant;
(E) 	Medical records;
(F) 	The costs of insuring against or paying
for malpractice, including insurance
premiums, attorneys' fees and
settlements of claims; and
(G) 	The costs of fringe benefits properly
allocated to employees involved in
general and administrative duties.
(b) 	Costs allocated to line items on the base
year cost report other than those components listed in
subsection (a) or to inappropriate line items, shall
be appropriately reclassified to the three components.
Reclassification shall be performed by the department
or its fiscal agent. 	If maintenance therapy is
identified as a separate line item on the provider’s
cost report, then the department shall include those
costs in calculating the PPS rates. 	The department
shall not, however, allow reclassification of

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maintenance therapy costs from the physical or
occupational therapy ancillary cost center to routine
costs.
(c) 	Costs of services specifically excluded from
the basic PPS rate under section 17-1739.2-4(b) shall
be deleted from the costs identified in subsection (a)
for purposes of the basic PPS rate calculation. 	This
process shall involve identifying line items from the
base year cost report or other financial records of
the provider pertaining to the excluded services and
subtracting these costs from the appropriate
component. 	If a provider's base year cost report does
not identify the costs of excluded services, then the
department shall so advise the provider and request
additional financial records. 	If the provider does
not respond with appropriate information, then the
department may delete from the provider's costs an
amount reasonably estimated to represent the costs of
such excluded services.
(d) 	Cost reports for facilities which began
operations after the beginning of the base year are
not included in calculating the statewide weighted
average per diem costs or used to calculate the
provider's basic PPS rate.
(e) 	Costs attributable to new beds that are
placed in service after the beginning of the base year
are also not included in calculating the statewide
weighted average per diem costs or used to calculate
the portion of the provider's basic PPS rate that
relates to the new beds.
(f) 	Where an existing facility has partial year
cost reports from more than one owner or operator, the
department may either select one of the partial year
cost reports or combine the cost reports from the
former and current owners or operators, or both. 	In
either case, the cost reports shall be adjusted to
approximate the costs that would have been incurred
for a twelve-month period.
(g) 	Gross excise taxes paid on receipts, NF
taxes, and any return on equity received by a for-
profit provider shall be deleted from the costs used
to calculate the basic PPS rate and shall be

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reimbursed separately.
(h) 	If a provider received a rate increase
pursuant to a rate reconsideration request in the base
year, and that increase is for a non-recurring cost,
then the department may delete from the base year
costs that are included in calculating the basic PPS
rates an amount equal to the costs that were used to
calculate the rate increase.
(i) 	If a provider received supplemental payments
from the state (with no federal matching funds) for
special services in the base year, then the department
shall adjust the provider's base year costs to remove
the differential cost of those special services in
calculating the provider's basic PPS rates.
(j) 	The resulting component costs shall be
standardized to remove the effects of varying fiscal
year ends. 	Costs are inflated from the end of each
provider's fiscal year to a common point in time.
Therefore, facilities with fiscal years that end
earlier receive a higher rate (more months) of
inflation.
(k) 	To recognize annual inflationary cost
increases, these standardized component costs shall be
inflated as described in section 17-1739.2-14.
(l) 	For nursing facility providers, the portions
of a provider's standardized and inflated costs
(except for the costs of maintenance therapy services
included in direct nursing costs and the costs of
complying with OBRA 87) that are in excess of the
routine cost limits (excluding the add-on to those
limits for OBRA 87 costs) for long-term care
facilities shall be deleted from the costs used to
calculate the basic PPS rates. 	The department shall
apply its estimate of what the federal routine cost
limits would have been for urban Honolulu facilities
to all nursing facilities.
(m) 	Costs that are not otherwise specifically
addressed in this chapter shall be included in base
year costs if they comply with HCFA Publication No. 15
standards.
(n) 	Legal expenses for the prosecution of claims
in federal or state court against the State of Hawaii

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1739.2-14
or the department incurred after September 30, 1988,
shall not be included as allowable costs in
determining the PPS per diem rates.
(o) 	A provider-specific per diem component cost
shall be calculated by dividing the cost associated
with each component identified in subsection (a) as
adjusted in subsection (b) by the number of long-term
care provider census days for each acuity level report
on the cost report and segregated in accordance with
the classifications in section 17-1739.2-5.
(p) 	For providers with both acuity levels A and
C residents in the base year, per diem component rates
shall be established as follows:
(1) 	Costs as reported on the base year cost
report shall be used for the computation of
the level A and level C per diem component
rates for providers which report costs for
acuity levels A and C residents separately;
(2) 	If a provider reports combined costs for
acuity levels A and C and does not segregate
its direct nursing costs based upon a case
mix method or study, then the department
shall allocate the provider's direct nursing
costs based upon the acuity ratio;
(3) 	Costs for the general and administrative
component shall be allocated equally on a
per diem basis between acuity levels A and
C, or at the provider's option, allocated by
the provider using the same case-mix index
developed for nursing costs;
(4) 	Capital costs shall be allocated equally
between Acuity levels A and C on a per diem
basis; and
(5) 	In no case shall a provider's acuity level A
per diem costs exceed its acuity level C per
diem costs.
(q) 	Notwithstanding the foregoing, if a
provider's base year cost report indicates that the
provider had insufficient experience at a particular
level of care, then its basic PPS rate for that level
of care shall be computed as follows:
(1) 	The G&A and capital cost components shall

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remain the same for both levels of care;
(2) 	The provider shall receive the substitute
direct nursing component for the level of
care for which it had insufficient
experience;
(3) 	If the provider allocated its costs between
levels A and C, then the costs and days
allocated to the level of care for which it
had insufficient experience shall not be
considered in calculating its basic PPS
rates;
(4) 	If the provider did not allocate its costs
between levels A and C, then no part of its
costs or days shall be allocated to the
level of care for which it had insufficient
experience in calculating its basic PPS
rates; and
(5) 	The calculation of the basic PPS rate for an
acuity level in which the provider has
insufficient experience shall also consider
the adjustments that have been incorporated
into the basic PPS rate for which sufficient
experience exists. 	[Eff 09/01/03 	]
(Auth: 	HRS §346-59; 42 U.S.C. §1396a)
(Imp: 	42 C.F.R. §447.252)
§17-1739.2-9 	Application of component rate
ceilings. 	(a) 	Each provider's per diem cost
components, as calculated in accordance with section
17-1739.2-8, shall be subject to component rate
ceilings in determining a provider's basic PPS rates.
(b) 	For each classification identified in
section 17-1739.2-5, component rate ceilings shall be
established as follows:
(1) 	For each provider, multiply the provider-
specific per diem component cost by the
provider's total census days in the base
period to determine total cost per component
by provider. 	Any per diem component cost
that is greater than two standard deviations
above or below the statewide mean of the

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component cost shall be excluded in
calculating the component rate ceilings;
(2) 	For each classification identified in
section 17-1739.2-5, sum the providers and
totals calculated in paragraph (1) to
determine the total cost per component for
each classification;
(3) 	Divide the classification component costs
calculated in paragraph (2) by the total
census days reported in the base year cost
reports for all providers in the
classification to determine an average cost
per component by provider classification;
provided, however, that if any per diem
costs are excluded because they deviate more
than two standard deviations from the
statewide mean, then the days associated
with those per diem costs shall also be
deleted in calculating the average cost per
component for the peer group; and
(4) 	Multiply the results of paragraph (3) above
by the following factors to determine the
cost component rate ceilings by each
provider classification:
(A) 	General and Administrative-1.1;
(B) 	Capital-1.1; and
(C) 	Direct Nursing-1.15.
(c) 	Generally, each per diem cost component of a
provider's basic PPS rates shall be the lesser of the
provider's per diem cost component rate calculated
under section 17-1739.2-8 or the per diem ceiling for
that component, except as noted in section
17-1739.2-19(f). 	In the case of the capital
component, no provider shall receive less than $1.50 a
day regardless of its cost per day.
(d) 	If a provider's rate includes a substitute
direct nursing component, then all three of the
component ceilings that apply to the acuity level for
which the rate is being calculated shall be applied.
(e) 	The component ceilings shall not be applied
in the following circumstances:
(1) 	To a grandfathered PPS rate;

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(2) 	To a grandfathered capital component if a
provider meets the provisions of section
17-1739.2-10;
(3) 	To grandfathered direct nursing and G&A
components; and
(4) 	To a new provider or provider with new beds
whose basic PPS rates are, in whole or in
part, calculated under the special
provisions defined in sections 17-1739.2-10
and 17-1739.2-11. 	That section defines the
circumstances in which either the component
ceilings or some other ceilings will be
applied.
(f) 	For the FY 98 rebasing only, the rate
calculation for all providers shall include the higher
of the rates calculated under the following two
options:
(1) 	Sections 17-1739.2-8 and 17-1739.2-9 and
increased by the GET and ROE adjustments and
capital and G&A incentives, if applicable;
or
(2) 	The grandfathered PPS rate, which excludes
OBRA 1987 payments, but includes rate
reconsideration;
(3) 	If the grandfathered PPS rate is the lower
of the two options, then the provider shall
receive the basic PPS rate and all other
appropriate adjustments that are defined in
this chapter.
(4) 	If the grandfathered PPS rate is the higher
of the two options, then the provider shall
also receive the following adjustments or
increases to that rate:
(A) 	For FY 98, one-half of the inflation
adjustment. 	For all subsequent PPS
years, the provider shall receive the
same inflation adjustments that are
received by all other providers.
(B) 	The GET adjustment, however, shall only
be applied to the incremental increase
to the total PPS rates that results
from the adjustments or increases noted

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1739.2-18
above. 	[Eff 09/01/03 	] 	(Auth:
HRS §346-59; 42 U.S.C. §1396a) 	(Imp:
42 C.F.R. §447.252)
§17-1739.2-10 	Treatment of new providers without
historical costs. 	(a) 	The following two types of
providers shall have their basic PPS rates calculated,
in whole or in part, under this section:
(1) 	A provider that began operating after the
base year, and therefore has no base year
cost report; or
(2) 	A provider that began operating a new
facility during the base year, and therefore
has no base year cost report that reflects a
full twelve months of operations.
(b) 	A provider that qualifies under one of the
above criteria shall submit its projected costs to the
department on forms and in the format defined by the
department.
(c) 	The qualifying provider shall receive as its
basic PPS rate the lesser of: its reasonable projected
allowable costs under Medicare reasonable cost
principles of reimbursement (as defined in 42 C.F.R.
Chapter 413 and modified by this chapter), or one
hundred twenty-five per cent of the sum of the
statewide weighted averages (including the inflation
adjustment) for its peer group in each acuity level.
(d) 	Commencing on January 1, 1996, the
qualifying provider shall receive as its basic PPS
rates the lesser of:
(1) 	Its reasonable projected allowable costs
under Medicare reasonable cost principles of
reimbursement (as defined in 42 C.F.R.
chapter 413 and as modified by this
chapter); or
(2) 	The sum of the component rate ceilings for
its peer group in each acuity level.
(3) 	Subsection (c) shall continue to be applied
under the following circumstances:
(A) 	Facilities that, as of December 31,
1995, qualify for and are receiving the

UNOFFICIAL
1739.2-19
new provider rate; or
(B) 	New LTC projects with certificate of
need (CON) approval (if applicable) as
required by the state health and
development agency (SHPDA), that
either:
(i) 	have started construction as of
December 31, 1995; or
(ii) have not started construction but
have a financial commitment as of
December 31, 1995 which contains a
penalty clause, in which case the
department may grant a provider’s
request for an exception based on
a review of the provider’s
financial situation.
(e) 	In PPS rate years following the calculation
of per diem rates under this section, the provider's
basic PPS rates shall receive the same inflation
adjustments as other providers. 	[Eff 09/01/03 	]
(Auth: 	HRS 	§346-59; 42 U.S.C. §1396a(13)) 	(Imp: 42
C.F.R. §447.252)
§17-1739.2-11 	Treatment of new beds without
historical costs. 	(a) 	A provider that has expanded
beds since or during the base year, and therefore has
no base year cost report reflecting a full twelve
months of operation with the new beds, shall have its
basic PPS rates calculated, in whole or in part, under
this section.
(b) 	Existing providers which add new beds during
or after the base year shall receive basic PPS rates
that "blend" the rates for the old and new beds.
(c) 	Basic PPS rates associated with the new beds
shall be calculated in accordance with sections
17-1739.2-10(c) and 17-1739.2-10(d). 	If applicable,
the GET adjustment shall be increased to cover the
higher gross excise taxes that will result.
(d) 	The result of subsection (c) above shall be
multiplied by the number of new beds.
(e) 	The basic PPS rates calculated on the

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1739.2-20
historical costs of the existing beds as defined in
sections 17-1739.2-7, 17-1739.2-8, and 17-1739.2-9
shall be multiplied by the number of existing beds.
(f) 	The sum of subsections (d) and (e) above
shall be divided by the total number of existing and
new beds.
(g) 	The rates calculated in subsection (f) above
shall be the provider's basic PPS rate for all beds.
(h) 	The computation shall be performed
separately for each acuity level. 	[Eff 09/01/03
] 	(Auth: 	HRS §346-59; 42 U.S.C. §1396a) 	(Imp: 	42
C.F.R. §447.252)
§17-1739.2-12 	Transition of new providers and
new beds into the PPS. 	(a) 	A new provider or a
provider with new beds shall eventually have its basic
PPS rates calculated in the same manner as other
providers. 	The transition will begin with the first
rebasing in which the new provider or provider with
new beds has a base year cost report that reflects a
full twelve months of operations.
(b) 	Unless the provider is eligible for the
grandfathered direct nursing and G&A components, the
G&A and direct nursing components of the provider's
basic PPS rates shall be calculated in the same manner
as existing providers. 	This calculation shall include
the application of the component ceilings.
(c) 	For new providers or providers that added
new beds, the capital component of the basic PPS rates
subject to the capital component ceilings shall be
determined as follows:
(1) 	The new provider or provider with new beds
shall receive the lesser of the following
two options as the capital component of its
basic PPS rates:
(A) 	Its facility-specific capital per diem
costs calculated in the same manner as
existing providers (excluding the
application of the capital component
ceiling); or
(B) 	Its grandfathered capital component

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1739.2-21
(excluding the application of the
capital component ceiling); provided,
however, that if the provider's
facility-specific capital per diem
amount after the application of the
capital component ceiling is higher
than its grandfathered capital
component, then the provider shall
receive the higher amount as the
capital component of its basic PPS
rates.
(2) 	In order to implement the preceding section,
the department shall identify the capital
component of the basic PPS rates for new
providers that existed immediately prior to
the implementation of the FY 98 rebasing.
That amount, which is the grandfathered
capital component, shall be calculated as
follows:
(A) 	The department shall compare the new
provider's projected per diem costs,
which were used to establish its
initial PPS rates, with its actual
capital per diem costs as indicated on
the base year cost report to determine
whether the projected capital costs
were reasonable. 	If the department
concludes that the projections were
unreasonable, then the department may
adjust the grandfathered capital
component accordingly;
(B) 	If the new provider's projected
aggregate costs in all three PPS rate
components exceeded one hundred twenty
five percent of the sum of the
statewide weighted averages, then the
grandfathered capital component shall
be reduced pro rata. 	That reduction
shall be accomplished by multiplying
the projected capital per diem by the
(C) 	capital component reduction factor; and
(D) 	After applying the capital component

UNOFFICIAL
1739.2-22
reduction factor, the new provider's
initial projected capital per diem
amount shall be increased by the
inflation factor to remove the effects
of varying fiscal year ends and to
inflate the per diem to the PPS year.
That amount shall be the capital
component of the new provider's basic
PPS rates.
(3) 	The department shall follow the same general
procedure in calculating the portion of the
capital component for new beds that was used
to calculate the blended capital component
for providers with new beds. 	That process
shall include the following steps:
(A) 	Identifying the grandfathered capital
component;
(B) 	If appropriate, applying the capital
component reduction factor;
(C) 	Determining whether the facility-
specific or grandfathered capital
component rate is appropriate; and
(D) 	Using the appropriate amount to
calculate a "blended" capital per diem
amount for the provider.
(d) 	A provider that added new beds and meets the
defined eligibility tests is entitled to have its
direct nursing and general administrative components
adjusted as defined below:
(1) 	In order to be eligible for the
grandfathered direct nursing and G&A
components, a provider must meet the
following requirements:
(A) 	The provider must have both old and new
beds;
(B) 	The provider must have a full twelve
months of historical costs for the new
beds reflected in the base year cost
report;
(C) 	Immediately prior to the effective date
of the FY 98 rebasing, the provider
must have had in effect a "blended"

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1739.2-23
basic PPS rate that included the costs
of both the old and new beds; and
(D) 	The provider's adjusted PPS rate for FY
98 (excluding the NF and OBRA 87
adjustments) is less than its total PPS
rate immediately prior to the rebasing
plus one-half the FY 98 inflation
adjustment.
(2) 	A provider who meets the eligibility tests
defined above shall receive the
grandfathered direct nursing and G&A
adjustment. 	As part of the calculation to
determine the amount of the adjustment, one-
half of the inflation adjustment for FY 98
is included. 	For FY 98 only, no other
inflation adjustment shall be included in
calculating the provider's adjusted PPS
rates. 	Thereafter, the provider shall
receive the full inflation adjustment in
calculating its adjusted PPS rates.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59;
42 U.S.C. §1396a) 	(Imp: 	42 C.F.R.
§447.252)
§17-1739.2-13 	Treatment of providers who provide
acuity level D care. 	(a) 	Providers that furnish
level D services after the base year shall submit
costs and days to the department on forms and in the
format defined by the department.
(b) Payment for acuity level D services will be
based on the facility’s reasonable projected allowable
costs under Medicare reasonable cost principles of
reimbursement (as defined in 42 C.F.R. chapter 413 and
as modified by this chapter). 	However, if a provider
has historical costs data of providing acuity level D
services under a state pilot program, the rate will be
based on the lesser of the pilot program or the
facility’s projected costs. 	[Eff 09/01/03 	]
(Auth: 	HRS §346-59) 	(Imp: 	42 C.F.R. §447.252)

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1739.2-24
§17-1739.2-14 	Application of inflation and other
adjustments to establish provider-specific prospective
payment rates. 	(a) 	Annual cost increases shall be
recognized by applying the inflation adjustment to the
provider’s historical costs or basic PPS rates, or
both. 	This provision shall not apply to Acuity Level
A and Acuity Level C facilities. 	The provisions of
section 17-1739.2-21 shall apply to Acuity Level A and
Acuity Level C facilities.
(b) For years in which the department performs a
rebasing, cost increases attributable to inflation
that have occurred since the base year shall be
recognized as follows:
(1) 	The basic PPS rates shall be
standardized to remove the effects of
varying fiscal year ends;
(2) 	The basic PPS rates shall be multiplied
by one plus the cumulative inflation
adjustment;
(3) 	For the purpose of determining the
inflation adjustment, the department
shall use the most current and accurate
data that is then available; and
(4) 	To ensure the prospective nature of the
system, the data shall not be
retroactively modified or adjusted.
(c) 	For years when the department does not
perform a rebasing, cost increases due to inflation
for the upcoming rate year shall be recognized as
follows:
(1) 	The department shall multiply the
adjusted PPS rate (excluding any rate
reconsideration increases) in effect on
June 30th of the immediately preceding
fiscal year by one plus the inflation
adjustment for the following state
fiscal year.
(2) 	To ensure the prospective nature of the
payment methodology, the inflation
adjustment shall not be retroactively
modified or adjusted.
[Eff 09/01/03 	] (Auth: 	HRS
§346-59; 42 U.S.C. §1396a) 	(Imp: 	42

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1739.2-25
C.F.R. §447.252)
§17-1739.2-15 	Limitations on long-term care
provider reimbursement. 	(a) 	Notwithstanding any
other provision of this chapter, aggregate payments to
each group of facilities (i.e., nursing facilities or
intermediate care facilities for the mentally
retarded) may not exceed the amount that can
reasonably be estimated would have been paid for those
services under Medicare reasonable cost principles of
reimbursement (as defined in 42 C.F.R. Chapter 413).
In addition, aggregate payments to each group of
state-operated providers (i.e., nursing facilities or
intermediate care facilities for the mentally
retarded) may not exceed the amount that can
reasonably be estimated would have been paid under
Medicare reasonable cost principles of reimbursement.
If a formal and final determination is made that
payments in the aggregate exceeded the upper limit and
federal financial participation is 	disallowed, the
department may recoup any payments made to providers
in excess of the upper limit.
(b) 	Notwithstanding any other provisions of this
chapter, payment for out-of-state long-term care
facility services shall be the lesser of the
facility's charge, the other state's Medicaid rate, or
the statewide weighted average Hawaii Medicaid rate
applicable to services provided by comparable Hawaii
providers.
(c) 	Notwithstanding any other provision of this
chapter, no payments shall be made for the improper
admission of or care for mentally ill or mentally
retarded individuals, as those terms are defined in
section 4211(e)(7)(G) of OBRA 87.
(d) 	Notwithstanding any other provisions of the
chapter, should federal participation for CAH
providers be disallowed, the department may recoup any
such payments made to these CAH facilities.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59; 42 U.S.C.
§1396a(13)) 	(Imp: 	42 C.F.R. §447.252)

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1739.2-26
§17-1739.2-16 	Adjustments to base year cost.
(a) 	Adjustments to a provider's base year cost report
that occur subsequent to a rebasing that utilizes that
base year cost report shall not result in any change
to the component rate ceilings for the provider's peer
group.
(b) 	Beginning with the FY 98 rebasing, the
following rules shall apply to changes to a base year
cost report that are made after a rebasing occurs. 	If
a provider's PPS rates are based upon a cost report
that is not finally settled, then the department shall
not adjust those rates based upon subsequent changes
to the base year cost report.
(c) 	The PPS rate calculation process is complex
and requires an extensive commitment of the
department's resources. 	Occasionally, the department
may uncover or have brought to its attention minor
data extraction or calculation errors that affect one
or a few providers. 	Unless the department reasonably
expects the correction of an error for one or a few
providers to have a significant impact on the
statewide weighted averages or component ceilings, the
department need not recalculate those averages or
ceilings to reflect a recalculation of the basic PPS
rates of the one or few providers. 	[Eff 09/01/03
] 	(Auth: HRS §346-59; 42 U.S.C. §1396a) 	(Imp: 	42
C.F.R. §447.252)
§17-1739.2-17 	Rebasing the basic PPS rates. 	The
department shall perform a rebasing following the
methodology but using updated cost report data as
described in section 17-1739.2-7 so that a provider
shall not have its basic PPS rates calculated by
reference to the same base year for more than eight
state fiscal years. 	[Eff 09/01/03 	] 	(Auth: 	HRS
§346-59; 42 U.S.C. §1396a) 	(Imp: 	42 C.F.R. §447.252)
§17-1739.2-18 	Adjustments to the basic PPS
rates. 	(a) 	Each proprietary provider is eligible to
receive the ROE adjustment. 	The ROE adjustment shall

UNOFFICIAL
1739.2-27
be calculated by identifying the appropriate amounts
from the base year cost report or other sources, and
dividing those amounts by the provider's base year
patient days to obtain a base year ROE per diem. 	The
base year ROE adjustments shall receive the same
increase to reflect inflation as all other base year
costs.
(b) 	All proprietary providers shall receive the
GET adjustment. 	The GET adjustment shall be paid by
increasing the basic PPS rates plus all applicable
adjustments by 1.04167.
(c) 	Nursing facilities who qualify shall receive
the capital incentive adjustment, the G&A incentive
adjustment, or both. 	Due to the limited number of
ICF/MRs, those facilities shall not be eligible to
receive either the Capital Incentive or G&A incentive
adjustments.
(d) 	Beginning with PPS rate year July 1, 1995 to
June 30, 1996, qualifying NFs shall receive the G&A
small facility adjustment.
(e) 	All facilities will have a per diem dental
allowance add-on added to the basic PPS rate. 	This
amount will be the same for all facilities, based on
historical paid dental claims data, as determined by
the department.
(f) 	Total PPS rates - A provider's basic PPS
rates shall equal the sum of its direct nursing, G&A
and capital per diem components for each acuity level
as calculated under this chapter. 	A new provider's
basic PPS rate shall be the per diem rate calculated
under section 17-1739.2-10. 	The basic PPS rate for a
provider with new beds shall be the per diem rate
calculated under section 17-1739.2-11.
(g) 	A provider's adjusted PPS rate shall be the
product of the following formula:
Basic PPS Rate
+ Capital Incentive Adjustment (if applicable)
+ G&A Incentive Adjustment (if applicable)
+ ROE Adjustment (if applicable)
+ G&A Small Facility Adjustment (if applicable)
Subtotal
x GET Adjustment (if applicable))
= Adjusted PPS Rate

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1739.2-28
(h) 	A provider's total PPS rate shall be the
adjusted PPS rate. 	[Eff 09/01/03; am 05/05/05]
(Auth: 	HRS §346-59; 42 U.S.C. §1396a (13) 	(Imp: 	42
C.F.R. §447.252)
§17-1739.2-19 	Administrative review - rate
reconsideration. 	(a) 	Providers shall have the right
to request a rate reconsideration for the following
conditions:
(1) 	A change in ownership, leaseholder, or
operator, without a change in licensure and
certification, which shall be grounds for
rate reconsideration only to the extent
authorized in section 17-1739.2-3(f);
(2) 	Providers who receive no rate increase or a
reduced rate due to implementation of the
acuity based reimbursement system will not
be able to file for a rate reconsideration
under this section for adjustments or
damages.
(3) 	Extraordinary circumstances including, but
not limited to, the following: acts of God;
changes in life and safety code
requirements; changes in licensure law,
rules, or regulation; significant changes in
patient mix or nature of service occurring
subsequent to the base year; errors by the
department in data extraction or calculation
of the per diem rates; subject to section
17-1739.2-16, inaccuracies or errors in the
base year cost report; or additional capital
costs resulting from renovation of a
facility that does not
result in additional beds but otherwise are
attributable to extraordinary circumstances.
Mere inflation of costs, absent
extraordinary circumstances, shall not be a
basis for rate reconsideration;
(4) 	To determine in advance the amount of rate
reconsideration relief, if any, that will be
granted to the provider for an anticipated
future cost in excess of $50,000, or $1,000

UNOFFICIAL
1739.2-29
per bed, whichever is less. 	The provider
must be otherwise ready to incur the cost,
and it must be attributable to a proposed
capital expenditure, change in service or
licensure or extraordinary circumstance.
Any determination by the department is
subject to the provider actually incurring
the anticipated cost. 	If the actual cost is
greater or lesser than the anticipated
future cost submitted by the provider, then
the department may adjust its rate
reconsideration relief determination either
on its own initiative or by supplemental
request of the provider. 	A provider that
fails to request an advance rate
reconsideration from the department assumes
the risk that no rate reconsideration relief
may ultimately be available; and
(5) 	If the department reduces the grandfathered
capital component of a new provider or a
provider with new beds due to an inaccurate
or unreasonable projection of capital costs
by the provider.
(b) 	Requests for reconsideration shall be
submitted in writing to the department and shall set
forth the reasons for the requests. 	Each request
shall be accompanied by sufficient documentation to
enable the department to act upon the request.
Documentation shall include the data necessary to
demonstrate that the circumstances for which
reconsideration is requested meet one or more of the
conditions specified in subsection (a). 	The requests
shall include the following:
(1) 	A presentation of data to demonstrate the
reasons for the provider's request for rate
reconsideration;
(2) 	If the reconsideration request is based on
changes in patient mix, the provider must
document the change using well-established
case-mix measures, accompanied by a showing
of cost impact; and
(3) 	A demonstration that the provider's costs

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1739.2-30
exceed the payments under this chapter.
(c) 	Except as otherwise provided in this
chapter, a request for reconsideration shall be
submitted within sixty days after the annual PPS rate
is provided to the provider by the department, or at
other times throughout the year if the department
determines that extraordinary circumstances occurred
or if the circumstances defined in subsection (a)(1)
occur.
(d) 	Pending the department's decision on a
request for rate reconsideration, the provider shall
be paid the PPS rate initially determined by the
department. 	If the reconsideration request is
granted, the resulting new PPS rate shall be effective
no earlier than the first day of the PPS rate year.
(e) 	A provider may appeal the department's
decision on the rate reconsideration request. 	The
appeal shall be filed in accordance with the
procedural requirements of chapter 17-1736, subchapter
3, of the Hawaii Administrative Rules.
(f) 	Except as noted below, rate increases
granted pursuant to the rate reconsideration process
shall not exceed an amount equal to the sum of the
component ceilings for a particular provider's
classification minus the provider's basic PPS rate:
(1) 	If a provider is either new or has added new
beds and its basic PPS rate is calculated
under sections 17-1739.2-10, 17-1739.2-11,
or 17-1739.2-12, then a rate increase shall
not exceed the difference between the sum of
the ceilings for the direct nursing and
general and administrative components and
the sum of the provider's facility-specific
components for those categories;
(2) 	If a provider is receiving the grandfathered
capital component, then the increase shall
not exceed the difference between the sum of
the direct nursing and G&A component
ceilings and sum of the provider's direct
nursing and G&A components;
(3) 	For providers that qualify for the G&A small
facility adjustment, the sum of the

UNOFFICIAL
1739.2-31
component ceiling is to reflect the increase
to the G&A component ceiling as defined in
section 17-1739.2-1.
(g) 	Rate reconsideration granted under this
section shall be effective for the remainder of the
PPS rate year. 	If the provider believes its
experience justifies continuation of the reconsidered
rate in subsequent fiscal years, then it shall submit
information to update the documentation specified in
subsection (b) within sixty days after receiving
notice of the provider's rate for each subsequent PPS
rate year. 	The department shall review the
documentation and notify the provider of its
determination as described in subsection (d). 	The
department may, at its discretion, grant a rate
adjustment that will be incorporated into the
provider's rate for one or more of the following PPS
rate years.
(h) 	The decision to grant a rate reconsideration
request is subject to the department's discretion. 	In
exercising that discretion, the department may
consider that a provider's adjusted PPS rate includes
a grandfathered component or incentive adjustment.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59; 42 U.S.C.
§1396a) 	(Imp: 42 C.F.R. §447.252)
§17-1739.2-20 	Cost report requirements. 	(a)
All providers shall maintain an accounting system that
identifies costs in conformance with accepted
accounting principles.
(b) 	Beginning with cost reporting periods on or
after January 1, 1996, participating providers shall
submit the following on an annual basis no later than
five months after the close of each provider's fiscal
year:
(1) 	Uniform cost report;
(2) 	Working trial balance;
(3) 	Provider cost report questionnaire;
(4) 	If the provider has its financial statement
audited, then a copy of that audited
financial statement;

UNOFFICIAL
1739.2-32
(5) 	Disclosure of appeal items included in the
cost report; and
(6) 	A listing of all Medicaid credit balances
showing information deemed necessary by the
State, and copies of provider policies and
procedures to review Medicaid credit
balances and refunds of overpayments to the
State.
(7) 	Such other cost reporting and financial
information as the department shall request.
This information may include segregation of
certain costs of delivering services to
acuity level C residents as opposed to
acuity level A residents.
(c) 	In subsequent years, the department may
require providers to classify their costs according to
the components as defined in section 17-1739.2-8 and
interpretive guidelines provided by the department and
submit that classification with its cost report.
Final classification of costs into appropriate
components shall be at the discretion of the
department.
(d) 	Claims payment for services will be
suspended one hundred per cent until an acceptable
cost report is received. 	A thirty-day maximum
extension shall be granted upon written request only
when a provider’s operations are significantly
adversely affected due to extraordinary circumstances
beyond the control of the provider, as provided in
Medicare guidelines.
(e) 	Each provider shall keep financial and
statistical records of the cost reporting year for at
least six years after submitting the cost report form
to the department and shall make such records
available upon request to authorized state or federal
representatives. 	[Eff 09/01/03 	] 	(Auth: 	HRS
§346-59; 42 U.S.C. §1396a(27)) 	(Imp: 	42 C.F.R.
§447.252)
§17-1739.2-21 	Acuity based reimbursement system.
(a) 	Beginning with the effective date of these rules,

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1739.2-33
the department will implement a phased in transition
approach from PPS to an acuity based 	reimbursement
system. 	The phased approach will be completed by
June 30, 2008.
(b) 	The transition rate methodology uses a price
based system with the following parameters:
(1) 	For the direct care rate component, the
component price is set at one hundred ten
per cent of the day-weighted median. 	The
rate that is calculated is subject to a case
mix adjustment based upon the change on each
facility’s overall case mix.
(2) 	For the administrative and general rate
component, the component price is set at one
hundred three per cent of the day-weighted
median. 	The rate is not subject to a case
mix adjustment.
(3) 	For the capital rate component, the
component price is set at the day-weighted
median. 	The rate is not subject to a case
mix adjustment.
(4) 	The Hawaii general excise tax is treated as
a pass-through.
The rate setting parameters will remain constant for
all future rate setting periods. 	The prices
calculated for direct care, administrative and
general, and capital will reflect prices that relate
to the rate period beginning July 1, 2002 and ending
June 30, 2003. 	The component prices will be updated
for each subsequent rate period by the inflation
adjustment for each period.
(c) 	Effective for rate periods starting the
effective date of these rules and July 1, 2004, the
annual cost increases shall be determined as follows:
(1) 	Calculate the blended Acuity A and Acuity C
rates for all eligible NF facilities using
the inflation adjustment.
(2) 	For each NF, compare the blended rates with
the inflation adjustment to the rates that
would have been reimbursed under the acuity
based reimbursement system.
(3) 	Apply the inflation adjustment only to the

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1739.2-34
NFs that would have received an increase
under the acuity based reimbursement system.
The rate as increased by the inflation
adjustment for the NF shall not exceed the
rate the provider would have been entitled
to under the acuity based reimbursement
system. Any NF not entitled to the inflation
adjustment shall receive no rate increase or
decrease.
(4) 	For all NFs that are not entitled to an
inflation adjustment, or whose rate is
limited by the rate determined by the acuity
based reimbursement system, calculate by
facility the annual amount associated with
the inflation adjustment based on the
Medicaid bed days from the latest available
cost report.
(5) 	The total amount of inflation adjustments
calculated in paragraph (4) shall be
distributed to NFs whose rates with
inflation adjustments are below the rate
calculated under the acuity based
reimbursement system. 	The total amount
shall be divided by the number of Medicaid
bed days for the NFs with rates below those
calculated by the acuity based reimbursement
system. A SNF and ICF bed day rate shall be
calculated.
(6) 	Each NF with rates below that calculated by
the acuity based reimbursement system shall
receive an additional adjustment to its
rate. 	The adjustment shall be applied to
each SNF and ICF bed day, provided the new
bed day rate does not exceed the rate that
would have been paid under the acuity based
reimbursement system.
(d) 	Effective for rate periods starting
July 1, 2005, July 1, 2006, and July 1, 2007, the
reimbursement methodology is adjusted each year as
follows:
(1) 	Effective July 1, 2005, seventy-five per
cent of the NF’s rates for SNF and ICF are

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1739.2-35
based on the previous year’s rate adjusted
for inflation. 	Twenty-five per cent of the
SNF and ICF rates are based on the acuity
based reimbursement system adjusted for
inflation.
(2) 	Effective July 1, 2006, fifty per cent of
the NF’s rates for SNF and ICF are based on
the previous year’s rates adjusted for
inflation. 	Fifty per cent of the SNF and
ICF rates are based on the acuity based
reimbursement system adjusted for inflation.
(3) 	Effective July 1, 2007, twenty-five per cent
of the NF’s rates for SNF and ICF are based
on the previous year’s rates adjusted for
inflation. 	Seventy-five per cent of the SNF
and ICF rates are based on the acuity based
reimbursement system adjusted for inflation.
(4) 	Effective July 1, 2008, one hundred per cent
of the NF’s rates are based on the acuity
based reimbursement system.
[Eff 09/01/03 	] 	(Auth: 	HRS §346-59;
42 C.F.R. 431.10) (Imp: 	HRS §346-14(b))
§17-1739.2-22 	Audit requirements. 	(a) 	The
department or its fiscal agent shall conduct
periodically either on-site or desk audits of cost
reports, including financial and statistical records
of a sample of participating providers in each
provider classification.
(b) 	Reports of the on-site or desk audit
findings shall be retained by the department or its
fiscal agent for a period of not less than three years
following the date of submission of the report.
(c) 	Each provider shall have the right to appeal
audit findings in accordance with the procedural
requirements of chapter 17-1736, subchapter 3, of the
Hawaii Administrative Rules. 	[Eff 09/01/03 	]
(Auth: 	HRS §346-59; 42 U.S.C. 	§ 1396a) 	(Imp: 	42
C.F.R. §447.252)

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1739.2-36
§17-1739.2-23 	Bed-hold requirements for long-
term care. 	A Medicaid recipient's bed may be reserved
during a recipient's temporary absence from the long-
term care facility if:
(1) 	The recipient's plan of care provides for
absences other than for hospitalization, and
is approved by the recipient's attending
physician;
(2) 	Any single episode during which a bed is
reserved does not exceed a period of three
consecutive days, unless a request for prior
approval is submitted to the program,
reviewed, and approved by its medical
consultant;
(3) 	The total number of days a recipient
reserves
a bed per calendar year does not exceed
twelve days; and
(4) 	A record is maintained in the recipient's
medical charts which accounts for the number
of days and specific dates for any year that
a recipient reserved a bed, subject to
periodic review by the department's
representatives. 	[Eff 09/01/03 	]
(Auth: 	HRS 	§346-59; 42 U.S.C. §1396a)
(Imp: 	42 C.F.R. §447.252)
§17-1739.2-24 	Public process. 	The State has in
place a public process, which complies with the
requirements of Section 1902(a)(13)(A) of the Social
Security Act. 	[Eff 09/01/03 	] 	(Auth: 	HRS §346-
59) 	(Imp: 	42 C.F.R. §447.205)
Exhibit A
Acuity Based Long Term Care Reimbursement Rates
(July 2003)
A new price based reimbursement system with three
components (direct care, administrative and capital)

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1739.2-37
will determine the rates paid to nursing facilities.
The direct care component will be acuity based
(adjusted for the average acuity of all of the
patients in each facility).
The case mix system is based on the thirty-four III
classification methodology similar to that which will
be employed to calculate the acuity based portion of
the long term care reimbursement rates. 	The system is
price-based, with periodic evaluation of the price
level of the rate components. 	An adjustment for case
mix will be applied periodically to the direct care
price component.
The acuity based portion of the reimbursement system
applies the average case mix of all of the patients in
each provider’s facility to the direct care price to
arrive at an acuity adjusted direct care component for
each provider. 	The resulting acuity adjusted direct
care component will be combined with the other price
components to establish the rate for that provider.
This rate will be adjusted periodically when the
acuity scores are compiled. 	The rate established will
be used for all patient days billed to Medicaid for
that period. 	After the initial phase in period there
will no longer be a distinction between level A and
level C acuity as the new thirty-four group RUG-III
system will replace the old classification system.
The standard price components for direct care, general
and administrative, and capital were derived from the
most current Medicare cost reports available on June
30, 2001 and inflated using from the midpoint of the
cost report period to the midpoint of the FY 03 rate
year using DRI. 	A statewide standard price for the
direct care component is calculated using the cost
reports for all facilities and their respective case
mix indices.
Calculation of the facility specific case mix index is
based on data from the Minimum Data Set (MDS), a
component of the federally mandated Resident
Assessment Instrument, to classify residents into one

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1739.2-38
of thirty-four mutually exclusive groups representing
the residents’ relative direct care resource
requirements. 	The average case mix index of all of
the residents of the facility at various points in
time (“snapshots”) is then applied to the direct care
component for each facility. 	The facility’s Medicaid
acuity based reimbursement rate is the direct care
component adjusted by the facility’s case mix index
for all residents, to which is added the general and
administrative component, and the capital component.
Parameters of the New Rate Setting Methodology
The new rate setting methodology uses a price based
system with the following parameters:
Rate Component 	Component
Price set
at
Myers & Stauffer
calculated
amount for rate
period ending
6/30/2003
Case –
Mix
Adjusted
Direct care 	110% of
Median
$102.19 	Yes
Administrative
& General
103% of
Median
$61.83 	No
Capital 	Median 	$13.04 	No
The price parameters listed above (110% of median for
direct care, 103% of the median for administrative and
general and the median for capital) will remain
constant for all future rate setting periods. 	The
prices listed above ($102.19 for direct care, $61.83
for administrative and general and $13.04 for capitol)
reflect prices that relate to the rate period
beginning July 1, 2002 and ending June 30, 2003.
Therefore, those prices will need to be updated for

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1739.2-39
each subsequent rate period before they can be used in
the rate setting process for those periods. 	They will
be updated by the full inflation factor for each
period, as determined by the inflation adjustment.