Medicare: Hospital inpatient prospective payment systems and 2005 FRY rates,

[Federal Register: May 18, 2004 (Volume 69, Number 96)]

[Proposed Rules]

[Page 28195-28817]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr18my04-19]

[[Page 28195]]

Part II

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Part 403, et al.

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates; Proposed Rule

[[Page 28196]]

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 403, 412, 413, 418, 460, 480, 482, 483, 485, and 489

[CMS-1428-P]

RIN 0938-AM80

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

AGENCY: Centers for Medicare and Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems; and to implement a number of changes made by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173), enacted on December 8, 2003. In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. These proposed changes would be applicable to discharges occurring on or after October 1, 2004. We also are setting forth proposed rate-of- increase limits as well as proposed policy changes for hospitals and hospital units excluded from the IPPS that are paid on a reasonable cost basis subject to these limits.

Among the policy changes that we are proposing to make are: Changes to the classification of cases to the diagnosis-related groups (DRGs); changes to the long-term care (LTC)-DRGs and relative weights; changes in the wage data, labor-related share of the wage index, and the geographic area designations used to compute the wage index; changes in the qualifying threshold criteria for and the proposed approval of new technologies and medical services for add-on payments; changes to the policies governing postacute care transfers; changes to payments to hospitals for the direct and indirect costs of graduate medical education; changes to the payment adjustment for disproportionate share rural hospitals; changes in requirements and payments to critical access hospitals (CAHs); changes to the disclosure of information requirements for Quality Improvement Organization (QIOs); and changes in the hospital conditions of participation for discharge planning and fire safety requirements for certain health care facilities.

DATES: Comments will be considered if received at the appropriate address, as provided below, no later than 5 p.m. on July 12, 2004.

ADDRESSES:

Submitting Comments: We welcome comments from the public on all issues set forth in this proposed rule to assist in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1428-P and the specific ``issue identifier'' that precedes the section on which you choose to comment.

Submit electronic comments to: http://www.accessdata.fda.gov/scripts/oc/dockets/commentdocket.cfm?AGENCY=CMS or www.regulations.gov.

Mail written comments (an original and three copies) to the following address only:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1428-P, P.O. Box 8010, Baltimore, MD 21244-1850.

If you prefer, you may deliver, by hand or courier, your written comments (an original and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for commenters who wish to retain proof of filing by stamping in and keeping an extra copy of the comments being filed.)

Comments mailed to those addresses specified as appropriate for courier delivery may be delayed and could be considered late.

Because of staffing and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

Inspection of Public Comments: All comments received before the close of the comment period will be available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. After the close of the comment period, CMS will post all electronic comments received before the close of the period on its public Web sites. Written comments received timely will be available for public inspection as they are received, generally beginning approximately 4 weeks after publication of a document, in room C5-12-08 of the Centers for Medicare & Medicaid Services, 7500 Security Blvd., Baltimore, MD, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. Please call (410) 786-7197 to schedule an appointment to view public comments.

For comments that relate to information collection requirements, mail a copy of comments to the following addresses:

Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Security and Standards Group, Office of Regulations Development and Issuances, Room C4-24-02, 7500 Security Boulevard, Baltimore, Maryland 21244-1850. Attn: Dawn Willinghan, CMS- 1428-P; and

Office of Information and Regulatory Affairs, Office of Management and Budget, Room 3001, New Executive Office Building, Washington, DC 20503, Attn: Brenda Aguilar, CMS Desk Officer.

FOR FURTHER INFORMATION CONTACT: Jim Hart, (410) 786-9520, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and Technology, Standardized Amounts, Hospital Geographic Reclassifications, Postacute Care Transfers, and Disproportionate Share Hospital Issues.

Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education, Critical Access Hospitals, and Long-Term Care (LTC)--DRGs Issues.

Mary Collins, (410) 786-3189, CAH Bed Limits and Distinct Part Unit Issues.

John Eppinger, (410) 786-4518, CAH Periodic Interim Payment Issues.

Maria Hammel, (410) 786-1775, Quality Improvement Organization Issues.

Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Project Issues.

Jeannie Miller, (410) 786-3164, Bloodborne Pathogens Standards, Hospital Conditions of Participation for Discharge Planning, and Fire Safety Requirements Issues.

Dr. Mark Krushat, (410) 786-6809, and Dr. Anita Bhatia, (410) 786- 7236 Quality Data for Annual Payment Update Issues.

SUPPLEMENTARY INFORMATION:

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Acronyms

ACGME--Accreditation Council on Graduate Medical Education AHIMA--American Health Information Management Association AHA--American Hospital Association AOA--American Osteopathic Association ASC--Ambulatory Surgical Center BBA--Balanced Budget Act of 1997, Public Law 105-33 BIPA--Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554 BLS--Bureau of Labor Statistics CAH--Critical access hospital CART--CMS Abstraction & Reporting Tool CBSAs--Core-Based Statistical Areas CC--Complication or comorbidity CMS--Centers for Medicare & Medicaid Services CMSA--Consolidated Metropolitan Statistical Area COBRA--Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272 CoP--Condition of Participation CPI--Consumer Price Index CRNA--Certified registered nurse anesthetist DRG--Diagnosis-related group DSH--Disproportionate share hospital ESRD--End-stage renal disease FDA--Food and Drug Administration FQHC--Federally qualified health center FSES--Fire Safety Evaluation System FTE--Full-time equivalent FY--Federal fiscal year GME--Graduate medical education HCRIS--Hospital Cost Report Information System HIPC--Health Information Policy Council HIPAA--Health Insurance Portability and Accountability Act of 1996, Public Law 104-191 HHA--Home health agency HPSA--Health Professions Shortage Area ICD-9-CM--International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS--International Classification of Diseases, Tenth Edition, Procedure Coding System ICF/MRs--Intermediate care facilities for the mentally retarded IME--Indirect medical education IPPS--Acute care hospital inpatient prospective payment system IPF--Inpatient psychiatric facility IRF--Inpatient rehabilitation facility JCAHO--Joint Commission on the Accreditation of Healthcare Organizations LAMA--Left Against Medical Advice LTC-DRG--Long-term care diagnosis-related group LTCH--Long-term care hospital LSC--Life Safety Code MCE--Medicare Code Editor MCO--Managed care organization MDC--Major diagnostic category MDH--Medicare-dependent small rural hospital MedPAC--Medicare Payment Advisory Commission MedPAR--Medicare Provider Analysis and Review File MEI--Medicare Economic Index MGCRB--Medicare Geographic Classification Review Board MMA--Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173 MPFS--Medicare Physician Fee Schedule MSA--Metropolitan Statistical Area NECMA--New England County Metropolitan Areas NCHS--National Center for Health Statistics NCVHS--National Committee on Vital and Health Statistics NFPA--National Fire Protection Association NPR--Notice of Program Reimbursement NQF--National Quality Forum NVHRI--National Voluntary Hospital Reporting Initiative OES--Occupational Employment Statistics OIG--Office of the Inspector General OMB--Executive Office of Management and Budget O.R.--Operating room OSCAR--Online Survey Certification and Reporting (System) OSHA--Occupational Safety and Health Act PACE--Programs of All-Inclusive Care for the Elderly PIP--Periodic interim payment PMS--Performance Measurement System PMSAs--Primary Metropolitan Statistical Areas PPS--Prospective payment system PRA--Per resident amount ProPAC--Prospective Payment Assessment Commission PRRB--Provider Reimbursement Review Board PS&R--Provider Statistical and Reimbursement System QIO--Utilization and Quality Control Quality Improvement Organization RHC--Rural health clinic RHQDAPU--Reporting Hospital Quality Data for Annual Payment Update RRC--Rural referral center SCH--Sole community hospital SNF--Skilled nursing facility SOCs--Standard occupational classifications SOM--State Operations Manual SSA--Social Security Administration SSI--Supplemental Security Income TEFRA--Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 UHDDS--Uniform Hospital Discharge Data Set

Table of Contents

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

2. Hospitals and Hospital Units Excluded from the IPPS

a. IRFs

b. LTCH

c. IPFs

3. Critical Access Hospitals (CAHs)

4. Payments for Graduate Medical Education (GME)

B. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

C. Major Contents of this Proposed Rule

1. Proposed Changes to the DRG Reclassifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index

3. Other Decisions and Proposed Changes to the PPS for Inpatient Operating and GME Costs

4. Proposed Changes to the PPS for Capital-Related Costs

5. Proposed Changes for Hospitals and Hospital Units Excluded from the IPPS

6. Proposed Changes to QIO Disclosure of Information Requirements

7. Proposed Changes Relating to Medicare Provider Agreements: Bloodborne Pathogens Standards, Hospital Conditions of Participation for Discharge Planning, and Fire Safety Requirements for Certain Health Care Facilities

8. Determining Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

9. Impact Analysis

10. Recommendation of Update Factor for Hospital Inpatient Operating Costs

11. Discussion of Medicare Payment Advisory Commission Recommendations II. Proposed Changes to DRG Classifications and Relative Weights

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A. Background

B. DRG Reclassification

1. General

2. MDC 1 (Diseases and Disorders of the Nervous System): Intracranial Hemorrhage and Stroke with Infarction

3. MDC 5 (Diseases and Disorders of the Circulatory System)

a. Heart Assist System Transplant

b. Cardiac Resynchronization Therapy and Heart Failure

c. Combination Cardiac Pacemaker Devices and Lead Codes

4. MDC 6 (Diseases and Disorders of the Digestive System): Artificial Anal Sphincter

5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)

a. 360 Spinal Fusion

b. Multiple Level Spinal Fusion

6. MDC 15 (Newborns and Other Neonates with Conditions Originating in the Perinatal Period)

7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders): Drug-Induced Dementia

8. MDC 22 (Burns): Burn Patients on Mechanical Ventilation

9. Pre-MDC: Tracheostomy

10. Medicare Code Editor (MCE) Changes

11. Surgical Hierarchies

12. Refinement of Complications and Comorbidities (CC) List

13. Review of Procedure Codes in DRGs 468, 476, and 477

a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs

b. Reassignment of Procedures among DRGs 468, 476, and 477

c. Adding Diagnosis or Procedure Codes to MDCs

14. Pancreatic Islet Cell Transplantation in Clinical Trials

15. Changes to the ICD-9-CM Coding System

16. Other Issues

a. Craniotomy Procedures

(1) Unruptured Cerebral Aneurysms

(2) GLIADEL[reg] Chemotherapy Wafers

(3) DRG 3 (Craniotomy Age 0-17)

b. Coronary Stent Procedures

c. Severe Sepsis

d. Implantable Cardiac Defibrillators

C. Recalibration of DRG Weights

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2005

1. Background

2. Proposed Changes in the LTC-DRG Classifications

a. Background

b. Patient Classifications into DRGs

3. Development of the Proposed FY 2005 LTC-DRG Relative Weights

a. General Overview of Development of the LTC-DRG Relative Weights

b. Data

c. Hospital-Specific Relative Value Methodology

d. Low-Volume LTC-DRGs

4. Steps for Determining the Proposed FY 2005 LTC-DRG Relative Weights

E. Proposed Add-On Payments for New Services and Technologies

1. Background

2. Other Provisions of Section 503 of Public Law 108-173

3. FY 2005 Status of Technology Approved for FY 2004 Add-On Payments

a. Drotrecogin Alfa (Activated)--Xigris[reg]

b. InFUSETM(Bone Morphogenetic Proteins (BMPs) for Spinal Fusions)

4. Reevaluation of FY 2004 Applications That Were Not Approved

5. FY 2005 Applicants for New Technology Add-On Payments

a. InFUSETMBone Graft (Bone Morphogenetic Proteins (BMPs) for Tibia Fractures)

b. Norian Skeletal Repair System(SRS)[reg] Bone Void Filler

c. InSync[reg] Defibrillator System (Cardiac Resynchronization Therapy with Defibrillation (CRT-D))

d. GliaSite[reg] Radiation Therapy System (RTS)

e. Natrecor[reg]--Human B-Type Natriuretic Peptide (hBNP)

f. Kinetra[reg] Implantable Neurostimulator for Deep Brain Stimulation

g. Intramedullary Skeletal Kinetic Distractor (ISKD)

h. ActiconTMNeosphincter

i. TandemHeartTMPercutaneous Left Ventricular Assist System

j. AquadexTMSystem 100 Fluid Removal System (System 100) III. Proposed Changes to the Hospital Wage Index

A. Background

B. Revised OMB Definitions for Geographical Statistical Areas

1. Current Labor Market Areas Based on MSAs

2. Core-Based Statistical Areas

3. Revised Labor Market Areas

a. New England MSAs

b. Metropolitan Divisions

c. Micropolitan Areas

d. Transition Period

C. Proposed Occupational Mix Adjustment to Proposed FY 2005 Index

1. Development of Data for the Occupational Mix Adjustment

2. Proposed Calculation of the Occupational Mix Adjustment Factor and the Proposed Occupational Mix Adjusted Wage Index

D. Worksheet S-3 Wage Data for the Proposed FY 2005 Wage Index Update

E. Verification of Worksheet S-3 Wage Data

F. Computation of the Unadjusted Wage Index

G. Computation of the Proposed FY 2005 Blended Wage Index

H. Proposed Revisions to the Wage Index Based on Hospital Redesignation

1. General

2. Effects of Reclassification

3. FY 2005 Issues

a. FY 2005 MGCRB Reclassifications

b. Implementation of New MSAs

c. Redesignations under Section 1886(d)(8)(B) of the Act

d. Reclassifications Under Section 508 of Public Law 108-173

e. Proposed Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

(1) Data

(2) Qualifying Counties

(3) The Adjustment

(4) Automatic Adjustments

4. Proposed FY 2005 Reclassifications

I. Process for Requests for Wage Index Data Corrections

1. Worksheet S-3 Wage Data

2. Occupational Mix Data

3. All FY 2005 Wage Index Data

J. Proposed Revision of the Labor-Related Share of the Wage Index IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

A. Postacute Care Transfer Payment Policy

1. Background

2. Proposed Changes to DRGs Subject to the Postacute Care Transfer Policy

B. Payments for Inpatient Care in Providers That Change Classification Status During a Patient Stay

C. Geographic Reclassifications--Definitions of Urban and Rural Areas

D. Equalization of Urban and Rural Standardized Amounts

E. Reporting of Hospital Quality Data for Annual Hospital Payment Update

1. Background

2. Requirements for Hospital Reporting of Quality Data

3. Submission of Hospital Data for FYs 2006 and 2007

4. Proposed Regulation Change

F. Proposed Revision of the Labor-Related Share of the Hospital Wage Index

G. Wage Index Adjustment for Commuting Patterns of Hospital Employees

H. Additional Payments for New Medical Services and Technology: Proposed Policy Changes

I. Rural Referral Centers

1. Case-Mix Index

2. Discharges

J. Additional Payments to Hospitals with High Percentage of End- Stage Renal Disease (ESRD) Discharges

K. Indirect Medical Education (IME) Adjustment

1. IME Adjustment Factor Formula Multipliers

2. IME Adjustment Formula Multiplier for Redistributed FTE Resident Slots

3. Technical Changes

L. Payment to Disproportionate Share Hospitals

1. Enhanced DSH Adjustment for Rural Hospitals and Urban Hospitals with Fewer Than 100 Beds

2. Proposals Relating to Available Beds and Patient Days for the DSH Adjustment

M. Payment Adjustments for Low-Volume Hospitals

N. Medicare Geographic Classification Review Board (MGCRB) Reclassifications

1. Background

2. Standardized Amount Reclassification Provisions

3. Reclassification of Urban Rural Referral Centers

4. Special Circumstances of Sole Community Hospitals (SCHs) in Low Population Density States

5. Possible Reclassifications for Dominant Hospitals and Hospitals in Single-Hospital MSAs

6. Special Circumstances of Hospitals in All-Urban States

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O. Payment for Direct Graduate Medical Education

1. Background

2. Reductions of and Increases in Hospitals' FTE Resident Caps for GME Payment Purposes under Section 422 of Public Law 108-173

a. General Background on Methodology for Determining the FTE Resident Count

b. Reduction of Hospitals' FTE Resident Caps under the Provisions of Section 422 of Public Law 108-173

c. Hospitals Subject to the FTE Resident Cap Reduction

d. Exemption from FTE Resident Cap Reduction for Certain Rural Hospitals

e. Determining the Estimated Number of FTE Resident Slots Available for Redistribution

f. Determining the Possible Reduction to a Hospital's FTE Resident Cap

(1) Reference Resident Level--General

(2) Expansion of an Existing Program

(3) Audits of the Reference Cost Reporting Periods

(4) Expansions Under Newly Approved Programs

(5) Affiliations

g. Criteria for Determining Hospitals That Will Receive Increases in Their FTE Resident Caps

h. Application Process for the Increases in Hospitals' FTE Resident Caps

i. CMS Evaluation of Applications for Increases in FTE Resident Caps

j. Application of Locality-Adjusted National Average Per Resident Amount (PRA)

k. Application of Section 422 to Hospitals That Participate in Demonstration Projects or Voluntary Reduction Programs

l. Application of Section 422 to Hospitals That File Low Utilization Medicare Cost Reports

m. Specific Solicitation for Public Comment on the Proposals

n. CMS Evaluation Form

o. CMS Central and CMS Regional Office Mailing Addresses for Applications for Increases in FTE Resident Caps

3. Direct GME Initial Residency Period

a. Background

b. Direct GME Initial Residency Period Limitation: Simultaneous Match Issue

c. Exception to Initial Residency Period for Geriatric Residency or Fellowship Programs

4. Per Resident Amount: Extension of Update Limitation on High- Cost Programs

5. Residents Training in Nonhospital Settings

a. Background

b. Moratorium on Disallowances of Allopathic or Osteopathic Family Practice Residents Training Time in Nonhospital Settings

(1) Cost Reports That Are Settled Between January 1, 2004 and December 31, 2004

(2) Family Practice Residents That Are Training in Nonhospital Settings Between January 1, 2004 and December 31, 2004

c. Requirements for Written Agreements for Residency Training in Nonhospital Settings

P. Rural Community Hospital Demonstration Program

Q. Special Circumstances of Hospitals Facing High Malpractice Insurance Rate Increases V. Proposed Changes to the PPS for Capital-Related Costs

A. Background

B. Payments to Hospitals Located in Puerto Rico

C. Exception Payment for Extraordinary Circumstances

A. Treatment of Hospitals Previously Reclassified for the Operating PPS

E. Definition of Large Urban Area Standardized Amounts VI. Proposed Changes for Hospitals and Hospital Units Excluded from the IPPS

A. Payments to Excluded Hospitals and Hospital Units

1. Payments to Existing Excluded Hospitals and Hospital Units

2. Updated Caps for New Excluded Hospitals and Units

3. Implementation of a PPS for IRFs

4. Implementation of a PPS for LTCHs

5. Development of a PPS for IPFs

6. Technical Changes Related to Establishment of Payments for Excluded Hospitals

B. Criteria for Classification of Hospitals-Within-Hospitals

C. Critical Access Hospitals (CAHs)

1. Background

2. Payment Amounts for Inpatient CAH Services

3. Condition for Application of Special Professional Service Payment Adjustment

4. Coverage of Costs for Certain Emergency Room On-Call Providers

5. Authorization of Periodic Interim Payments for CAHs

6. Revision of the Bed Limit for CAHs

7. Authority to Establish Psychiatric and Rehabilitation Distinct Part Units of CAHs

8. Waiver Authority for Designation of a CAH as a Necessary Provider

9. Payment for Clinical Diagnostic Laboratory Tests

10. Proposed Technical Changes in Part 489 VII. Proposed Changes to the Disclosure of Information Requirements for Quality Improvement Organizations (QIOs)

A. Background

B. Provisions of the Proposed Regulations

C. Technical Changes VIII. Proposed Policy Changes Relating to Medicare Provider Agreements for Compliance with Bloodborne Pathogens Standards, Hospital Conditions of Participation for Discharge Planning, and Fire Safety Requirements for Certain Health Care Facilities

A. Conditions of Participation for Discharge Planning

1. Background

2. Implementation

B. Compliance with Bloodborne Pathogens Standards

C. Fire Safety Requirements for Certain Health Care Facilities

1. Background

2. Proposed Changes to the Regulations IX. MedPAC Recommendations X. Other Required Information

A. Requests for Data from the Public

1. CMS Wage Data

2. CMS Hospital Wage Indices (Formerly: Urban and Rural Wage Index Values Only)

3. PPS SSA/FIPS MSA State and County Crosswalk

4. Reclassified Hospitals New Wage Index (Formerly: Reclassified Hospitals by Provider Only)

5. PPS-IV to PPS-XII Minimum Data Set

6. PPS-IX to PPS-XII Capital Data Set

7. PPS-XIII to PPS-XIX Hospital Data Set

8. Provider-Specific File

9. CMS Medicare Case-Mix Index File

10. DRG Relative Weights (Formerly Table 5 DRG)

11. PPS Payment Impact File

12. AOR/BOR Tables

13. Prospective Payment System (PPS) Standardizing File

B. Collection of Information Requirements

C. Public Comments

Regulation Text

Addendum--Proposed Schedule of Standardized Amounts Effective with Discharges Occurring On or After October 1, 2004 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2004

Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/ Nonlabor (71.1 Percent Labor Share/28.9 Percent Nonlabor Share If Wage Index Is Greater Than 1) Table 1B--National Adjusted Operating Standardized Amounts, Labor/ Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1) Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor Table 1D--Capital Standard Federal Payment Rate Table 2--Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2003; Hospital Average Hourly Wage for Federal Fiscal Years 2003 (1999 Wage Data), 2004 (2000 Wage Data), and 2005 (2001 Wage Data) Wage Indexes and 3-Year Average of Hospital Average Hourly Wages Table 3A--3-Year Average Hourly Wage for Urban Areas Table 3B--3-Year Average Hourly Wage for Rural Areas Table 4A--Wage Index and Capital Geographic Adjustment Factor for Urban Areas Table 4B--Wage Index and Capital Geographic Adjustment Factor for Rural Areas Table 4C--Wage Index and Capital Geographic Adjustment Factor for Hospitals That Are Reclassified Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment Factor Table 4G--Pre-Reclassified Wage Index for Urban Areas

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Table 4H--Pre-Reclassified Wage Index for Rural Areas Table 4J--Wage Index Adjustment for Commuting Hospital Employees (Out-Migration) In Qualifying Counties--FY 2005 Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay (LOS) Table 6A--New Diagnosis Codes Table 6B--New Procedure Codes Table 6C--Invalid Diagnosis Codes Table 6D--Invalid Procedure Codes Table 6E--Revised Diagnosis Code Titles Table 6F--Revised Procedure Code Titles Table 6G--Additions to the CC Exclusions List Table 6H--Deletions from the CC Exclusions List Table 7A--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2003 MedPAR Update December 2003 GROUPER V21.0 Table 7B--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2003 MedPAR Update December 2003 GROUPER V22.0 Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban and Rural Hospitals (Case-Weighted) Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case- Weighted) Table 9A--Hospital Reclassifications and Redesignations by Individual Hospital--FY 2004 Table 9B--Hospital Reclassifications and Redesignation by Individual Hospital Under Section 508 of Public Law 108-173--FY 2004 Table 10--Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)--March 2004 Table 11--Proposed FY 2005 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and 5/6ths of the Geometric Average Length of Stay Appendix A--Regulatory Impact Analysis Appendix B--Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis- related groups (DRGs).

The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located; and if the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of- living adjustment factor. This base payment rate is multiplied by the DRG relative weight.

If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations.

If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS (known as the indirect medical education (IME) adjustment). This percentage varies, depending on the ratio of residents to beds.

Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add- on payment, it would be inadequately paid under the regular DRG payment.

The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare- dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries (although MDHs receive only 50 percent of the difference between the IPPS rate and their hospital-specific rates if the hospital-specific rate is higher than the IPPS rate).

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services ``in accordance with a prospective payment system established by the Secretary.'' The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital PPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Similar adjustments are also made for IME and DSH as under the operating IPPS. In addition, hospitals may receive an outlier payment for those cases that have unusually high costs.

The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR Part 412, Subparts A through M. 2. Hospitals and Hospital Units Excluded From the IPPS

Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: psychiatric hospitals and units; rehabilitation hospitals and units; long-term care hospitals (LTCHs); children's hospitals; and cancer hospitals. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106- 554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), and LTCHs, as discussed below. Children's hospitals and cancer hospitals continue to be paid under reasonable cost-based reimbursement.

The existing regulations governing payments to excluded hospitals and

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hospital units are located in 42 CFR Parts 412 and 413. a. IRFs

Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and prospective payments for cost reporting periods beginning January 1, 2002 through September 30, 2002, to payment on a full prospective payment system basis effective for cost reporting periods beginning on or after October 1, 2002 (66 FR 41316, August 7, 2001; 67 FR 49982, August 1, 2002; and 68 FR 45674, August 1, 2003). The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P. b. LTCHs

Under the authority of sections 123(a) and (c) of Public Law 106- 113 and section 307(b)(1) of Public Law 106-554, LTCHs are being transitioned from being paid for inpatient hospital services based on a blend of reasonable cost-based reimbursement under section 1886(b) of the Act to fully Federal prospective rates during a 5-year period, beginning with cost reporting periods that start on or after October 1, 2002. For cost reporting periods beginning on or after October 1, 2006, LTCHs will be paid under the fully Federal prospective payment rate (the June 6, 2003 LTCH PPS final rule (68 FR 34122)). LTCHs may elect to be paid based on full PPS payments instead of a blended payment in any year during the 5-year transition period. The existing regulations governing payment under the LTCH PPS are located in 42 CFR part 412, Subpart O. c. IPFs

Sections 124(a) and (c) of Public Law 106-113 provide for the development of a per diem PPS for payment for inpatient hospital services furnished in IPFs under the Medicare program, effective for cost reporting periods beginning on or after October 1, 2002. This system must include an adequate patient classification system that reflects the differences in patient resource use and costs among these hospitals and maintains budget neutrality. We published a proposed rule to implement the PPS for IPFs on November 28, 2003 (68 FR 66920). The November 28, 2003 proposed rule proposed an April 1, 2004 effective date for purposes of ratesetting and calculating impacts. However, the proposed rule was unusually complex because it proposed a completely new payment system for inpatient hospital services furnished by psychiatric hospitals and units and the public requested additional time to comment. As a result, we extended the comment period for the proposed rule. Thus, we are still in the process of analyzing public comments and developing a final rule for publication. Consequently, an April 1, 2004 effective date for the IPF PPS is no longer possible. 3. Critical Access Hospitals (CAHs)

Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services on a reasonable cost basis. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415. 4. Payments for Graduate Medical Education (GME)

Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act; the amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR part 413.

On August 1, 2003, we published a final rule in the Federal Register (68 FR 45346) that implemented changes to the Medicare hospital inpatient prospective payment systems for both operating cost and capital-related costs, as well as changes addressing payments for excluded hospitals and payments for GME costs. Generally these changes were effective for discharges occurring on or after October 1, 2003. On October 6, 2003, we published a document in the Federal Register (68 FR 57731) that corrected technical errors made in the August 1, 2003 final rule.

B. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Public Law 108-173, was enacted. Public Law 108-173 made a number of changes to the Act relating to prospective payments to hospitals for inpatient services, payments to excluded hospitals and units, and payments to CAHs. This proposed rule would implement amendments made by the following sections of Public Law 108-173:

Section 401, which provides that, for discharges occurring in a fiscal year beginning with FY 2004 under the IPPS, Medicare will pay hospitals in rural and small urban areas in the 50 States using the standardized amount (computed for the previous fiscal year) that would be used to pay hospitals in large urban areas (or beginning with FY 2005, for all hospitals in the previous fiscal year), increased by the appropriate market basket percentage increase. One standardized amount for hospitals in Puerto Rico would be established that would equal the amount for hospitals in large urban areas in Puerto Rico.

Section 402, which provides that for discharges occurring on or after April 1, 2004, the DSH payment adjustment for a hospital that is not a large urban or large rural hospital will be calculated using the current DSH adjustment formula for large urban hospitals, subject to a limit of 12 percent for any of these hospitals that are not rural referral centers. (There is no limit on the DSH payment percentage for rural referral centers.)

Section 403, which provides that, for discharges occurring on or after October 1, 2004, a hospital's labor-related share to which the wage index is applied will be decreased to 62 percent of the standardized amount when such a change will result in higher total payments to the hospital. This provision also applies to the labor- related share of the standardized amount for hospitals in Puerto Rico.

Section 405(a), which provides that inpatient, outpatient, and covered SNF services provided by a CAH will be reimbursed at 101 percent of reasonable costs for services furnished to Medicare beneficiaries. This provision is applicable to payments for services furnished during cost reporting periods beginning on or after January 1, 2004.

Section 405(b), which expands coverage of the costs associated with covered Medicare services furnished by on-call emergency room providers in CAHs to include services furnished by physician assistants, nurse practitioners, and clinical nurse specialists, effective for costs incurred for services furnished on or after January 1, 2005.

Section 405(c), which provides that eligible CAHs may receive payments for their inpatient services on a periodic interim payment (PIP) basis, effective

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with payments made on or after July 1, 2004.

Section 405(d), which allows CAHs to elect to receive payments under the optional payment method (a payment encompassing both inpatient CAH services and physician and practitioner services to outpatients) even if some practitioners do not reassign to the CAH their rights to bill for professional services to CAH outpatients. This provision applies to cost reporting periods occurring on or after July 1, 2004, except that in the case of a CAH that made an election of the optional payment method before November 1, 2003, the provision applies to cost reporting periods beginning on or after July 1, 2001.

Section 405(e), which increases the limit on the number of beds that a CAH may have for acute care from 15 to 25 beds. This provision applies to CAH designations made before, on, or after January 1, 2004. Any election made in accordance to the regulations promulgated to implement this provision will only apply prospectively.

Section 405(g), which provides that a CAH may establish psychiatric and rehabilitation distinct part units and limits the number of beds in each unit to no more than 10. Services in these distinct part units will be paid under the reasonable cost-based methodology. This provision applies to cost reporting periods beginning on or after October 1, 2004.

Section 405(h), which terminates a State's authority to waive the location requirement for a CAH by designating the CAH as the necessary provider, effective January 1, 2006. A grandfathering provision is included for CAHs that are certified as necessary providers prior to January 1, 2006, which allows any CAH that is designated as a necessary provider in its State's rural health plan prior to January 1, 2006, to maintain its necessary provider designation.

Section 406, which provides for a graduated adjustment to the inpatient prospective payment rates to account for the higher costs associated with hospitals described under section 1886(d) of the Act that are located more than 25 road miles from another subsection (d) hospital and that have less than 800 discharges during a fiscal year, effective for discharges occurring on or after October 1, 2004. The increase in these payments may not be greater than 25 percent and the determination of the percentage payment increase is not subject to administrative or judicial review.

Section 410A, which authorizes the Secretary to establish a demonstration program to test the feasibility and advisability of the establishment of rural community hospitals to furnish covered inpatient hospital services to Medicare beneficiaries. The Secretary must select up to 15 rural community hospitals to participate in the demonstration. The Secretary must implement the demonstration program not later than January 1, 2005, but may not implement the program before October 1, 2004.

Section 422(a), which provides that a hospital's GME FTE resident cap will be reduced, and the reduction will be redistributed among other hospitals if the hospital's resident count is less than its resident cap (rural hospitals with less than 250 acute care inpatient beds will be exempt) in a particular reference period. This provision is effective for cost reporting periods occurring on or after July 1, 2005.

Section 422(b), which specifies that the formula multiplier for the IME adjustment is 0.66 for FTE residents attributable to redistributed resident positions, effective for discharges occurring on or after July 1, 2005.

Section 501, which provides the update factor for payments for the hospital inpatient operating costs for FY 2005 and subsequent fiscal years is the market basket percentage increase. For FYs 2005 through 2007, the update factor will be the market basket percentage increase minus 0.4 percentage points for any ``subsection (d) hospital'' that does not submit hospital quality data on 10 measures as specified by the Secretary.

Section 502, which modifies the IME formula multiplier to be used in the calculation of the IME adjustment for midway through FY 2004 and provides a new schedule of formula multipliers for FYs 2005 and thereafter.

Section 503(a), which includes a requirement for updating the ICD- 9-CM diagnosis and procedure codes in April 1 of each year, in addition to the current process of annual updates on October 1 of each year. This change will not affect Medicare payments or DRG classifications until the fiscal year that begins after that date.

Section 503(b), which provides for changes to the threshold amount for determining eligibility of new technologies or medical services for add-on payments; provides for public input on applications for new technology or medical service add-on payments prior to the publication of a proposed rule; provides for reconsideration of applications received for FY 2004 that were denied; provides for preference in the use of DRG adjustments; and provides that new technology or medical service payments shall not be budget neutral. This provision is effective for fiscal years beginning in FY 2005.

Section 504, which increases the national portion of the operating PPS payment rate for hospitals in Puerto Rico from 50 percent of the Federal rate to 75 percent of the Federal rate and decreases the Puerto Rico portion of the operating PPS payment from 50 percent to 25 percent, effective for discharges occurring on or after October 1, 2004. For the period of April 1, 2004 through September 30, 2004, payments for hospitals in Puerto Rico will be based on 62.5 percent Federal rate and 37.5 percent of the Puerto Rico rate.

Section 505, which provides for an increase in a hospital's wage index value to take into consideration a commuter wage adjustment for hospital employees who reside in a county and work in a different area with a higher wage index.

Section 508, which provides for the establishment of a one-time process for a hospital to appeal its geographic classification for wage index purposes. By law, any reclassification resulting from this one- time appeal applies for a 3-year period to discharges occurring on or after April 1, 2004.

Section 711, which freezes the annual CPI-U updates to hospital- specific per resident amount (PRAs) for GME payments for those PRAs that exceed the ceiling, effective for cost reporting periods beginning FY 2004 through FY 2013.

Section 712, which provides for an exception to the initial residency period for purposes of direct GME payments for geriatric residency or fellowship programs that allows the 2 years spent in an approved geriatric program to be counted as part of the resident's initial training period, but not to count against any limitation on the initial residency period. This provision is effective for cost reporting periods beginning on or after October 1, 2003.

Section 713, which, during a 1-year moratorium period of January 1, 2004 through December 31, 2004, allows hospitals to count allopathic or osteopathic family practice residents training in nonhospital settings for IME and direct GME purposes, without regard to the financial arrangement between the hospital and the teaching physician practicing in the nonhospital setting to which the resident is assigned.

Section 733, which provides for the Medicare payment of routine costs, as well as costs relating to the transplantation and appropriate related items and services, for Medicare beneficiaries participating in a clinical trial involving pancreatic islet cell

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transplantation, beginning no earlier than October 1, 2004.

Section 926, which requires the Secretary to make information publicly available that enables hospital discharge planners, Medicare beneficiaries, and the public to identify skilled nursing facilities (SNFs) that are participating in the Medicare program, and requires a hospital, as part of its discharge planning, to evaluate a patient's need for SNF care.

Section 947, which requires that, by July 1, 2004, hospitals not otherwise subject to the Occupational Safety and Health Act (OSHA) (or a State occupational safety and health plan that is approved under section 18(b) of that Act) must comply with the OSHA bloodborne pathogens (BBP) standard as part of their Medicare provider agreements.

C. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs under the IPPS for FY 2005. We also are setting forth proposed changes relating to payments for GME costs, payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis, payments for DSH, requirements and payments for CAHs, conditions of participation for hospitals relating to discharge planning and fire safety requirements, requirements for Medicare provider agreements relating to bloodborne pathogen standards, and QIO disclosure of information requirements. The changes being proposed would be effective for discharges occurring on or after October 1, 2004, unless otherwise noted.

The following is a summary of the major changes that we are proposing to make: 1. Proposed Changes to the DRG Reclassifications and Recalibrations of Relative Weights

As required by section 1886(d)(4)(C) of the Act, we are proposing annual adjustments to the DRG classifications and relative weights. Based on analyses of Medicare claims data, in section II. of this preamble, we are proposing to establish a number of new DRGs and make changes to the designation of diagnosis and procedure codes under other existing DRGs. Our proposed changes for FY 2005 are set forth in section II. of this preamble.

Among the proposed changes discussed are:

Restructuring and retitling of several DRGs to reflect expanded coverage of heart assist systems such as ventricular assist devices (VAD) or left ventricular assist devices (LVAD) as destination (or permanent) therapy for end-stage heart failure patients who are not candidates for heart transplantation: DRG 103 (Heart Transplant or Implant of Heart Assist System) (proposed title change), DRG 104 (Cardiac Valve and Other Major Cardiothoracic Procedures with Cardiac Catheterization) and DRG 105 (Cardiac Valve and Other Major Cardiothoracic Procedures Without Cardiac Catheterization), and DRG 525 (Other Heart Assist System Implant) (proposed title change).

Addition of pacemaker device and lead procedure code combinations that could lead to the assignment of DRG 115 (Permanent Cardiac Pacemaker Implant with Acute Myocardial Infarction, Heart Failure, or Shock or ACID Lead or Generator Procedures) and DRG 116 (Other Permanent Cardiac Pacemaker Implant).

Movement of the procedure code for 360 spinal fusion from DRG 496 (Combined Anterior/Posterior Spinal Fusion) to DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC).

Addition of combination codes, which also include heart failure, to the list of major problems under DRG 387 (Prematurity With Major Problems) and DRG 389 (Full-Term Neonate With Major Problems).

Modification of DRGs 504 through 509 under MDC 22 (Burns) to recognize the impact of long-term mechanical ventilation on burn cases and renaming DRG 504 as proposed title ``Extensive Burns or Full Thickness Burns With Mechanical Ventilation 96+ Hours With Skin Graft'' and DRG 505 as proposed title ``Extensive Burns or Full Thickness Burns With Mechanical Ventilation 96+ Hours Without Skin Graft.''

Deletion of DRG 483 (Tracheostomy for Face, Mouth, and Neck Diagnoses) and splitting the assignment of cases to two proposed new DRGs on the basis of the performance of a major operating room procedure: proposed new DRGs 541 and 542 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnosis With and Without Major Operating Room Procedure, respectively).

We also are presenting our reevaluation of FY 2004 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of FY 2005 applicants (including public input, as directed by Public Law 108-173, obtained in a town meeting).

We are proposing the annual update of the long-term care diagnosis- related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2005. 2. Proposed Changes to the Hospital Wage Index

In section III. of this preamble, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed in this section included the following:

The proposed FY 2005 wage index update, using wage data from cost reporting periods that began during FY 2001.

Proposed revised labor market areas as a result of OMB revised definitions of geographical statistical areas.

A discussion of the collection of occupational mix data and the proposed occupational mix adjustment to the wage index that we are proposing to apply beginning October 1, 2004.

The proposed revisions to the wage index based on hospital redesignations and reclassifications, including changes that reflect the new OMB standards for assignment of hospitals to geographic areas.

The proposed adjustment to the wage index based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index, to implement section 505 of Public Law 108-173.

A discussion of eligible hospitals reclassified under the one-time appeals process under section 508 of Public Law 108-173.

Proposed changes to the labor-related share to which the wage index is applied in determining the PPS rate for hospitals located in specific geographic areas, to implement section 403 of Public Law 108-173.

The revised timetable for reviewing and verifying the wage data that is in effect for the proposed FY 2005 wage index. 3. Other Decisions and Proposed Changes to the PPS for Inpatient Operating and GME Costs

In section IV. of this preamble, we discuss a number of provisions of the regulations in 42 CFR Parts 412 and 413 and set forth proposed changes concerning the following:

Proposed expansion of the current postacute care transfer policy.

Payments for inpatient care in providers that change classification status during a patient stay.

Proposed changes in the definitions of urban and rural areas for geographic reclassifications purposes.

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Equalization of the standardized amount for urban and rural hospitals.

The reporting of hospital quality data as a condition for receiving the full annual payment update increase.

Proposed revision of the regulations to reflect the revision of the labor share of the wage index.

Proposed revision of the regulations to reflect the wage index adjustment for commuting patterns of hospital employees who live in one county and commute to work in other areas with higher level wages.

Proposed changes in the threshold amount for eligibility for new medical services and technology add-on payments.

Proposed revision to our policy on additional payments to hospitals with high percentages of ESRD discharges.

Proposed changes to the IME adjustment formula multipliers, and the formula multiplier applicable to redistribution of unused numbers of FTE residents slots.

Proposed changes in DSH adjustment payments to rural and small urban hospitals.

Proposed payment adjustments for low-volume hospitals.

Proposed changes in policy affecting hospitals that apply as a group for reclassification and a discussion of possible reclassifications for dominant hospitals and hospitals in single- hospital MSAs.

Proposed changes in policies governing payments for direct GME, including the redistribution of unused FTE resident slots; changes in the GME initial residency period; extension of the update limitation on hospital-specific per resident amounts; and changes in the policies on residents training in nonhospital settings, including written agreements for teaching physician compensation.

An announcement of the rural community hospital demonstration to be established under section 410A of Public Law 108- 173 and the opportunity for eligible hospitals to apply for participation in the demonstration program.

A solicitation of public comments on the effect of increases in malpractice insurance premiums on hospitals participating in the Medicare program and beneficiary access of services. 4. Proposed Changes to the PPS for Capital-Related Costs

In section V. of this preamble, we discuss the payment requirements for capital-related costs and propose changes relating to capital payments to hospitals located in Puerto Rico, changes in the policies on exception payments for extraordinary circumstances, treatment of hospitals previously reclassified for the operating standardized amounts, and capital payment adjustments based on the proposed changes in geographic classifications. 5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

In section VI. of this preamble, we discuss the following proposed revisions and clarifications concerning excluded hospitals and hospital units and CAHs:

Proposed changes in the payment rate for new excluded hospitals.

Proposed changes to the criteria for determining payments to hospitals-within-hospitals.

Proposed changes to the policies governing payment to CAHs, including a change in the payment percentage for services furnished by CAHs; changes in the rules governing the election by a CAH of the optional method of payment; expansion of the payment to emergency room on-call providers to include physician assistants, nurse practitioners, and clinical nurse specialists; authorization for the making of periodic interim payments (PIPs) for CAHs for inpatient services furnished; revision of the bed count limit for CAHs from 15 to 25 acute care beds; proposed requirements for establishing psychiatric and rehabilitation distinct part units in CAHs; and termination of the location requirement for a CAH by designating the CAH as a necessary provider. 6. Proposed Changes to QIO Disclosure of Information Requirements

In section VII. of this preamble, we discuss our proposed clarification of the requirements for disclosure by QIOs of information on institutions and practitioners collected in the course of the QIO's quality improvement activities. 7. Proposed Changes Relating to Medicare Provider Agreements, Hospital Conditions of Participation, and Fire Safety Requirements for Certain Health Care Facilities

In section VIII. of this preamble, we are proposing to--

Require hospitals, as part of the discharge planning standard under the Medicare hospital conditions of participation, to furnish a list of Medicare-participating home health agencies to patients who receive home health services after discharge and to provide information on Medicare-certified SNFs to patients who are likely to need posthospital extended care services.

Require that Medicare provider agreements include provisions that would ensure that all hospital employees who may come into contact with human blood in the course of their duties are provided proper protection from bloodborne pathogens.

Correct a technical error relating to the application of the 2000 edition of the Life Safety Code as the fire safety requirements for certain health care facilities; and clarify the effective date for the prohibition on the use of roller latches in these facilities. 8. Determining Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2005 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2005 for hospitals and hospital units excluded from the PPS. 9. Impact Analysis

In Appendix A of the proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 10. Recommendation of Update Factor for Hospital Inpatient Operating Costs

In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the appropriate percentage changes for FY 2005 for the following:

A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs).

Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 11. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, the Medicare Payment Advisory Commission (MedPAC) is required to submit a report to Congress, no later than March 1 of each year, that reviews and makes recommendations on Medicare payment policies. MedPAC's March 2004 recommendation

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concerning hospital inpatient payment policies addressed only the update factor for inpatient hospital operating costs and capital- related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. This recommendation is addressed in Appendix B. For further information relating specifically to the MedPAC March 1 report or to obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGS.

Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. The proposed changes to the DRG classification system and the proposed recalibration of the DRG weights for discharges occurring on or after October 1, 2004, are discussed below.

B. DRG Reclassifications

[If you choose to comment on issues in this section, please include the caption ``DRG Reclassifications'' at the beginning of your comment.] 1. General

Cases are classified into DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM).

For FY 2004, cases are assigned to one of 522 DRGs in 25 major diagnostic categories (MDCs). Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). The table below lists the 25 MDCs.

Major diagnostic categories (MDCs).

1--Diseases and Disorders of the Nervous System. 2--Diseases and Disorders of the Eye. 3--Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 4--Diseases and Disorders of the Respiratory System. 5--Diseases and Disorders of the Circulatory System. 6--Diseases and Disorders of the Digestive System. 7--Diseases and Disorders of the Hepatobiliary System and Pancreas. 8--Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 9--Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 10--Endocrine, Nutritional and Metabolic Diseases and Disorders. 11--Diseases and Disorders of the Kidney and Urinary Tract. 12--Diseases and Disorders of the Male Reproductive System. 13--Diseases and Disorders of the Female Reproductive System. 14--Pregnancy, Childbirth, and the Puerperium. 15--Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 16--Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 17--Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18--Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19--Mental Diseases and Disorders. 20--Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders. 21--Injuries, Poisonings, and Toxic Effects of Drugs. 22--Burns. 23--Factors Influencing Health Status and Other Contacts with Health Services. 24--Multiple Significant Trauma. 25--Human Immunodeficiency Virus Infections

In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2004, there are eight DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart, liver, bone marrow, lung, simultaneous pancreas/kidney, and pancreas transplants and for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the current eight pre- MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs)

DRG 103--Heart Transplant. DRG 480--Liver Transplant.

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DRG 481--Bone Marrow Transplant. DRG 482--Tracheostomy for Face, Mouth, and Neck Diagnoses. DRG 483--Tracheostomy with Mechanical Ventiliation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnoses. DRG 495--Lung Transplant. DRG 512--Simultaneous Pancreas/Kidney Transplant. DRG 513--Pancreas Transplant

Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (less than or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or a comorbidity (CC).

Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect DRG assignment for certain principal diagnoses, for example, extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones.

Patient's diagnosis, procedure, discharge status, and demographic information is fed into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into a DRG.

After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into a DRG on the basis of the diagnosis and procedure codes and, for a limited number of DRGs, demographic information (that is, sex, age, and discharge status).

After cases are screened through the MCE and assigned to a DRG by the GROUPER, a base DRG payment is calculated by the PRICER software. The PRICER calculates the payments for each case covered by the IPPS based on the DRG relative weight and additional factors associated with each hospital, such as IME and DSH adjustments. These additional factors increase the payment amount to hospitals above the base DRG payment.

The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights. However, in the July 30, 1999 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

Many of the changes to the DRG classifications are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible inclusion in the next proposed rule and so any proposed changes may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the DRG recalibration process, concerns about DRG classification issues should be brought to our attention no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS.

The changes we are proposing to the DRG classification system for the FY 2005 GROUPER version 22.0 and to the methodology used to recalibrate the DRG weights are set forth below. Unless otherwise noted in this proposed rule, our DRG analysis is based on data from the December 2003 update of the FY 2003 MedPAR file, which contains hospital bills received through December 31, 2003 for discharges in FY 2003. 2. MDC 1 (Diseases and Disorders of the Nervous System): Intracranial Hemorrhage and Stroke With Infarction

It has come to our attention that the title of DRG 14 (Intracranial Hemorrhage and Stroke With Infarction) may be misleading because it implies that a combination of conditions exists when the DRG is assigned. When we developed this title, we did not intend to imply that a combination of conditions exists. Therefore, we are proposing to change the title of DRG 14 to read ``Intracranial Hemorrhage or Cerebral Infarction''. 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Heart Assist System Implant

Circulatory support devices, also known as heart assist systems, ventricular assist devices (VADs) or left ventricular assist devices (LVADs), offer a surgical alternative for end-stage heart failure patients. This type of device is often implanted near a patient's native heart and assumes the pumping function of the weakened heart's left ventricle. In many cases, heart transplantation would be the treatment of choice for this type of patient. However, the low number of donor hearts limits this treatment option.

We have reviewed the payment and DRG assignment for this type of device many times in the past. The reader is referred to the August 1, 2002 IPPS final rule (67 FR 49989) for a complete listing of those discussions.

In the August 1, 2002 final rule (67 FR 49990), we attempted to clinically and financially align VAD procedures by creating new DRG 525 (Heart Assist System Implant). We also noted that cases in which a heart transplant also occurred during the same hospitalization episode would continue to be assigned to DRG 103 (Heart Transplant). At that time, we announced that DRG 525 would consist of any principal diagnosis in MDC 5, plus one of the following surgical procedure codes:

37.62, Insertion of nonimplantable heart assist system 37.63, Repair of heart assist system

[[Page 28207]]

37.65, Implant of external heart assist system 37.66, Insertion of implantable heart assist system

(To avoid confusion, we note that the titles of codes 37.62, 37.63, 37.65, and 37.66 have been revised for FY 2005 through the ICD-9-CM Coordination and Maintenance Committee process as reflected in Table 6F, Revised Procedure Code Titles in the Addendum to this proposed rule.)

Commenters on the May 19, 2003 proposed rule that preceded the August 1, 2003 IPPS (FY 2004) final rule notified us that procedure code 37.66 was neither a clinical nor a financial match to the rest of the procedure codes now assigned to DRG 525. We did not modify DRG 525 for FY 2004. We agreed that we would continue to evaluate whether to make further changes to DRG 525. After publication of the August 1, 2003 final rule, we again reviewed the MedPAR data concerning DRG 525, and came to the conclusion that procedure code 37.62 is different in terms of clinical procedures and resource utilization from the other procedure codes assigned to DRG 525. Therefore, in a correction to the August 1, 2003 IPPS (FY 2004) final rule, published on October 6, 2003 (68 FR 57733), we revised the composition of DRG 525 by correcting the assignment of procedures to DRG 525 in light of the lower charges associated with procedure code 37.62. We moved code 37.62 into DRG 104 (Cardiac Valve and Other Major Cardiothoracic Procedures With Cardiac Catheterization) and DRG 105 (Cardiac Valve and Other Major Cardiothoracic Procedures Without Cardiac Catheterization), and left procedure codes 37.63, 37.65, and 37.66 in DRG 525.

In addition, we have evaluated a request for expanded coverage for VADs and LVADs as destination (or permanent) therapy for end-stage heart failure patients who are not candidates for heart transplantation. VADs and LVADs had been approved for support of blood circulation post-cardiotomy (effective for services performed on or after October 18, 1993) and as a bridge to heart transplant (effective for services performed on or after January 22, 1996) to assist a damaged or weakened heart in pumping blood. The criteria that must be fulfilled in order for Medicare coverage to be provided for these purposes have been previously discussed in the August 1, 2000 final rule (65 FR 47058), and can also be accessed online at: http://www.cms.gov/manuals/pm_trans/r2ncd1.pdf .

As a result of that review, effective for services performed on or after October 1, 2003, VADs have been approved as destination therapy for patients requiring permanent mechanical cardiac support. Briefly, VADs used for destination therapy are covered only if they have received approval from the FDA for that purpose, and the device is used according to the FDA-approved labeling instructions. VADs are covered for patients who have chronic end-stage heart failure (New York Heart Association Class IV end-stage left ventricular failure for at least 90 days with a life expectancy of less than 2 years). Implanting facilities as well as patients must also meet all of the additional conditions that are listed in the national coverage determination for artificial hearts and related devices, which is posted on the above CMS Web site.

In light of the new indication of destination therapy, we again reviewed the FY 2003 MedPAR data for all cases in which a VAD had been implanted, using the criterion of any case containing a procedure code of 37.66. We found a total of 65 cases in 3 DRGs: DRG 103 (Heart Transplant); DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses); and DRG 525 (Heart Assist System Implant). The following table displays our findings:

Average length Average DRG with code 37.66 reported

Count

of stay

charges

103.............................................................

14

77.36

$836,011 483.............................................................

6

100.50 1,400,706 525.............................................................

45

38.93

308,725

The remaining 354 cases in DRG 103 that did not report code 37.66 had average charges of $282,578. The remaining 171 cases in DRG 525 that did not contain code 37.66 had an average length of stay of 12.39 days and average charges of $168,388. The 45 cases in DRG 525 with code 37.66 accounted for 26 percent of the cases. However, the average charges for these cases are approximately $140,340 higher than the average charges for cases in DRG 525 that did not report code 37.66.

Commenters on the FY 2004 final rule suggested adding code 37.66 to DRG 103. We were concerned with the timing of that comment, as it was received after publication of the proposed rule. We noted that the commenter's suggestions on the structure of the DRGs involved were significant, and that change of that magnitude should be subject to public review and comment. We also noted that we would evaluate the suggestion further. (68 FR 45370) However, as one of the indications for this device has become destination therapy, and as this new indication is more clinically aligned with DRG 103, we are proposing to remove procedure code 37.66 from DRG 525 and assign it to DRG 103. We also are proposing to change the title of DRG 103 to ``Heart Transplant or Implant of Heart Assist System''. The proposed restructured DRG 103 would include any principal diagnosis in MDC 5, plus one of the following surgical procedure codes:

33.6, Combined heart-lung transplantation 37.51, Heart transplantation 37.66, Insertion of implantable heart assist system

In addition to the proposed changes to DRG 103, we are proposing to change the title of DRG 525 to ``Other Heart Assist System Implant''.

In conjunction with the above data review, we also looked at DRGs 104 and 105.

DRGs 104 and 105 had been restructured in FY 2003 by assigning code 37.62 to them. (Note: The code title for 37.62 has been revised, effective FY 2005, as reflected in Table 6F of the Addendum to this proposed rule). We examined the MedPAR data and found that the average charges were $113,667 and $82,899, respectively, for DRGs 104 and 105 for cases not reporting code 37.62, while cases containing code 37.62 had average charges of $124,559 and $166,129, respectively.

The removal of code 37.66 from DRG 525 would have the effect of clinically realigning that DRG to be more coherent. As a result of the proposal to remove code 37.66 from DRG 525 and assign it to DRG 103, we also are proposing to remove code 37.62 from DRGs 104 and 105 and assign it back into DRG 525. In addition, the average

[[Page 28208]]

charges for code 37.62 shown above in DRGs 104 and 105 ($124,559 and $166,129) more closely match the average charges reported for the 171 cases in DRG 525, absent code 37.66 ($168,388).

The proposed restructured DRG 525 would include any principal diagnosis in MDC 5, plus the following surgical procedure codes:

37.52, Implantation of total replacement heart system* 37.53, Replacement or repair of thoracic unit of total replacement heart system* 37.54, Replacement or repair of other implantable component of total replacement heart system* 37.62, Insertion of nonimplantable heart assist system 37.63, Repair of heart assist system 37.65, Implant of external heart assist system *These codes represent noncovered services for Medicare beneficiaries. However, it is our longstanding practice to assign every code in the ICD-9-CM classification to a DRG. Therefore, they have been assigned to DRG 525. b. Cardiac Resychronization Therapy and Heart Failure

We received a request from a manufacturer of a Cardiac Resynchronization Therapy Defibrillator (CRT-D) device for a modification to DRG 535 (Cardiac Defibrillator Implant With Cardiac Catheterization With Acute Myocardial Infarction/Heart Failure/Shock) and DRG 536 (Cardiac Defibrillator Implant With Cardiac Catheterization Without Acute Myocardial Infarction/Heart Failure/Shock). The commenter pointed out that defibrillator device implantations, including the CRT- D type of defibrillator, are assigned to DRG 535 when the patient also has a cardiac catheterization and has either an acute myocardial infarction, heart failure, or shock as a principal diagnosis. If the patient receiving the defibrillator implant and cardiac catheterization does not have a principal diagnosis of acute myocardial infarction, heart failure, or shock, the cases are assigned to DRG 536.

The commenter requested that cases be assigned to DRG 535 when the patient has heart failure as either a principal diagnosis or a secondary diagnosis. The commenter stated that patients receive a CRT-D (as opposed to other types of defibrillators) when they have both heart failure and arrhythmia. The commenter was concerned that some coders may sequence the heart failure as a secondary diagnosis, which would result in the patient being assigned to DRG 536.

As stated earlier, DRGs 535 and 536 are split based on the principal diagnosis of acute myocardial infarction, heart failure, or shock. Cases are not assigned to DRG 535 when heart failure is a secondary diagnosis.

The commenter described a scenario where a patient was admitted with heart failure for an evaluation of the need for a CRT-D implantation. The hospitalization studies indicated that the patient had a ventricular tachycardia. The commenter indicated that coders would be confused as to which code should be listed as the principal diagnosis.

CMS' review of this scenario as described would be that the heart failure led to the admission and would be the principal diagnosis. This case would properly be assigned to DRG 535. Furthermore, when two conditions are considered to be equally responsible for the admission, either one of the two conditions may be selected as the principal diagnosis.

The commenter also stated that its own study shows CRT-D patients have significantly higher charges than do other patients in DRGs 535 and 536 who receive an implantable defibrillator. This was the case whether heart failure was used as a principal or secondary diagnosis.

A cardiac catheterization is a diagnostic procedure generally performed to establish the nature of the patient's cardiac problem and determine if implantation of a cardiac defibrillator is appropriate. Generally, the cardiac catheterization can be done on an outpatient basis. Patients who are admitted with acute myocardial infarction, heart failure, or shock and have a cardiac catheterization are generally acute patients who require emergency implantation of the defibrillator. Thus, there are very high costs associated with these patients.

We examined the MedPAR file for all cases in DRGs 535 and 536 and only cases in DRG 536 in which acute myocardial infarction or heart failure was listed as a secondary diagnosis. The following chart illustrates the results of our findings:

Average length of DRGs

Count

stay

Average charges

535....................................................

6,801

9.50

$110,663.57 536--All cases.........................................

17,454

5.47

89,493.85 536--Cases With Secondary Diagnosis of Cardiac

8,562

6.5

94,832.14 Defibrillator Implant With Cardiac Catheterization Without Acute Myocardial Infarction/Heart Failure/ Shock.................................................

The data show that cases with a secondary diagnosis of acute myocardial infarction or heart failure have average charges ($94,832.14) closer to the overall average charges for DRG 536 ($89,493.85) where they are currently assigned. Overall charges for DRG 535 were $110,663.57. We do not believe these data support modifying DRG 535 and DRG 536 as requested. Many of the CRT-D patients who are admitted for heart failure would be assigned into DRG 535. Furthermore, modifying the DRG logic for one specific type of defibrillator (CRT-D) is not consistent with our overall policy of grouping similar types of patients together in the same DRG. In addition, to modify the DRG logic for the small percentage of cases where there might be confusion concerning the selection of the principal diagnosis does not seem prudent. Therefore, we are not proposing a modification to DRG 535 or 536 for CRT-Ds. c. Combination Cardiac Pacemaker Devices and Lead Codes

We received a comment that recommended that we include additional combination procedure codes representing cardiac pacemaker device and lead codes under DRG 115 (Permanent Cardiac Pacemaker Implant With Acute Myocardial Infarction, Heart Failure, or Shock or ACID Lead or Generator Procedures) and DRG 116 (Other Permanent Cardiac Pacemaker Implant). DRGs 115 and 116 are assigned when a complete pacemaker unit with leads is implanted. Combinations of pacemaker devices and lead codes that would lead to the DRG assignment are listed under DRGs 115 and 116. The commenter recommended that the following pacemaker device and lead procedure code combinations be added to these two DRGs:

00.53 & 37.70

[[Page 28209]]

00.53 & 37.71 00.53 & 37.72 00.53 & 37.73 00.53 & 37.74 00.53 & 37.76

These codes are defined as follows:

00.53, Implantation or replacement of cardiac resynchronization pacemaker, pulse generator only [CRT-P] 37.70, Initial insertion of pacemaker lead [electrode], not otherwise specified 37.71, Initial insertion of transvenous lead [electrode] into ventricle 37.72, Initial insertion of transvenous lead [electrode] into atrium and ventricle 37.73, Initial insertion of transvenous lead [electrode] into atrium 37.74, Initial insertion or replacement of epicardial lead

[electrode] into epicadium 37.76, Replacement of transvenous atrial and/or ventricular lead(s) [electrode]

We have consulted our medical advisors and they agree that these recommended procedure code combinations also describe pacemaker device and lead implantations and should be included under DRGs 115 and 116. Therefore, we are proposing to add the recommended procedure code combinations to the list of procedure code combinations under DRGs 115 and 116. 4. MDC 6 (Diseases and Disorders of the Digestive System): Artificial Anal Sphincter

In the FY 2003 IPPS final rule (67 FR 50242), we created two new codes for procedures involving an artificial anal sphincter, effective for discharges occurring on or after October 1, 2002: code 49.75 (Implantation or revision of artificial anal sphincter) that is used to identify cases involving implantation or revision of an artificial anal sphincter and code 49.76 (Removal of artificial anal sphincter) that is used to identify cases involving the removal of the device. In Table 6B of that final rule, we assigned both codes to one of four MDCs, based on principal diagnosis, and one of six DRGs within those MDCs. In the August 1, 2003 IPPS final rule (68 FR 45372), we discussed the assignment of these codes in response to a request we had received to consider reassignment of these two codes to different MDCs and DRGs. The requester believed that the average charges ($44,000) for these codes warranted reassignment. In the August 1, 2003 IPPS final rule, we stated that we did not have sufficient MedPAR data available on the reporting of codes 49.75 and 49.76 to make a determination on DRG reassignment of these codes. We agreed that, if warranted, we would give further consideration to the DRG assignments of these codes because it is our customary practice to review DRG assignment(s) for newly created codes to determine clinical coherence and similar resource consumption after we have had the opportunity to collect MedPAR data on utilization, average length of stay charges, and distribution throughout the system.

Therefore, we reviewed the FY 2003 MedPAR data for the presence of codes 49.75 and 49.76. We then arrayed the results by DRG, count, average length of stay, charges, and the presence or absence of a secondary diagnosis that could be classified as a CC. We found that there were a total of 13 cases in 5 total DRGs with CCs, and 9 cases in 4 total DRGs without CCs, for a total of 22 cases that reported these procedure codes. We had anticipated that the majority of cases would have been found in DRGs 157 (Anal and Stomal Procedures With CC) and 158 (Anal and Stomal Procedures Without CC), but found only 2 cases grouped to DRG 157 and 4 cases grouped to DRG 158. Our data showed average charges of $22,374 for the cases with CC, and average charges of $20,831 for the cases without CC. Average charges for DRG 157 were $18,196, while average charges for DRG 158 were $9,348.

Our medical advisors also reviewed the contents of DRGs 157 and 158. The consensus was that codes 49.75 and 49.76 are not a clinical match to the other procedure codes found in these two DRGs. The other procedure codes in DRGs 157 and 158 are for simpler and less invasive procedures. In some circumstances, these procedures could potentially be performed in an outpatient setting or in a physician's office. Our medical advisors determined that clinical coherence was not demonstrated and recommended that we move these codes to DRGs 146 (Rectal Resection With CC) and 147 (Rectal Resection Without CC), as these anal sphincter procedures more closely resemble the procedures in these DRGs. In addition, the average charges for paired DRG 146 ($33,853) and DRG 147 ($21,747) more closely resemble the actual average charges found in the MedPAR data for these cases.

Even though there are few reports of codes 49.75 and 49.76 in the MedPAR data and we do not anticipate a significant increase in utilization of these procedures, we are proposing that these two codes would only be removed from paired DRG 157 and 158 and reassigned to paired DRG 146 and 147 under MDC 6 (Diseases and Disorders of the Digestive System). All other MDC and DRG assignments for codes 49.75 and 49.76 would remain the same. 5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) a. 360 Spinal Fusions

We received a comment that suggested procedure code 81.61 (360 Spinal fusion) should not be included in DRG 496 (Combined Anterior/ Posterior Spinal Fusion). The commenter stated that code 81.61 does not represent the same types of cases as other codes included in DRG 496. The commenter indicated that cases reported with code 81.61 involve making only one incision, and then fusing both the anterior and posterior portion of the spine. All other cases in DRG 496 involve two separate surgical approaches used to reach the site of the spinal fusion. For these other patients, an incision is made into the patient, and a fusion is made in part of the spine. The patient is then turned over and a separate incision is made so that a fusion can be made in another part of the spine. The commenter added that these two separate incisions and fusions are more time consuming than the single incision used for code 81.61. The commenter also stated that patients receiving the two surgical approaches have a longer recovery period and use more hospital resources.

We examined data in the MedPAR file for cases assigned to DRG 496 and found the following:

Average length Average DRG

Count

of stay

charges

496--All Cases..................................................

2,706

8.0 $74,967.33 496--Cases with code 81.61......................................

829

4.7 50,659.69 496--Cases with code 81.61 with CC..............................

451

5.4 55,639.50 496--Cases with code 81.61 without CC...........................

378

3.8 44,718.16 496--Cases without 81.61........................................

1877

9.4 85,703.09

[[Page 28210]]

We also examined cases in related DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC) in which code 81.61 was not reported. The chart below reflects our findings.

Average length Average DRG

Count

of stay

charges

497.............................................................

16,965

6.19 $49,315.27 498.............................................................

11,598

3.95 37,450.68

These data clearly show that cases with code 81.61 have significantly less average charges than other cases in DRG 496 that have two surgical approaches. Cases with code 81.61 are more closely aligned with cases in DRG 497 and DRG 498. Furthermore, including code 81.61 will have the effect of lowering the relative weights for DRG 496 in future years. Therefore, we are proposing to remove code 81.61 from DRG 496 and reassign it to DRGs 497 and 498. b. Multiple Level Spinal Fusion

On October 1, 2003 (68 FR 45596), the following new ICD-9-CM procedure codes were created to identify the number of levels of vertebra fused during a spinal fusion procedure:

81.62, Fusion or refusion of 2-3 vertebrae 81.63, Fusion or refusion of 4-8 vertebrae 81.64, Fusion or refusion of 9 or more vertebrae

Prior to the creation of these new codes, we received a comment recommending the establishment of new DRGs that would differentiate between the number of levels of vertebrae involved in a spinal fusion procedure. In the August 1, 2003 final rule, we discussed the creation of these new codes and the lack of sufficient MedPAR data with the new multiple level spinal fusion codes (68 FR 45369). The commenter had conducted an analysis and submitted data to support redefining the spinal fusion DRGs. The analysis found that increasing the levels fused from 1 to 2 levels to 3 levels or more levels increased the mean standardized charges by 38 percent for lumbar/thoracic fusions, and by 47 percent for cervical fusions.

The following current spinal fusion DRGs separate cases based on whether or not a CC is present: DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC); DRG 519 (Cervical Spinal Fusion With CC) and DRG 520 (Cervical Spinal Fusion Without CC). However, the difference in charges associated with the current CC split was only slightly greater than the difference attributable to the number of levels fused as found by the commenter's analysis. In addition, adopting the commenter's recommendation would have necessitated adjusting the DRG relative weights using non-MedPAR data because Medicare claims data with the new ICD-9-CM codes would not have been available until the FY 2003 MedPAR file. Therefore, at that time, we did not redefine the spinal fusion DRGs to differentiate on the basis of the number of levels of vertebrae involved in a spinal fusion procedure.

We did not yet have any reported cases utilizing the new multilevel spinal fusion codes in our data. We stated that we would wait until sufficient data with the new multilevel spinal fusion codes were available before making a final determination on whether multilevel spinal fusions should be incorporated into the spinal fusion DRG structure. The codes went into effect on October 1, 2003 and we have not received any data using these codes. Spinal surgery is an area of rapid changes. In addition, we have created a series of new procedure codes that describe a new type of spinal surgery, spinal disc replacement. (See codes 84.60 through 84.69 in Table 6B in the Addendum to this proposed rule that will go into effect on October 1, 2004.) Our medical advisors describe this new surgical procedure as a more conservative approach for back pain than the spinal fusion surgical procedure. With only limited data concerning multiple level spinal fusion and the rapid changes in spinal surgery, we believe it is more prudent not to propose the establishment of new DRGs based on the number of levels of vertebrae involved in a spinal fusion procedure at this time.

In addition, no other surgical DRG is split based on the number of procedures performed. For instance, the same DRG is assigned whether one or more angioplasties are performed on a patient's arteries. The insertion of multiple stents within an artery does not result in a different DRG assignment. Similarly, the excision of neoplasms from multiple sites does not lead to a different DRG assignment. To begin splitting DRGs based on the number of procedures performed or devices inserted could set a new and significant precedent for DRG policy. Therefore, while we will continue to study this area, we are not proposing to redefine the spinal fusion DRGs based on the number of levels of vertebrae fused at this time. 6. MDC 15 (Newborns and Other Neonates With Conditions Originating in the Perinatal Period)

We continue to receive comments that MDC 15 (Newborn and Other Neonates With Conditions Originating in the Perinatal Period) does not adequately capture care provided for newborns and neonates by hospitals. The commenters point out that we have not updated the DRGs within MDC 15 as we have for other parts of the DRG system.

Our primary focus of updates to the Medicare DRG classification system is on changes relating to the Medicare patient population, not the pediatric or neonatal patient populations. However, we acknowledge the Medicare DRGs are sometimes used to classify other patient populations. Over the years, we have received comments about aspects of the Medicare newborn DRGs that appear problematic, and we have responded to these on an individual basis. In the May 9, 2002 IPPS proposed rule (67 FR 31413), we proposed extensive changes to multiple DRGs within MDC 15. Because of our limited data and experience with newborn cases under Medicare, we contacted the National Association of Children's Hospitals and Related Institutions (NACHRI) to obtain proposals for possible revisions of the DRG categories within MDC 15. We received extensive comments opposing these revisions. Therefore, we did not implement the proposals.

We advise those non-Medicare systems that need a more up-to-date system to choose from other systems that are currently in use in this country, or to develop their own modifications. As previously stated, we do not have the data or the expertise to develop more extensive newborn and pediatric DRGs. Our mission in maintaining the Medicare DRGs is to serve the Medicare population. Therefore, we will make only minor corrections of obvious errors to the DRGs within MDC 15. At this time, we do not plan to conduct a more extensive analysis involving major revisions to these DRGs.

In the IPPS final rule for FY 2004 (68 FR 45360), we added heart failure

[[Page 28211]]

diagnosis codes 428.20 through 428.43 to the list of secondary diagnosis of major problem under DRG 387 (Prematurity With Major Problems) and DRG 389 (Full-Term Neonate With Major Problems). We received a comment after the August 1, 2003 final rule stating that we should add the following list of combination codes, which also include heart failure, to the list of major problems under DRGs 387 and 389:

398.91, Rheumatic heart failure (congestive) 402.01, Malignant hypertensive heart disease, with heart failure 402.11, Benign hypertensive heart disease, with heart failure 402.91, Unspecified hypertensive heart disease, with heart failure 404.01, Malignant hypertensive heart and renal disease, with heart failure 404.03, Malignant hypertensive heart and renal disease, with heart failure and renal failure 404.11, Benign hypertensive heart and renal disease, with heart failure 404.13, Benign hypertensive heart and renal disease, with heart failure and renal failure 404.91, Unspecified hypertensive heart and renal disease, with heart failure 404.93, Unspecified hypertensive heart and renal disease, with heart failure and renal failure. 428.9, Heart failure, unspecified

We agree that the codes listed above also include heart failure and should also be added to DRGs 387 and 389 as major problems. Therefore, we are proposing to add the heart failure codes listed above to DRGs 387 and 389 as major problems. 7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders): Drug-Induced Dementia

We received a request from a commenter that we remove the principal diagnosis code 292.82 (Drug-induced dementia) from MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders) and the following DRGs under MDC 20:

DRG 521 (Alcohol/Drug Abuse or Dependence With CC) DRG 522 (Alcohol/Drug Abuse or Dependence With Rehabilitation Therapy Without CC) DRG 523 (Alcohol/Drug Abuse or Dependence Without Rehabilitation Therapy Without CC)

The commenter indicated that a patient who has a drug-induced dementia should not be classified to an alcohol/drug DRG. However, the commenter did not propose a new DRG assignment for code 292.82.

Our medical advisors have evaluated the request and determined that the most appropriate DRG classification for a patient with drug-induced dementia would be within MDC 20. The medical advisors indicated that because this mental condition is drug induced, it is appropriately classified to DRGs 521 through 523 in MDC 20. Therefore, we are not proposing a new DRG classification for the principal diagnosis code 292.82. 8. MDC 22 (Burns): Burn Patients on Mechanical Ventilation

We have received concerns raised by hospitals treating burn patients that the current DRG payment for burn patients on mechanical ventilation is not adequate. The DRG assignment for these cases depends on whether the hospital performed the tracheostomy or the tracheostomy was performed prior to transfer to the hospital. If the hospital does not actually perform the tracheostomy, the case is assigned to one of the burn DRGs in MDC 22 (Burns). If the hospital performs a tracheostomy, the case is assigned to Pre-MDC DRG 482 (Tracheostomy for Face, Mouth, and Neck Diagnoses) or DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses).

In the August 1, 2002 final rule, we modified DRGs 482 and 483 to recognize code 96.72 (Continuous mechanical ventilation for 96+ hours) for the first time in the DRG assignment (67 FR 49996). The modification was partially in response to concerns that hospitals could omit diagnosis codes indicating face, mouth, or neck diagnoses in order to have cases assigned to DRG 483 rather than the much lower paying DRG 482 (the payment for DRG 483 is more than four times greater than the DRG 482 payment weight). In addition, we noted that many patients assigned to DRG 483 did not have code 96.72 recorded. We believed this was due, in part, to the limited number of procedure codes (six) that can be submitted on the current billing form and the fact that code 96.72 did not affect the DRG assignment prior to FY 2003. The modification was the first attempt to refine DRGs 482 and 483 so that patients who receive long-term mechanical ventilation for more than 96 hours are differentiated from those who receive mechanical ventilation for less than 96 hours. The modification was intended to ensure that patients who have a tracheostomy and continuous mechanical ventilation greater than 96 hours (code 96.72) would be assigned to DRG 483. By making the GROUPER recognize long-term mechanical ventilation and assigning those patients to the higher weighted DRG 483, we encouraged hospitals to be more aware of the importance of reporting code 96.72 and to increase reporting of code 96.72 when, in fact, patients had been on the mechanical ventilator for greater than 96 hours. We stated in the August 1, 2002 final rule that, once we received more accurate data, we would give consideration to further modifying DRGs 482 and 483 based on the presence of code 96.72.

To assess the DRG payments for burn patients on mechanical ventilation, we analyzed FY 2003 MedPAR data for burn cases in the following DRGs to determine the frequency for which these burn cases were treated with continuous mechanical ventilation for 96 or more consecutive hours (code 96.72):

DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses) DRG 504 (Extensive 3rd Degree Burns With Skin Graft) DRG 505 (Extensive 3rd Degree Burns Without Skin Graft) DRG 506 (Full Thickness Burn With Skin Graft or Inhalation Injury With CC or Significant Trauma) DRG 507 (Full Thickness Burn With Skin Graft or Inhalation Injury Without CC or Significant Trauma) DRG 508 (Full Thickness Burn Without Skin Graft or Inhalation Injury With CC or Significant Trauma) DRG 509 (Full Thickness Burn Without Skin Graft or Inhalation Injury Without CC or Significant Trauma) DRG 510 (Nonextensive Burns With CC or Significant Trauma) DRG 511 (Nonextensive Burns Without CC or Significant Trauma)

The following chart summarizes those findings:

Average length Average DRG

Count

of stay

charges

483--All cases..................................................

31,754

37.68 $210,631.94 483--Cases with code 96.72 reported.............................

19,669

36.54 195,171.66

[[Page 28212]]

483--Cases without code 96.72 reported..........................

12,085

39.52 235,794.39 504--All cases..................................................

98

30.54 191,645.49 504--Cases with code 97.62 reported.............................

19

25.79 264,095.16 504--Cases without code 96.72 reported..........................

79

31.68 174,220.89 505--All cases..................................................

119

2.96 18,619.78 505--Cases with code 96.72 reported.............................

20

7.70 42,613.00 505--Cases without code 96.72 reported..........................

99

2.00 13,772.67 506--All cases..................................................

754

16.15 61,370.63 506--Cases with code 96.72 reported.............................

54

20.13 138,272.46 506--Cases without code 96.72 reported..........................

700

15.85 55,438.20 507--All cases..................................................

236

8.78 25,891.89 507--Cases with code 96.72 reported.............................

1

38.00 137,132.00 507--Cases without code 96.72 reported..........................

235

8.66 25,418.53 508--All cases..................................................

448

7.02 18,332.46 508--Cases with code 96.72 reported.............................

5

10.40 83,171.80 508--Cases without code 96.72 reported..........................

443

6.98 17,600.64 509--All cases..................................................

117

4.32

8,994.71 509--Cases with code 96.72 reported.............................

0

0

0 509--Cases without code 96.72 reported..........................

117

4.32

8,994.71 510--All cases..................................................

1,209

6.90 18,457.21 510--Cases with code 96.72 reported.............................

21

20.52 93,925.62 510--Cases without code 96.72 reported..........................

1,188

6.66 17,123.18 511--All cases..................................................

413

4.18 10,046.89 511--Cases with code 96.72 reported.............................

0

0

0 511--Cases without code 96.72 reported..........................

413

4.18 10,046.89

We found 120 cases that reported code 96.72 within the 3,394 burn DRG cases (DRGs 504 through 511). Cases reporting code 96.72 have significantly longer average lengths of stay and average charges. The majority (54) of these cases that reported code 96.72 were in DRG 506. The cases with code 96.72 reported had average charges approximately 1.5 times higher than other cases in DRG 506 without code 96.72.

We noted that there were 21 cases that reported code 96.72 within DRG 510. Since the 21 patients were on continuous mechanical ventilation for 96 consecutive hours or more, it seems surprising that the principal diagnosis was listed as one of the nonextensive burn codes included in DRG 510. A closer review of these cases shows some questionable coding and reporting of information. It would appear that hospitals did not always correctly select the principal diagnosis (the reason after study that led to the hospital admission). For instance, one admission was for a second-degree burn of the ear. This patient was on a ventilator for over 96 hours. It would appear that the reason for the admission was a diagnosis other than the burn of the ear. Other cases where the patient received long-term mechanical ventilation included those with a principal diagnosis of first degree burn of the face, second degree burn of the nose, second degree burn of the lip, and an unspecified burn of the foot. These four cases reported average charges ranging from $48,551 to $186,824 and had lengths of stay ranging from 8 to 36 days.

The impact of long-term mechanical ventilation is quite clear on burn cases as was shown by the data above. Therefore, we are proposing to modify the burn DRGs 504 through 509 under MDC 22 to recognize this impact. We are proposing to modify DRG 504 and DRG 505 so that code 96.72 will be assigned to these DRGs when there is a principal diagnosis of extensive third degree burns or full thickness burns (those cases currently assigned to DRGs 504 through 509). In other words, when cases currently in DRGs 506 through 509 also have code 96.72 reported, they would now be assigned to DRGs 504 or 505. We are proposing to modify the titles of DRGs 504 and 505 to reflect the proposed changes in reporting code 96.72 as follows:

Proposed DRG 504 (Extensive Burns or Full Thickness Burns With Mechanical Ventilation 96+ Hours With Skin Graft) Proposed DRG 505 (Extensive Burns or Full Thickness Burns With Mechanical Ventilation 96+ Hours Without Skin Graft)

Cases currently assigned to DRGs 504 and 505 that do not entail 96+ hours of mechanical ventilation will continue to be assigned to DRGs 504 and 505 because they would have extensive burns, as required by the DRG logic.

We are not proposing to include DRG 510 and DRG 511 within this revised DRG logic. Cases currently assigned to DRG 510 or DRG 511 that also report code 96.72 would not be reassigned to DRGs 504 and 505. We recommend that hospitals examine cases that are assigned to DRG 510 or DRG 511 and that have code 96.72 to determine if there are possible coding problems or other issues. As stated earlier, in examining reported cases within DRG 510, we noted several cases with code 96.72 that appear to have an incorrect principal diagnosis. It would appear that the principal diagnosis may more appropriately be related to an inhalation injury, if the injury was present at the time of admission.

We are specifically seeking comments on our proposal to move cases reporting code 96.72 from DRGs 506 through 509 and assign them to DRGs 504 and 505. We also are seeking comments on our proposal not to include DRGs 510 and 511 in this proposed revision. 9. Pre-MDC: Tracheostomy

In the August 1, 2002 IPPS final rule (67 FR 49996), for FY 2003, we modified DRG 482 (Tracheostomy for Face, Mouth, and Neck Diagnoses) and DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses) to recognize procedure code 96.72 (Continuous mechanical ventilation 96+ hours) in the DRG 483 assignment. As discussed earlier, we were concerned about an underreporting of code 96.72 and wanted to encourage increased reporting of this code.

We examined cases in the MedPAR file in which code 96.72 was reported

[[Page 28213]]

within DRGs 482 and 483. The following chart illustrates the average charges and lengths of stays for cases within DRGs 482 and 483 with and without code 96.72 reported:

Average length Average DRG

Count

of stay

charges

482--All cases..................................................

3,557

11.77 $45,419.10 482--Cases with code 96.72......................................

22

31.64 137,880.41 482--Cases without code 96.72...................................

3,535

11.64 44,843.67 483--All cases..................................................

31,754

37.68 210,631.94 483--Cases with code 96.72......................................

19,669

36.54 195,171.66 483--Cases without code 96.72...................................

12,085

39.52 235,794.39

Of the 3,557 cases reported in DRG 482, only 22 cases reported code 96.72. These 22 cases did not have a tracheostomy performed. All 22 cases reported code 30.4 (Laryngectomy), which also leads to an assignment of DRG 482. It would appear that the long-term mechanical ventilation was performed through an endotracheal tube instead of through a tracheostomy. While the average charges for DRG 482 cases with code 96.72 reported were significantly higher than the average charges for other cases in the DRG, we do not believe that the very limited number of cases (22) warrants proposing a DRG modification. Therefore, we are not proposing any modification for DRG 482 at this time. We will continue to monitor cases assigned to this DRG.

In DRG 483, 19,669 cases were reported with code 96.72. However, the data were counter-intuitive. While one would expect to find higher average charges for cases reported with code 96.72, the opposite is the case. Cases in DRG 483 reported with code 96.72 had average charges that were $40,623 lower than those not reported with code 96.72. Clearly, the presence or absence of code 96.72 does not explain differences in charges for patients within DRG 483.

As stated earlier, we are concerned that hospitals may not always report code 96.72 because of space limitations. The electronic billing system limits the number of procedure codes that can be reported to six codes. We then looked at whether or not another major O.R. procedure is performed in addition to a tracheostomy. The DRG 483 logic requires that all patients assigned to DRG 483 have a tracheostomy. We examined cases in DRG 483 in the MedPAR file and discovered that those patients in DRG 483 who have a major procedure performed in addition to the tracheostomy have higher charges. A major procedure is a procedure whose code is included on the list that would be assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), except for tracheostomy codes 31.21 and 31.29. Currently, this additional O.R. procedure does not affect the DRG assignment for cases assigned to DRG 483. The following chart reflects our findings.

Average length Average DRG

Count

of stay

Charges

483--All Cases..................................................

31,754

37.68 $210,631.94 483--Cases with major O.R. procedure............................

15,664

42.70 255,914.00 483--Cases without major O.R. procedure.........................

12,867

32.7 168,890.20

We found that cases of patients assigned to DRG 483 who had a major procedure (in addition to the required tracheostomy) had average charges that were $87,023 higher than the average charges for cases without a major O.R. procedure and an average length of stay of 5 days more than those without a major O.R. procedure. We found that the performance of an additional major O.R. procedure helps to identify the more expensive patients within DRG 483.

Therefore, as a result of our findings, we are proposing to modify DRG 483 by dividing these cases into two new DRGs depending on whether or not there is a major O.R. procedure reported (in addition to the tracheostomy). We are proposing to delete DRG 483 and create two new DRGs as follows:

Proposed new DRG 541 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses With Major O.R. Procedure) Proposed new DRG 542 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses Without Major O.R. Procedure)

We are specifically seeking comments on our proposal to delete DRG 483 and replace it with two proposed new DRGs by splitting the assignment of cases on the basis of the performance of a major O.R. procedure (in addition to the tracheostomy). 10. Medicare Code Editor (MCE) Changes

[If you choose to comment on issues in this section, please include the caption ``Medicare Code Editor'' at the beginning of your comment.]

As explained under section II.B.1. of this preamble, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. In this proposed rule, we are proposing to make changes to three of the edits in the MCE.

a. Edit 11 (Noncovered Procedures) in the MCE contains codes that describe procedures for which Medicare does not provide reimbursement. We received a request to remove procedure codes relating to stem cell transplants from Edit 11 to conform the MCE edit to our published coverage decisions in the Medicare Coverage Issues Manual. In accordance with chapter 13, section 4 of the Program Integrity Manual (PIM), contractor discretion exists to cover diagnoses that are not explicitly stated in a national coverage decision as noncovered. Specifically this section states: that ``a local medical review policy (LMRP)'' must be clear, concise, properly formatted and not restrict or conflict with NCDs or coverage provision in interpretive manuals. If an NCD or coverage provision in an interpretive manual states that a given

[[Page 28214]]

item is ``covered for diagnoses/conditions A, B, and C,'' contractors may not use that as a basis to develop LMRP to cover only ``diagnosis/ conditions A, B, C''. When an NCD or coverage provision in an interpretive manual does not exclude coverage for other diagnoses/ conditions, contractors must allow for individual consideration unless the LMRP supports automatic denial for some or all of those other diagnoses/conditions.''

The national coverage decision on stem cell transplantation provides for coverage of certain diagnoses and excludes coverage for other diagnoses. However, the vast majority of diagnoses are not mentioned as either covered or noncovered. In accordance with the above-cited provision of the PIM, contractors must allow for individual consideration of these diagnoses. Thus, they are not appropriate for inclusion in the edit for noncovered procedures.

We agree that we need to make conforming changes relating to stem cell transplants. Therefore, we are proposing the following restructure of Edit 11:

This list contains ICD-9-CM procedure codes identified as ``Noncovered Procedures'' that are always considered noncovered procedures:

11.71, Keratomileusis 11.72, Keratophakia 11.75, Radial keratotomy 11.76, Epikeratophakia 36.32, Other transmyocardial revascularization 37.35, Partial ventriculectomy 37.52, Implantation of total replacement heart system 37.53, Replacement or repair of thoracic unit of total replacement heart system 37.54, Replacement or repair of other implantable component of total replacement heart system 39.28, Extracranial-intracranial (EC-IC) vascular bypass 44.93, Insertion of gastric bubble (balloon) 50.51, Auxiliary liver transplant 52.83, Heterotransplant of pancreas 57.96, Implantation of electronic bladder stimulator 57.97, Replacement of electronic bladder stimulator 63.70, Male sterilization procedure, not otherwise specified 63.71, Ligation of vas deferens 63.72, Ligation of spermatic cord 63.73, Vasectomy 64.5, Operations for sex transformation, not elsewhere classified 66.21, Bilateral endoscopic ligation and crushing of fallopian tubes 66.22, Bilateral endoscopic ligation and division of fallopian tubes 66.29, Other bilateral endoscopic destruction or occlusion of fallopian tubes 66.31, Other bilateral ligation and crushing of fallopian tubes 66.32, Other bilateral ligation and division of fallopian tubes 66.39, Other bilateral destruction or occlusion of fallopian tubes 98.52, Extracorporeal shockwave lithotripsy [ESWL] of the gallbladder and/or bile duct 98.59, Extracorporeal shockwave lithotripsy of other sites

The following list contains ICD-9-CM procedure codes identified as ``Noncovered Procedures'' only when any of the following diagnoses are present as either a principal or secondary diagnosis.

Procedure List

41.01, Autologous bone marrow transplant without purging 41.04, Autologous hematopoietic stem cell transplant without purging 41.07, Autologous hematopoietic stem cell transplant with purging 41.09, Autologous bone marrow transplant with purging

Principal or Secondary Diagnosis List

204.00, Acute lymphoid leukemia, without mention of remission 205.00, Acute myeloid leukemia, without mention of remission 206.00, Acute monocytic leukemia, without mention of remission 207.00, Acute erythremia and erythroleukemia, without mention of remission 208.00, Acute leukemia of unspecified cell type, without mention of remission 205.10, Acute myeloid leukemia, in remission 205.11, Chronic myeloid leukemia, in remission

The following list contains ICD-9-CM procedure codes identified as ``Noncovered Procedures'' only when any of the following diagnoses are present as either a principal or secondary diagnosis.

Procedure List

41.02, Allogeneic bone marrow transplant with purging 41.03, Allogeneic bone marrow transplant without purging 41.05, Allogeneic hematopoietic stem cell transplant without purging 41.08, Allogeneic hematopoietic stem cell transplant with purging

Principal or Secondary Diagnosis List

203.00, Multiple myeloma, without mention of remission

203.01, Multiple myeloma, in remission

The following list contains ICD-9-CM procedure codes identified as ``Non-Covered Procedures'' except when there is at least one principal or secondary diagnosis code present from both list 1 and list 2.

Procedure List

52.80, Pancreatic transplant, not otherwise specified 52.82, Homotransplant of pancreas

Procedure List 1

250.00, Diabetes mellitus without mention of complication, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.01, Diabetes mellitus without mention of complication, type I [insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.02, Diabetes mellitus without mention of complication, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.03, Diabetes mellitus without mention of complication, type I [insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.10, Diabetes with ketoacidosis, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.11, Diabetes with ketoacidosis, type I [insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.12, Diabetes with ketoacidosis, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.13, Diabetes with ketoacidosis, type I [insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.20, Diabetes with hyperosmolarity, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.21, Diabetes with hyperosmolarity, type I [insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.22, Diabetes with hyperosmolarity, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.23, Diabetes with hyperosmolarity, type I [insulin dependent type] [IDDM] [juvenile type], uncontrolled 250.30, Diabetes with other coma, type II [non-insulin dependent type]

[[Page 28215]]

[NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.31, Diabetes with other coma, type I [insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.32, Diabetes with other coma, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.33, Diabetes with other coma, type I [insulin dependent type] [IDDM] [juvenile type], uncontrolled, type I [insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.40, Diabetes with renal manifestation, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.41, Diabetes with renal manifestation, type I [insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.42, Diabetes with renal manifestation, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.43, Diabetes with renal manifestation, type I [insulin dependent type] [IDDM type] [juvenile type], uncontrolled 205.50, Diabetes with ophthalmic manifestations, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 205.51, Diabetes with ophthalmic manifestations, type I

[insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 205.52, Diabetes with ophthalmic manifestations, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 205.53, Diabetes with ophthalmic manifestations, type I

[insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.60, Diabetes with neurological manifestations, type II

[non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.61, Diabetes with neurological manifestations, type I

[insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.62, Diabetes with neurological manifestations, type II

[non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.63, Diabetes with neurological manifestations, type I

[insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.70, Diabetes with peripheral circulatory disorders, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.71, Diabetes with peripheral circulatory disorders type I

[insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.72, Diabetes with peripheral circulatory disorders, type II [non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.73, Diabetes with peripheral circulatory disorders, type I

[insulin dependent type] [IDDM type] [juvenile type], uncontrolled 250.80, Diabetes with other specified manifestations, type II

[non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.81, Diabetes with other specified manifestations, type I

[insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.82, Diabetes with other specified manifestations, type II

[non-insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.83, Diabetes with other specified manifestations, type I

[insulin dependent type] [IDDM] [juvenile type], uncontrolled 250.90, Diabetes with unspecified complication, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, not stated as uncontrolled 250.91, Diabetes with unspecified complication, type I

[insulin dependent type] [IDDM] [juvenile type], not stated as uncontrolled 250.92, Diabetes with unspecified complication, type II [non- insulin dependent type] [NIDDM type] [adult-onset type] or unspecified type, uncontrolled 250.93, Diabetes with unspecified complication, type I

[insulin dependent type] [IDDM] [juvenile type], uncontrolled

Diagnosis List 2

403.01, Malignant hypertensive renal disease, with renal failure 403.11, Benign hypertensive renal disease, with renal failure 403.91, Unspecified hypertensive renal disease, with renal failure 404.02, Malignant hypertensive heart and renal disease, with renal failure 404.03, Malignant hypertensive heart and renal disease, with heart failure and renal failure 404.12, Benign hypertensive heart and renal disease, with renal failure 404.13, Benign hypertensive heart and renal disease, with heart failure and renal failure 404.92, Unspecified hypertensive heart and renal disease, with renal failure 404.93, Unspecified hypertensive heart and renal disease, with heart failure and renal failure 585, Chronic renal failure V42.0, Organ or tissue replaced by transplant, kidney V43.89, Organ or tissue replaced by other means, other

b. Edit 6 (Manifestations Not Allowed As Principal Diagnosis) in the MCE contains codes that describe the manifestation of an underlying disease, not the disease itself, and therefore, should not be used as a principal diagnosis. The following codes describe manifestations of an underlying disease; they should not be used as a principal diagnosis according to ICD-9-CM coding convention. Therefore, we are proposing to add the following diagnosis codes to Edit 6:

289.52, Splenic sequestration 571.3, Acute chest syndrome 785.52, Septic shock

Coding conventions in the ICD-9-CM Diagnostic Tabular List specify that etiologic conditions be coded first.

c. Edit 9 (Unacceptable Principal Diagnoses) contains codes ``that describe a circumstance which influences an individual's health status but is not a current illness of injury; therefore, these codes are considered unacceptable as a principal diagnosis.'' (This definition can be found on page 1094 of the DRG Definitions Manual, Version 21.0). Therefore, these codes are considered unacceptable as a principal diagnosis. Last year, we became aware that two codes should be removed from this list, as they can be legitimate causes for inpatient admission. However, we were made aware of this too late in the process to make a change to this edit prior to FY 2004. We will now be able to make the necessary system changes before the start of FY 2005. Therefore, in this proposed rule, we are proposing to remove the following codes from Edit 9:

V53.01, Adjustment of cerebral ventricular (communicating) shunt V53.02, Adjustment of neuropacemaker (brain) (peripheral nerve) (spinal cord) 11. Surgical Hierarchies

[If you choose to comment on the issues in this section, please include the caption ``Surgical Hierarchies'' at the beginning of your comment.]

[[Page 28216]]

Some inpatient stays entail multiple surgical procedures, each one of which, occurring by itself, could result in assignment of the case to a different DRG within the MDC to which the principal diagnosis is assigned. Therefore, it is necessary to have a decision rule within the GROUPER by which these cases are assigned to a single DRG. The surgical hierarchy, an ordering of surgical classes from most resource-intensive to least resource-intensive, performs that function. Application of this hierarchy ensures that cases involving multiple surgical procedures are assigned to the DRG associated with the most resource- intensive surgical class.

Because the relative resource intensity of surgical classes can shift as a function of DRG reclassification and recalibrations, we reviewed the surgical hierarchy of each MDC, as we have for previous reclassifications and recalibrations, to determine if the ordering of classes coincides with the intensity of resource utilization.

A surgical class can be composed of one or more DRGs. For example, in MDC 11, the surgical class ``kidney transplant'' consists of a single DRG (DRG 302) and the class ``kidney, ureter and major bladder procedures'' consists of three DRGs (DRGs 303, 304, and 305). Consequently, in many cases, the surgical hierarchy has an impact on more than one DRG. The methodology for determining the most resource- intensive surgical class involves weighting the average resources for each DRG by frequency to determine the weighted average resources for each surgical class. For example, assume surgical class A includes DRGs 1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also that the average charge of DRG 1 is higher than that of DRG 3, but the average charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To determine whether surgical class A should be higher or lower than surgical class B in the surgical hierarchy, we would weight the average charge of each DRG in the class by frequency (that is, by the number of cases in the DRG) to determine average resource consumption for the surgical class. The surgical classes would then be ordered from the class with the highest average resource utilization to that with the lowest, with the exception of ``other O.R. procedures'' as discussed below.

This methodology may occasionally result in assignment of a case involving multiple procedures to the lower-weighted DRG (in the highest, most resource-intensive surgical class) of the available alternatives. However, given that the logic underlying the surgical hierarchy provides that the GROUPER search for the procedure in the most resource-intensive surgical class, this result is unavoidable.

We note that, notwithstanding the foregoing discussion, there are a few instances when a surgical class with a lower average charge is ordered above a surgical class with a higher average charge. For example, the ``other O.R. procedures'' surgical class is uniformly ordered last in the surgical hierarchy of each MDC in which it occurs, regardless of the fact that the average charge for the DRG or DRGs in that surgical class may be higher than that for other surgical classes in the MDC. The ``other O.R. procedures'' class is a group of procedures that are only infrequently related to the diagnoses in the MDC but are still occasionally performed on patients in the MDC with these diagnoses. Therefore, assignment to these surgical classes should only occur if no other surgical class more closely related to the diagnoses in the MDC is appropriate.

A second example occurs when the difference between the average charges for two surgical classes is very small. We have found that small differences generally do not warrant reordering of the hierarchy because, as a result of reassigning cases on the basis of the hierarchy change, the average charges are likely to shift such that the higher- ordered surgical class has a lower average charge than the class ordered below it.

Based on the preliminary recalibration of the DRGs, we are proposing modifications of the surgical hierarchy as set forth below.

At this time, we are proposing to revise the surgical hierarchy for the pre-MDC DRGs and MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue).

In the pre-MDC DRGs, we are proposing to reorder DRG 541 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses With Major O.R. Procedure) and DRG 542 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses Without Major O.R. Procedure) above DRG 480 (Liver Transplant).

In MDC 8, we are proposing to--

Reorder DRG 496 (Combined Anterior/Posterior Spinal Fusion), DRG 497 (Spinal Fusion Except Cervical With CC), and DRG 498 (Spinal Fusion Except Cervical Without CC) above DRG 471 (Bilateral or Multiple Major Joint Procedures of the Lower Extremity).

Reorder DRG 519 (Cervical Spinal Fusion With CC) and DRG 520 (Cervical Spinal Fusion Without CC) above DRG 216 (Biopsies of the Musculoskeletal System and Connective Tissue).

Reorder DRG 213 (Amputation for the Musculoskeletal System and Connective Tissue Disorders) above DRG 210 (Hip and Femur Procedures Except Major Joint Age > 17 With CC), DRG 211 (Hip and Femur Procedures Except Major Joint Age > 17 Without CC), and DRG 212 (Hip and Femur Procedures Except Major Joint Age 0-17).

Reorder DRG 499 (Back and Neck Procedures Except Spinal Fusion With CC) and DRG 500 (Back and Neck Procedures Except Spinal Fusion Without CC) above DRG 218 (Lower Extremity and Humerus Procedures Except Hip, Foot, and Femur Age > 17 With CC), DRG 219 (Lower Extremity and Humerus Procedures Except Hip, Foot, and Femor Age > 17 Without CC), and DRG 220 (Lower Extremity and Humerus Procedures Except Hip, Foot, and Femur Age 0-17). 12. Refinement of Complications and Comorbidities (CC) List

[If you choose to comment on issues in this section, please include the caption ``CC List'' at the beginning of your comment.]

In the September 1, 1987 final notice (52 FR 33143) concerning changes to the DRG classification system, we modified the GROUPER logic so that certain diagnoses included on the standard list of CCs would not be considered valid CCs in combination with a particular principal diagnosis. We created the CC Exclusions List for the following reasons: (1) To preclude coding of CCs for closely related conditions; (2) to preclude duplicative or inconsistent coding from being treated as CCs; and (3) to ensure that cases are appropriately classified between the complicated and uncomplicated DRGs in a pair. We developed this list of diagnoses, using physician panels, to include those diagnoses that, when present as a secondary condition, would be considered a substantial complication or comorbidity. In previous years, we have made changes to the list of CCs, either by adding new CCs or deleting CCs already on the list. At this time, we are not proposing to delete any of the diagnosis codes on the CC list.

In the May 19, 1987 proposed notice (52 FR 18877) and the September 1, 1987 final notice (52 FR 33154), we explained that the excluded secondary diagnoses were established using the following five principles:

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Chronic and acute manifestations of the same condition should not be considered CCs for one another.

Specific and nonspecific (that is, not otherwise specified (NOS)) diagnosis codes for the same condition should not be considered CCs for one another.

Codes for the same condition that cannot coexist, such as partial/total, unilateral/bilateral, obstructed/unobstructed, and benign/malignant, should not be considered CCs for one another.

Codes for the same condition in anatomically proximal sites should not be considered CCs for one another.

Closely related conditions should not be considered CCs for one another.

The creation of the CC Exclusions List was a major project involving hundreds of codes. We have continued to review the remaining CCs to identify additional exclusions and to remove diagnoses from the master list that have been shown not to meet the definition of a CC.\1\

\1\ See the September 30, 1988 final rule (53 FR 38485) for the revision made for the discharges occurring in FY 1989; the September 1, 1989 final rule (54 FR 36552) for the FY 1990 revision; the September 4, 1990 final rule (55 FR 36126) for the FY 1991 revision; the August 30, 1991 final rule (56 FR 43209) for the FY 1992 revision; the September 1, 1992 final rule (57 FR 39753) for the FY 1993 revision; the September 1, 1993 final rule (58 FR 46278) for the FY 1994 revisions; the September 1, 1994 final rule (59 FR 45334) for the FY 1995 revisions; the September 1, 1995 final rule (60 FR 45782) for the FY 1996 revisions; the August 30, 1996 final rule (61 FR 46171) for the FY 1997 revisions; the August 29, 1997 final rule (62 FR 45966) for the FY 1998 revisions; the July 31, 1998 final rule (63 FR 40954) for the FY 1999 revisions, the August 1, 2000 final rule (65 FR 47064) for the FY 2001 revisions; the August 1, 2001 final rule (66 FR 39851) for the FY 2002 revisions; the August 1, 2002 final rule (67 FR 49998) for the FY 2003 revisions; and the August 1, 2003 final rule (68 FR 45364) for the FY 2004 revisions.) In the July 30, 1999 final rule (64 FR 41490), we did not modify the CC Exclusions List for FY 2000 because we did not make any changes to the ICD-9-CM codes for FY 2000.

We are proposing a limited revision of the CC Exclusions List to take into account the proposed changes that will be made in the ICD-9- CM diagnosis coding system effective October 1, 2004. (See section II.B.15. of this preamble for a discussion of ICD-9-CM changes.) We are proposing these changes in accordance with the principles established when we created the CC Exclusions List in 1987.

Tables 6G and 6H in the Addendum to this proposed rule contain the proposed revisions to the CC Exclusions List that would be effective for discharges occurring on or after October 1, 2004. Each table shows the principal diagnoses with changes to the excluded CCs. Each of these principal diagnoses is shown with an asterisk, and the additions or deletions to the CC Exclusions List are provided in an indented column immediately following the affected principal diagnosis.

CCs that are added to the list are in Table 6G--Additions to the CC Exclusions List. Beginning with discharges on or after October 1, 2004, the indented diagnoses would not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

CCs that are deleted from the list are in Table 6H--Deletions from the CC Exclusions List. Beginning with discharges on or after October 1, 2004, the indented diagnoses would be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

Copies of the original CC Exclusions List applicable to FY 1988 can be obtained from the National Technical Information Service (NTIS) of the Department of Commerce. It is available in hard copy for $152.50 plus shipping and handling. A request for the FY 1988 CC Exclusions List (which should include the identification accession number (PB) 88- 133970) should be made to the following address: National Technical Information Service, United States Department of Commerce, 5285 Port Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.

Users should be aware of the fact that all revisions to the CC Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2001, 2002, 2003, and 2004) and those in Tables 6G and 6H of this proposed rule for FY 2005 must be incorporated into the list purchased from NTIS in order to obtain the CC Exclusions List applicable for discharges occurring on or after October 1, 2004. (Note: There was no CC Exclusions List in FY 2000 because we did not make changes to the ICD-9-CM codes for FY 2000.)

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current DRG Definitions Manual, Version 21.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 22.0 of this manual, which includes the final FY 2004 DRG changes, is available for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303. Please specify the revision or revisions requested. 13. Review of Procedure Codes in DRGs 468, 476, and 477

[If you choose to comment on issues in this section, please include the caption ``DRGs 468, 476, and 477'' at the beginning of your comment.]

Each year, we review cases assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these DRGs.

DRGs 468, 476, and 477 are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These DRGs are intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. DRG 476 is assigned to those discharges in which one or more of the following prostatic procedures are performed and are unrelated to the principal diagnosis:

60.0, Incision of prostate 60.12, Open biopsy of prostate 60.15, Biopsy of periprostatic tissue 60.18, Other diagnostic procedures on prostate and periprostatic tissue 60.21, Transurethral prostatectomy 60.29, Other transurethral prostatectomy 60.61, Local excision of lesion of prostate 60.69, Prostatectomy, not elsewhere classified 60.81, Incision of periprostatic tissue 60.82, Excision of periprostatic tissue 60.93, Repair of prostate 60.94, Control of (postoperative) hemorrhage of prostate 60.95, Transurethral balloon dilation of the prostatic urethra 60.96, Transurethral destruction of prostate tissue by microwave thermotherapy 60.97, Other transurethral destruction of prostate tissue by other thermotherapy 60.99, Other operations on prostate

All remaining O.R. procedures are assigned to DRGs 468 and 477, with DRG 477 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis.\2\

\2\ In the August 1, 2003 final rule (68 FR 45365) we moved several procedures from DRG 468 to DRGs 476 and 477 because the procedures are nonextensive. The original list of the ICD-9-CM procedure codes for the procedures we consider nonextensive procedures, if performed with an unrelated principal diagnosis, was published in Table 6C in section IV. of the Addendum to the September 30, 1988 final rule (53 FR 38591). As part of the final rules published on September 4, 1990 (55 FR 36135), August 30, 1991 (56 FR 43212), September 1, 1992 (57 FR 23625), September 1, 1993 (58 FR 46279), September 1, 1994 (59 FR 45336), September 1, 1995 (60 FR 45783), August 30, 1996 (61 FR 46173), and August 29, 1997 (62 FR 45981), we moved several other procedures from DRG 468 to DRG 477, and some procedures from DRG 477 to DRG 468. No procedures were moved in FY 1999, as noted in the July 31, 1998 final rule (63 FR 40962); in FY 2000, as noted in the July 30, 1999 final rule (64 FR 41496); in FY 2001, as noted in the August 1, 2000 final rule (65 FR 47064); or in FY 2002, as noted in the August 1, 2001 final rule (66 FR 39852). In the August 1, 2002 final rule (67 FR 49999), we did not move any procedures from DRG 477. However, we did move procedures codes from DRG 468 and placed them in more clinically coherent DRGs.

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a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs

We annually conduct a review of procedures producing assignment to DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it would be appropriate to move procedure codes out of these DRGs into one of the surgical DRGs for the MDC into which the principal diagnosis falls. The data are arrayed two ways for comparison purposes. We look at a frequency count of each major operative procedure code. We also compare procedures across MDCs by volume of procedure codes within each MDC.

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. Based on this year's review, we did not identify any procedures in DRG 477 that should be removed. Therefore, we are not proposing to move any procedures from DRG 477 to one of the surgical DRGs. b. Reassignment of Procedures Among DRGs 468, 476, and 477

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to DRGs 468, 476, and 477, to ascertain if any of those procedures should be reassigned from one of these three DRGs to another of the three DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data. Based on a comment we received in response to last year's proposed rule (68 FR 45366), we are proposing to move procedure code 51.23 (Laparoscopic cholecystectomy) from DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis) into DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis).

The commenter suggested that a laparoscopic procedure was probably not an extensive O.R. procedure; it was more likely a nonextensive O.R. procedure. We agree and, therefore, are proposing this change. In addition, we are proposing to add several new procedure codes to DRGs 476 and 477. These procedures are also listed on Table 6B--New Procedure Codes in the Addendum to this proposed rule. However, DRGs 476 and 477 are not limited to one MDC, so the new codes are also included here for nonextensive cases in which the procedures are unrelated to the principal diagnosis:

44.67, Laparoscopic procedures for creation of esophagogastric sphincteric competence 44.68, Laparoscopic gastroplasty 44.95, Laparoscopic gastric restrictive procedure 44.96, Laparoscopic revision of gastric restrictive procedure 44.97, Laparoscopic removal of gastric restrictive device(s) 44.98, Laparoscopic adjustment of size of adjustable gastric restrictive device

In DRG 476, the above codes are to be added to the section ``With or Without Operating Room Procedures'' in the GROUPER logic.

We are not proposing to move any procedure codes from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476. c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, we are not proposing to add any diagnosis codes to MDCs. 14. Pancreatic Islet Cell Transplantation in Clinical Trials

[If you choose to comment on issues in this section, please include the caption ``Pancreatic Islet Cell Transplantation'' at the beginning of your comment.]

Section 733(a) of Public Law 108-173 directs the Secretary, acting through the National Institute of Diabetes and Digestive and Kidney Disorders (NIDDKD) to conduct a clinical investigation of pancreatic islet cell transplantation that includes Medicare beneficiaries. Section 733(b) provides for Medicare payments, beginning no earlier than October 1, 2004, for the routine costs as well as the costs of the transplantation and appropriate related items and services for Medicare beneficiaries who are participating in a clinical trial as if such transplantation were covered under Medicare Part A or Part B. Routine costs are defined as reasonable and necessary routine patient care costs (as defined in the CMS Coverage Issues Manual, Section 30-1) including immunosuppressive drugs and other followup care. Section 733(c)(2) defines transplantation and appropriate related items and services as items and services related to the acquisition and delivery of the pancreatic islet cell transplantation, notwithstanding any national noncoverage determination contained in the CMS Coverage Issues Manual.

While the DRG payment will cover the transplant injection and the subsequent hospital stay, we are considering establishing an add-on payment to the DRG payment amount to reimburse the acquisition costs associated with islet cell procurement. Historically, organ acquisition costs have been reimbursed as a cost pass-through. However, islet cell transplants are not exactly the same as solid organ transplants. While solid pancreata are procured, islet cells are not transplanted in the solid organ state as are other types of organs. Rather, the pancreata are procured by an organ procurement organization (OPO) and are then sent to an islet cell resource center that extracts the islet cells from the pancreata and sends the cells on to the transplant center. Since the procurement and processing system for islet cell transplants is not the same as for solid organ transplants, we do not intend to pay for these costs as a pass through. With the anticipated small number of beneficiaries in the clinical trial and the Medicare program's unfamiliarity with the isolation process, we believe it is most appropriate at this time to have a set payment rate for acquisition costs, rather than attempting a case-by-case determination of the reasonableness of these costs in each institution. We note there is precedent to exclude acquisition costs from the pass-through payment process. For example, stem cell transplants and corneal transplants do not have acquisition costs reimbursed as a cost pass-through payment.

The add-on payment would be a single amount that includes pre- transplant tests and services, pancreas procurement, and islet isolation services. We are proposing to use an

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add-on as opposed to increasing the DRG amount because the DRGs at issue are also applied in cases involving a variety of other procedures that do not include the costly islet cell acquisition required for this procedure. Thus, including these costs in the DRGs would have the potential of skewing the weights for all other DRGs. We are asking for specific comments on whether an add-on payment amount is the appropriate way to reimburse islet cell acquisition costs, or whether another methodology may be more appropriate.

In addition, while we have some data available regarding the cost of pancreas procurement, we are specifically asking for any other data that support the costs of acquisition and the costs of isolation cell resource centers.

Because we do not yet have enough data, we are unable to publish a proposed acquisition amount in this proposed rule. After analyzing data submitted during the comment period, other data acquired by CMS, and any suggested changes from the methodology proposed, we will issue the final organ acquisition payment amount in the IPPS final rule.

Pancreatic islet cell transplantation during the clinical trial will be performed to decrease or eliminate the need for insulin in patients with Type I diabetes. Islet cells are acquired from a cadaveric pancreas donor (islet allotransplantation).

As described in II.B.1. of this preamble, ICD-9-CM diagnosis and procedure codes are used to determine DRG assignments. In 1996, CMS (then HCFA) created codes for islet cell transplantation:

52.84, Autotransplantation of cells of islets of Langerhans 52.85, Allotransplantation of cells of islets of Langerhans

The Medicare GROUPER does not consider codes 52.84 and 52.85 as O.R. procedures and, therefore, these codes do not move the case from a medical DRG into a surgical DRG unless another procedure is performed. Based on the circumstances noted above under which pancreatic islet cell transplantation would be performed, we identified the three most logical DRGs to which we believe cases would be assigned. If a patient has Type I diabetes mellitus with ESRD and a pancreatectomy is performed, the case would group to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis). If a patient has Type I diabetes mellitus with ESRD and is also receiving a kidney transplant (simultaneous kidney and islet transplantation), the case would group to DRG 302 (Kidney Transplant). If a patient has Type I diabetes mellitus with ESRD and a history of a kidney transplant and then has the islet cells inserted via an open approach, the case would group to DRG 315 (Other Kidney and Urinary Tract O.R. Procedures).

As each case is assigned to a DRG based on all of the ICD-9-CM codes reported, cases could also be assigned to DRGs other than those mentioned above. In fact, our review of FY 2003 MedPAR data revealed that codes 52.84 and 52.85 were present in only four cases, and that each case was assigned to a different DRG. We found one case each in DRG 18 (Cranial and Peripheral Nerve Disorders With CC), DRG 192 (Pancreas, Liver, and Shunt Procedures Without CC), DRG 207 (Disorders of the Biliary Tract With CC), and DRG 302 (Kidney Transplant).

We are reluctant to propose assigning the islet cell codes to one specific DRG, as the islet cell infusion will have different indications depending on the merits of each case, as is shown from the MedPAR data mentioned above. In addition, we do not currently have accurate cost data or charges for patients in this type of clinical trial, which makes it difficult to determine an appropriate DRG weight. As a result, assignment of cases to a specific DRG might have the consequence of either overpaying or underpaying the cases. We believe that both of these consequences are unacceptable. Therefore, we are not proposing that cases involved in the clinical trials be assigned to one specific DRG for payment purposes. As we believe that these cases will be assigned to DRGs 302, 315, and 468, we are proposing to establish an add-on payment for cases in these three DRGs containing procedure codes 52.84 or 52.85. As stated earlier, we will not be able to establish the amount of this add-on until we have determined procurement costs for the islet cells. We are soliciting information from transplant centers and organ procurement organizations on costs for these types of transplantations. 15. Changes to the ICD-9-CM Coding System

[If you choose to comment on issues in this section, please include the caption ``ICD-9-CM Coding'' at the beginning of your comment.]

As described in section II.B.1. of this preamble, the ICD-9-CM is a coding system that is used for the reporting of diagnoses and procedures performed on a patient. In September 1985, the ICD-9-CM Coordination and Maintenance Committee was formed. This is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, charged with maintaining and updating the ICD-9-CM system. The Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The ICD-9-CM Manual contains the list of valid diagnosis and procedure codes. (The ICD-9-CM Manual is available from the Government Printing Office on CD-ROM for $25.00 by calling (202) 512-1800.) The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The Committee encourages participation in the above process by health-related organizations. In this regard, the Committee holds public meetings for discussion of educational issues and proposed coding changes. These meetings provide an opportunity for representatives of recognized organizations in the coding field, such as the American Health Information Management Association (AHIMA), the American Hospital Association (AHA), and various physician specialty groups, as well as individual physicians, medical record administrators, health information management professionals, and other members of the public, to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the Committee formulates recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes for implementation in FY 2005 at public meetings held on April 3, 2003 and December 4-5, 2003, and finalized the coding changes after consideration of comments received at the meetings and in writing by January 12, 2004. Those coding changes are announced in Tables 6A through 6F in the Addendum to this proposed rule. Copies of the minutes of the procedure codes discussions at the Committee's 2003 meetings can be obtained from the CMS Web site: http:// www. cms. gov/ payment

systems/ icd9/. The minutes of

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the diagnoses codes discussions at the 2003 meetings are found at: http:// www. cdc. gov/ nchs/ icd9. htm. Paper copies of these minutes

are no longer available and the mailing list has been discontinued.

For a report of procedure topics discussed at the April 1-2, 2004 meeting, see the Summary Report at: http://www. cms. hhs. gov/ payment

systems / icd9/. For a report of the diagnosis topics discussed at the April 1-2, 2004 meeting, see the Summary Report at: http:/www. cdc.

gov/ nchs/ icd9. htm.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2404, 3311 Toledo Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent by E-mail to: Patricia.Brooks1@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2004. The new ICD-9-CM codes are listed, along with their DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively) in the Addendum to this proposed rule. As we stated above, the code numbers and their titles were presented for public comment at the ICD-9-CM Coordination and Maintenance Committee meetings. Both oral and written comments were considered before the codes were approved. In this proposed rule, we are only soliciting comments on the proposed DRG classification of these new codes.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A. New procedure codes are shown in Table 6B. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2004. Table 6D usually contains invalid procedure codes, however, for FY 2005, there are no invalid procedure codes. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), which also includes the DRG assignments for these revised codes. Table 6F includes revised procedure code titles for FY 2005.

The first of the 2004 public meetings was held on April 1-2, 2004. In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the April meeting as part of the code revisions effective the following October.

Section 503(a) of Public Law 108-173 includes a requirement for updating ICD-9-CM codes twice a year instead of the current process of annual updates on October 1 of each year. This requirement is included as part of the amendments to the Act relating to recognition of new technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by adding a new clause (vii) which states that the ``Secretary shall provide for the addition of new diagnosis and procedure codes in April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis- related group classification) * * * until the fiscal year that begins after such date.'' Because this new statutory requirement will have a significant impact on health care providers, coding staff, publishers, system maintainers, software systems, among others, we are soliciting comments on our proposals described below to implement this requirement. This new requirement will improve the recognition of new technologies under the IPPS system by providing information on these new technologies at an earlier date. Data would be available 6 months earlier than would be possible with updates occurring only once a year on October 1. Many coding changes apply to longstanding medical issues.

While the new requirement states that the Secretary shall not adjust the payment of the DRG classification for the April 1 new codes, the Department will have to update its DRG software and other systems in order to recognize and accept the new codes. We will also have to publicize the code changes and the need for a mid-year systems update by providers to capture the new codes. Hospitals will have to obtain the new code books and encoder updates, and make other system changes in order to capture and report the new codes. We are aware of the additional burden this will have on health care providers.

The ICD-9-CM Coordination and Maintenance Committee has held its meetings in April and December of each year in order to update the codes and the applicable payment and reporting systems by October 1 of each year. Items are placed on the agenda for the ICD-9-CM Coordination and Maintenance Committee meeting if the request is received at least 2 months prior to the meeting. This requirement allows time for staff to review and research the coding issues and prepare material for discussion at the meeting. It also allows time for the topic to be publicized in meeting announcements in the Federal Register as well as on the CMS Web site. The public decides whether or not to attend the meeting based on the topics listed on the agenda. In order to provide an update on April 1, it became clear that a December Committee meeting would not provide time to finalize and publicize these code revisions. Final decisions on code title revisions are currently made by March 1 so that these titles can be included in the IPPS proposed rule. A complete addendum describing details of all changes to ICD-9-CM, both tabular and index, are publicized on CMS and NCHS web pages in May of each year. Publishers of coding books and software companies use this information to modify their products that are used by health care providers. This 5-month time period has proved to be necessary for hospitals and other providers to update their systems.

A discussion of this timeline and the need for changes are included in the December 4-5, 2003 ICD-9-CM Coordination and Maintenance Committee minutes. The public provided comment that additional time would be needed to update hospital systems and obtain new code books and coding software. There was considerable concern expressed about the impact this new update would have on providers. Therefore, we are rescheduling the second Committee meeting for 2004. We have scheduled this meeting for October 7-8, 2004. Those who wish to have a coding issue discussed at the October Committee meeting would be required to submit their request by August 7, 2004. The Department will continue this process to accommodate all requestors who submit appropriate requests in a timely manner.

We are proposing to implement section 503(a) by developing a mechanism for approving, in time for the April update, diagnoses and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We are proposing the following process for

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making these determinations. Topics considered during the October ICD- 9-CM Coordination and Maintenance Committee meeting would be considered for an April 1 update if a strong and convincing case is made by the requestor at the Committee's public meeting. The request must identify the reason why a new code is needed in April for purposes of the new technology process. The participants at the meeting and those reviewing the Committee meeting summary report would be provided the opportunity to comment on this expedited request. All other topics would be considered for the October 1 update. Participants at the Committee meeting would be encouraged to comment on all such requests.

We believe that this proposal captures the intent of section 503(a). This requirement was included in the provision revising the standards and process for recognizing new technology under the IPPS. In addition, the need for approval of new codes outside the existing cycle (October 1) arises most frequently and most acutely where the new codes would capture new technologies that are (or will be) under consideration for new technology add-on payments. Thus, we believe this provision was intended to expedite data collection through the assignment of new ICD-9-CM codes for new technologies seeking higher payments. Our proposal is designed to carry out that intention, while minimizing the additional administrative costs associated with mid-year changes to the ICD-9-CM codes.

The Department of Health and Human Services has been actively working on the development of new coding systems to replace the ICD-9- CM. In December 1990, the National Committee on Vital and Health Statistics (NCVHS) issued a report noting that, while the ICD-9-CM classification system had been responsive to changing technologies and identifying new diseases, there was concern that the ICD classification might be stressed to a point where the quality of the system would soon be compromised. The ICD-10-CM (for diagnoses) and the ICD-10-PCS (for procedures) were developed in response to these concerns. These efforts have become increasingly important because of the growing number of problems with the ICD-9-CM, which was implemented 25 years ago.

In November 2003, the NCVHS recommended that the Secretary prepare a notice of proposed rulemaking for the implementation of ICD-10-CM and ICD-10-PCS. A complete report on the activities of this committee can be found at: http://www.ncvhs.hhs.gov. The Department is studying these

recommendations. 16. Other Issues

[If you choose to comment on issues in this section, please include the caption ``Other DRG Issues'' at the beginning of your comments.] a. Craniotomy Procedures

As discussed in the August 1, 2003 IPPS final rule (68 FR 45353), for FY 2004 we conducted an analysis of the charges for various procedures and diagnoses within DRG 1 (Craniotomy Age > 17 With CC) and DRG 2 (Craniotomy Age > 17 Without CC) to determine whether further changes to these DRGs were warranted. Based on our analysis and consideration of public comments received on our May 19, 2003 IPPS proposed rule (68 FR 27161), in the August 1, 2003 IPPS final rule, we created three new DRGs: DRG 528 (Intracranial Vascular Procedures With a Principal Diagnosis of Hemorrhage) for patients with an intracranial vascular procedure and an intracranial hemorrhage; and DRGs 529 (Ventricular Shunt Procedures With CC) and 530 (Ventricular Shunt Procedures Without CC) for patients with only a vascular shunt procedure.

As discussed below, we have received further comments regarding the composition of DRGs 1 and 2 that relate to the appropriate DRG assignment of unruptured cerebral aneurysm cases and cases involving implantation of GLIADEL[reg] chemotherapy wafers. We have also received comments on possible revisions to DRG 3 (Craniotomy Age 0-17). (1) Unruptured Cerebral Aneurysms

In the August 1, 2003 final rule (68 FR 45354), in response to a comment that suggested we create a companion DRG to DRG 528 for intracranial vascular procedures for unruptured cerebral aneurysms, we evaluated cases in the MedPAR file involving unruptured cerebral aneurysm and determined that the average charges for unruptured cerebral aneurysm cases were consistent with the variation of charges found in DRGs 1 and 2. Therefore, we did not propose a change in the DRG classification. We indicated that we would continue to monitor cases involving unruptured cerebral aneurysms.

We now have examined cases in the FY 2003 MedPAR file that reported unruptured cerebral aneurysms. We found 657 unruptured aneurysm cases assigned to DRG 1 and 481 unruptured cerebral aneurysm cases assigned to DRG 2. The average charges for these unruptured cerebral aneurysm cases in DRG 1 ($50,879) are slightly lower than the overall charges for all cases in that DRG ($51,300). For unruptured cerebral aneurysm cases assigned to DRG 2, we found the average charges of approximately $29,524 are consistent with the overall average charges of that DRG of approximately $28,416.

Based on the results of our analysis, we still do not believe a proposal to modify the DRG assignment of unruptured cerebral aneurysm cases is warranted. (2) GLIADEL[reg] Chemotherapy Wafers

In the August 1, 2003 final rule (68 FR 45354), we stated that we had received comments requesting a change to the DRG assignment of cases involving implantation of GLIADEL[reg] chemotherapy wafers to treat brain tumors. One of the commenters had offered two options: (1) Create a new DRG for cases involving implantation of GLIADEL[reg] chemotherapy wafers; and (2) reassign these cases to DRG 484 (Craniotomy for Multiple Significant Trauma).

At that time, we had analyzed data in the March 2003 update of the FY 2003 MedPAR file and found a total of 61 cases in which procedure code 00.10 (Implantation of a chemotherapy agent) was reported for cases assigned to DRGs 1 and 2. There were 38 cases assigned to DRG 1 and 23 cases assigned to DRG 2. The GROUPER logic for these DRGs assigns cases with CCs to DRG 1 and those without CCs to DRG 2. Consistent with the GROUPER logic for these DRGs, we had found that the average standardized charges in DRGs 1 and 2 were approximately $64,864 and $42,624, respectively. However, while the estimated average charges for GLIADEL[reg] wafer cases of $50,394 may have been higher than the average standardized charges for DRG 2, they were within the normal variation of overall charges within each DRG. In addition, the volume of cases in these two DRGs was too small to warrant the establishment of a separate new DRG for this technology. Therefore, we stated that we wanted to review a full year of data and take the time to consider alternative options that might appear warranted before proposing a change.

We have now examined more complete MedPAR data (December 2003 update for FY 2003) on cases reporting GLIADEL[reg] chemotherapy wafers. We found a total of 127 cases in which procedure code 00.10 was reported for cases assigned to DRGs 1 and 2. There were 80 cases assigned to DRG 1 and 47 cases assigned to DRG 2. The average

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charges for these cases in DRGs 1 and 2 were approximately $61,866 and $47,189, respectively. The average charges for these cases are higher than the overall charges of DRGs 1 and 2 of approximately $51,300 and $28,416, respectively. Although the average charges for the GLIADEL[reg] wafer cases within these DRGs are higher than the average charges of all cases in these DRGs, they remain within the range of average charges for other procedures included in these DRGs. The majority of the GLIADEL[reg] wafer cases are assigned to the second highest weighted DRG in MDC 1 behind DRG 528 (Intracranial Vascular Procedure With a Principal Diagnosis of Hemorrhage) in which the weights were derived from average charges of approximately $113,884. In DRG 1, there are 10 procedures that have higher average charges than the GLIADEL[reg] wafer cases. However, in DRG 2, the charges associated with GLIADEL[reg] wafer cases are the highest of the procedures included within the DRG.

DRGs are based on the principal diagnosis, secondary diagnosis, and procedures performed on the patient. DRGs are not generally created to recognize the presence or absence of specific technologies for each patient. In the past, we have made one exception to this rule. The exception was the creation of two new DRGs for drug-eluting stents: DRG 526 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With Acute Myocardial Infarction) and DRG 527 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent Without Acute Myocardial Infarction) (67 FR 50003). We took this unprecedented approach in response to the unique circumstances surrounding the potential breakthrough nature of this technology. We currently have 59,613 drug-eluting cases annually, far more cases than the volume for GLIADEL[reg] wafers. We believe that the volume of GLIADEL[reg] wafer cases remains too small to warrant the taking of the exceptional step of establishing a separate new DRG for this technology.

Commenters also have proposed the reassignment of GLIADEL[reg] wafer cases to other existing DRGs, such as DRG 484 (Craniotomy for Multiple Significant Trauma), DRG 528 (Intracranial Vascular Procedures With Principal Diagnosis of Hemorrhage), DRG 492 (Chemotherapy With Acute Leukemia as a Secondary Diagnoses or With Use of a High Dose Chemotherapeutic Agent), or DRG 481 (Bone Marrow Transplant). We have examined these alternatives, and have come to the conclusion that none of these alternatives meets the standard of clinical coherence under the DRG system. For example, reconfiguring DRG 484 to include GLIADEL[reg] wafer cases would not produce a clinically coherent DRG because DRG 484 contains cases where craniotomy is performed in the setting of multiple significant trauma. Similarly, assigning GLIADEL[reg] wafer cases to DRG 528 would not produce a clinically coherent DRG because DRG 528 contains cases where craniotomy is performed as part of a vascular procedure with a primary diagnosis of hemorrhage, as in the case of a ruptured aneurysm. DRG 492 is clinically inappropriate because it contains cases of acute leukemia treated with chemotherapy, and DRG 481 is clinically inappropriate because it contains cases involving bone marrow transplant. None of these DRGs contains cases of glioblastoma multiforme or other primary brain tumors. Therefore, we are not proposing to adopt any of these changes at this time.

We also considered several other approaches to reassigning GLIADEL[reg] wafer cases in a manner that is appropriate both in terms of clinical coherence and resource use. For example, we considered the creation of a new DRG that includes GLIADEL[reg] wafer cases along with other types of local therapy for intracerebral malignant disease. Specifically, we considered the creation of a new DRG that includes GLIADEL[reg] wafers and a Gliasite Radiation Therapy System, a relatively new form of intracavitary brachytherapy. Such a DRG would be clinically coherent because it would contain cases of malignant brain tumors treated with local therapy. However, our analysis of existing MedPAR data suggests that such a DRG would probably not provide enhanced reimbursement for the GLIADEL[reg] wafer cases, and that, in fact, decreased reimbursement for GLIADEL[reg] wafer cases is a more likely result. Therefore, we are not proposing a change at this time. However, we will continue to monitor our data to determine whether a change is warranted in the future.

We recognize that the implantation of chemotherapeutically active wafers for local therapy of malignant brain tumors represents a significant medical technology that currently offers clinical benefits to patients and holds out the promise of future innovation in the treatment of these brain tumors. Therefore, we invite further comments and suggestions regarding the appropriate DRG assignment for this technology. (3) DRG 3 (Craniotomy Age 0-17)

We received a comment stating concern that DRG 3 has not been reviewed, while DRGs 1 and 2 have had some revisions. The commenter believed that, particularly with the removal of major trauma cases, age distinctions may no longer be significant for craniotomies and the other intracranial procedures classified in DRGs 1 through 3. The commenter stated that it may be more consistent, from both a clinical and resource perspective, to simply eliminate DRG 3 and redistribute the pediatric and juvenile cases to DRGs 1 and 2 based on the procedures performed and the complication or comorbidities present, instead. This analysis would require supplemental data from non-MedPAR sources.

We note that the primary focus of updates to the Medicare DRG classification system is for changes relating to the Medicare patient population, not the pediatric patient population. In the FY 2003 data, there were only two cases assigned to DRG 3. Therefore, we do not believe a proposal to address the commenter's request is warranted at this time. We are aware that the Medicare DRGs are sometimes used to classify other patient populations. We advise those non-Medicare systems that need a more up-to-date system to consider choosing from other systems that are currently in use in this country, or developing their own modifications. b. Coronary Stent Procedures

We have received comments and recommendations from several industry representatives about the DRG assignments for coronary artery stents. These representatives expressed concern about whether the reimbursement for stents is adequate, especially for insertion of multiple stents. They also expressed concern about whether the current DRG structure represents the most clinically coherent classification of stent cases.

We received two comprehensive recommendations for refinement and restructuring of the current coronary stent DRGs. The current DRG structure incorporates stent cases into the following two pairs of DRGs, depending on whether bare metal or drug-eluting stents are used and whether acute myocardial infarction (AMI) is present:

DRG 516 (Percutaneous Cardiovascular Procedures With AMI) DRG 517 (Percutaneous Cardiovascular Procedures With Nondrug- Eluting Stent Without AMI) DRG 526 (Percutaneous Cardiovascular Procedures With Drug- Eluting Stent With AMI) DRG 527 (Percutaneous Cardiovascular Procedures With Drug- Eluting Stent Without AMI)

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One of the recommendations involved restructuring these DRGs to create two additional stent DRGs that are closely patterned after these existing pairs and that would reflect insertion of multiple stents with and without AMI. The manufacturer recommended incorporating either stenting code 36.06 (Insertion of nondrug-eluting coronary artery stent(s)) or code 36.07 (Insertion of drug-eluting coronary artery stent(s)) when they are reported along with code 36.05 (Multiple vessel percutaneous transluminal coronary angioplasty [PTCA] or coronary atherectomy performed during the same operation, with or without mention of thrombolytic agent). The manufacturer expressed concern that hospitals are steering patients toward coronary artery bypass graft surgery in place of stenting in order to avoid significant financial losses due to what it considered the inadequate reimbursement for inserting multiple stents.

We appreciate receiving the manufacturer's recommendation, and agree that the DRG classification of cases involving coronary stents must be clinically coherent and provide for adequate reimbursement, including adequate reimbursement of cases requiring multiple stents. We also agree that the recommendation has some merits and deserves further study. However, we believe that it is premature to act on this recommendation for two reasons. One reason is that the current coding structure for coronary artery stents cannot distinguish cases in which multiple stents are inserted from cases in which only a single stent is inserted. Current codes are able to identify performance of PTCA in more than one vessel by use of code 36.05. However, while this code indicates that PTCA was performed in more than one vessel, its use does not reflect the exact number of procedures performed or the exact number of vessels treated. Similarly, when codes 36.06 and 36.07 are used, they document the insertion of at least one stent. However, these stenting codes do not identify how many stents were inserted in a procedure, nor distinguish insertion of a single stent from insertion of multiple stents. Even the use of one of the stenting codes in conjunction with multiple-PTCA code 36.05 does not distinguish insertion of a single stent from insertion of multiple stents. The use of code 36.05 in conjunction with code 36.06 or code 36.07 indicates only performance of PTCA in more than one vessel, along with insertion of at least one stent. The precise numbers of PTCA-treated vessels, the number of vessels into which stents were inserted, and the total number of stents inserted in all treated vessels cannot be determined. Therefore, the capabilities of the current coding structure do not permit the distinction between single vessel stenting and multiple vessel stenting that would be required under the recommended restructuring of the stenting DRGs.

In addition, because the FDA approved drug-eluting stents for use in April 2003, the distinct DRGs for drug-eluting stents have only been effective for payment in the last year. The MedPAR file thus does not contain a full year of data with which to conduct the requisite analysis to evaluate the adequacy of the current structure of four stenting DRGs. Therefore, we believe that it is still premature to undertake such a thorough restructuring of the stent DRGs. Nevertheless, we will consider this recommendation as we evaluate the current DRG structure once adequate data on the current stenting DRGs become available.

The second recommendation was that we transform the current structure of stenting DRGs into two new pairs of DRGs, reclassifying stenting cases according to whether bare metal or drug-eluting stents are used (as with the present DRGs) and whether the cases are ``complex'' or ``noncomplex.'' The manufacturer indicated that complex cases are those that include certain comorbid conditions or procedural factors such as hypertensive renal failure, diabetes, AMI, and multivessel PCI. The manufacturer further indicated that this structure would provide an improvement in both clinical and resource coherence over the current structure that classifies cases according to the type of stent inserted and the presence or absence of AMI alone, without considering other complicating conditions. Specifically, the manufacturer recommended replacing the current structure with the following four DRGs:

Recommended restructured DRG 516 (Complex percutaneous cardiovascular procedures with nondrug-eluting stents) Recommended restructured DRG 517 (Noncomplex percutaneous cardiovascular procedures with nondrug-eluting stents) Recommended restructured DRG 526 (Complex percutaneous cardiovascular procedures with drug-eluting stents) Recommended restructured DRG 527 (Noncomplex percutaneous cardiovascular procedures with drug-eluting stents)

The manufacturer presented an analysis based on FY 2002 MedPAR data, in which it evaluated charges and lengths of stay for cases with expected high resource use, and reclassified cases into the recommended new structure of paired ``complex'' and ``noncomplex'' DRGs. The analysis shows some evidence of clinical and resource coherence in the recommended DRG structure. However, the analysis does not yet provide a convincing case for adopting the recommended restructure. First, the analysis does not reveal significant gains in resource coherence compared to previous DRGs for stenting cases. Second, the analysis is limited in assessing the feasibility of using the recommended DRG restructure versus the current DRG structure for classification of stent cases. Because the manufacturer used FY 2002 MedPAR data in its analysis, it was not able to compare the resource coherence of the recommended structure with the current structure of four DRGs, but only with the two DRGs that preceded the approval of drug-eluting stents. While the manufacturer asserted that ``similar results would be expected'' from a comparison between its recommended DRG restructure and the current DRG structure, we do not believe that it is advisable to undertake a critical DRG restructuring without examining the recommendation against actual experience under the current structure. Nevertheless, we believe that this recommendation may have merit, and we will conduct a full analysis of the recommendation in comparison to the current DRG structure once adequate data become available.

The drug-eluting stents had not yet been FDA approved when we calculated the relative weights for DRGs 526 and 527 for the FY 2003 IPPS final rule. Therefore, in the absence of MedPAR data, we based our FY 2003 relative weight calculations on prices in countries where drug- eluting stents were already being used. A full discussion of this process can be found in the FY 2004 IPPS final rule (68 FR 45370). For computation of the proposed relative weights for FY 2005 for this proposed rule, we are using the December update of FY 2003 MedPAR data. There have been a total of 42,356 cases in DRG 526, and 33,179 cases in DRG 527, with adjustments made for transfers to other facilities. For computation of the final FY 2005 relative weights, we will use the latest update of the MedPAR data file for cases in these two DRGs. No foreign data will be used to compute the relative weights for DRGs 526 and 527 in FY 2005.

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c. Severe Sepsis

We received a comment that recommended a separate DRG be assigned to the diagnosis of severe sepsis. Patients admitted with sepsis currently are assigned to DRG 416 (Septicemia Age > 17) and DRG 417 (Septicemia Age 0-17) in MDC 18 (Infectious and Parasitic Diseases, Systemic or Unspecified Sites). The commenter contended that the costs of caring for patients with severe sepsis exceed those costs associated with other types of sepsis. Therefore, the commenter indicated, severe sepsis should be given a separate, unique DRG. Furthermore, the commenter requested that all cases in which severe sepsis is present on admission, as well as those cases in which it develops after admission (which are currently classified elsewhere) be included in this new DRG. The commenter suggested using various coexisting conditions and their corresponding ICD-9-CM codes (for example, respiratory failure or hypotension and renal failure) to identify patients with severe sepsis. The conditions suggested do not describe a clinically coherent set of patients that have severe sepsis. Using this list of conditions would erroneously identify patients as having severe sepsis.

We acknowledge the high costs of caring for seriously ill patients with sepsis. However, we do not find, from a clinical perspective, that a subset of patients with severe sepsis exists to the degree that a separate DRG classification is justified. Sepsis in all forms is quite common across many DRGs in the Medicare population. In addition, we do not believe that the commenter's suggested defining criteria for severe sepsis are specific, accurate, or unique enough to warrant a new DRG classification. Therefore, at this time, we are not proposing any change to the current DRG structure for sepsis. d. Implantable Cardiac Defibrillators

There is a range of implantable cardiac defibrillators (ICDs) available on the market from extremely complex devices with multiple leads, settings, and functions to simpler models with a single lead and simpler functions. ICDs deliver electrical shocks to the heart to eliminate the life-threatening abnormal rhythms such as ventricular fibrillation or ventricular tachycardia.

We have received a coverage request to expand the indications for implantable defibrillators to include the population studied in the Sudden Cardiac Death in Heart Failure Trial (SCD-HeFT) sponsored by the National Institutes of Health. SCD-HeFT treated heart failure patients with conventional therapy and randomized them to one of three additional treatment strategies: (1) Placebo; (2) amiodarone (drug therapy); or (3) single lead implantable defibrillator. The SCD-HeFT investigators presented results at the American College of Cardiology annual meeting that the basic single-lead implantable defibrillator is effective for saving lives in a population at low-moderate risk for sudden cardiac death. The requestor indicated that, as part of CMS' coverage decisions, CMS could expand the population eligible for implantable defibrillators. The requestor further added that CMS could restrict use of complex defibrillators to patients for whom they are medically necessary, that is, in the population at low-moderate risk for sudden cardiac death.

Given the potential increase of implantable defibrillator use in our population, we are soliciting input on how to encourage physicians to use the simpler, less costly device when advanced devices are not medically preferred. We are also soliciting input on the appropriate measures within the payment systems to accommodate payment for classes of defibrillators with very different costs. Ideally, we would like not only to align payments with relative costs, but also to align the incentives within the payment system with medically appropriate uses of different technologies.

We believe that, within the PPS for inpatient hospital operating costs, there are several ways to deal with the expanding use of simpler, lower cost defibrillators. One possibility is to maintain the current DRG configuration, under which complex, expensive devices and simpler, less costly devices would remain within the same DRGs and receive the same payment rates. This approach would encourage use of the simpler devices, which would receive relatively higher reimbursement because their lower charges would be averaged in with the higher charges for the more complex devices in setting the DRG weights. However, it could lead to complaints that the program is underpaying for the more complex, expensive devices as the lower charges for simpler, less expensive devices begin to affect (lower) the DRG weights.

Another approach would be to recognize the cost differences between various classes of defibrillators by establishing separate DRGs for basic single-lead implantable defibrillators as opposed to more complex, expensive models. This approach would prevent payments for the use of more expensive defibrillators (where medically necessary) from being diluted by the effect of the lower charges for basic single-lead implantable defibrillators on the weights within common DRGs. However, this policy would arguably provide less incentive for use of the lower cost devices: the weights for the DRGs containing the less expensive devices would be driven solely by their relatively lower charges, without being lifted by the higher charges for the more expensive models. This approach might also be criticized for departing from the averaging principle within the DRG system by basing too much on the cost differential alone in reconfiguring these DRGs.

We welcome comments on these and other approaches to paying for defibrillators under the IPPS. We discuss an application for new technology add-on payments for a Cardiac Resynchronization Therapy with Defibrillator (CRT-D) in section II.E.4.c. of this proposed rule.

C. Recalibration of DRG Weights

[If you choose to comment on issues in this section, please include the caption ``DRG Weights'' at the beginning of your comment.]

We are proposing to use the same basic methodology for the FY 2005 recalibration as we did for FY 2004 (August 1, 2003 IPPS final rule (68 FR 45373)). That is, we are proposing to recalibrate the DRG weights based on charge data for Medicare discharges using the most current charge information available (the FY 2003 MedPAR file).

The MedPAR file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2003 MedPAR data used in this proposed rule include discharges occurring between October 1, 2002 and September 30, 2003, based on bills received by CMS through December 31, 2003, from all hospitals subject to the IPPS and short- term acute care hospitals in Maryland (which is under a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2003 MedPAR file includes data for approximately 11,717,744 Medicare discharges. Discharges for Medicare beneficiaries enrolled in a Medicare+Choice managed care plan are excluded from this analysis. The data excludes CAHs, including hospitals that subsequently became CAHs after the period from which the data were taken.

The proposed methodology used to calculate the DRG relative weights from the FY 2003 MedPAR file is as follows:

To the extent possible, all the claims were regrouped using the DRG classification revisions discussed in section II.B. of this preamble.

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The transplant cases that were used to establish the relative weight for heart and heart-lung, liver, and lung transplants (DRGs 103, 480, and 495) were limited to those Medicare-approved transplant centers that have cases in the FY 2001 MedPAR file. (Medicare coverage for heart, heart-lung, liver, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)

Organ acquisition costs for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average charge for the DRG and before eliminating statistical outliers.

Charges were standardized to remove the effects of differences in area wage levels, indirect medical education and disproportionate share payments, and, for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment.

The average standardized charge per DRG was calculated by summing the standardized charges for all cases in the DRG and dividing that amount by the number of cases classified in the DRG. A transfer case is counted as a fraction of a case based on the ratio of its transfer payment under the per diem payment methodology to the full DRG payment for nontransfer cases. That is, a transfer case receiving payment under the transfer methodology equal to half of what the case would receive as a nontransfer would be counted as 0.5 of a total case.

Statistical outliers were eliminated by removing all cases that are beyond 3.0 standard deviations from the mean of the log distribution of both the charges per case and the charges per day for each DRG.

The average charge for each DRG was then recomputed (excluding the statistical outliers) and divided by the national average standardized charge per case to determine the relative weight.

The proposed new weights are normalized by a proposed adjustment factor of 1.46899 so that the average case weight after recalibration is equal to the average case weight before recalibration. This proposed adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. We are proposing to use that same case threshold in recalibrating the proposed DRG weights for FY 2005. Using the FY 2003 MedPAR data set, there are 42 DRGs that contain fewer than 10 cases. We are proposing to compute the weights for these low-volume DRGs by adjusting the FY 2004 weights of these DRGs by the percentage change in the average weight of the cases in the other DRGs.

Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with FY 1991, reclassification and recalibration changes be made in a manner that assures that the aggregate payments are neither greater than nor less than the aggregate payments that would have been made without the changes. Although normalization is intended to achieve this effect, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years and as discussed in section II.A.4.a. of the Addendum to this proposed rule, we are proposing to make a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2005

[If you choose to comment on issues in this section, please include the caption ``LTC-DRGs'' at the beginning of your comment.] 1. Background

In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed the LTCH PPS annual payment rate update cycle to be effective July 1 through June 30 instead of October 1 through September 30. In addition, since the patient classification system utilized under the LTCH PPS is based directly on the DRGs used under the IPPS for acute care hospitals, in that same final rule, we explained that the annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights will continue to remain linked to the annual reclassification and recalibration of the CMS-DRGs under the IPPS.

The annual update to the IPPS DRGs is based on the annual revisions to the ICD-9-CM codes and is effective each October 1. In the health care industry, annual changes to the ICD-9-CM codes are effective for discharges occurring on or after October 1 each year. The use of the ICD-9-CM coding system is also compliant with the requirements of the Health Insurance Portability and Accountability Act (HIPAA), Public Law 104-191, under 45 CFR Parts 160 and 162. Therefore, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, are also revised annually and effective for discharges occurring on or after October 1 each year. Because the LTC-DRGs are based on the patient classification system used under the IPPS (CMS- DRGs), which is updated annually and effective for discharges occurring on or after October 1 through September 30 each year, in the June 6, 2003 LTCH PPS final rule (68 FR 34128), we specified that we will continue to update the LTC-DRG classifications and relative weights to be effective for discharges occurring on or after October 1 through September 30 each year. Furthermore, we stated that we will publish the annual update of the LTC-DRGs in the proposed and final rules for the IPPS.

In this proposed rule, we are proposing revisions to the LTC-DRG classifications and relative weights and will finalize them in the IPPS final rule, to be effective October 1, 2004 through September 30, 2005. The proposed LTC-DRGs and relative weights for FY 2005 in this proposed rule are based on the IPPS DRGs (GROUPER version 22.0) discussed in section II. of this proposed rule. 2. Proposed Changes in the LTC-DRG Classifications a. Background

Section 123 of Public Law 106-113 specifically requires that the PPS for LTCHs be a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 307(b)(1) of Public Law 106-554 modified the requirements of section 123 of Public Law 106-113 by specifically requiring that the Secretary examine ``the feasibility and the impact of basing payment under such a system [the LTCH PPS] on the use of existing (or refined) hospital diagnosis-related groups (DRGs) that have been modified to account for different resource use of long-term care hospital patients as well as the use of the most recently available hospital discharge data.''

In accordance with section 307(b)(1) of Public Law 106-554 and Sec. 412.515 of our existing regulations, the LTCH PPS uses information from LTCH patient

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records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. The LTC-DRGs used as the patient classification component of the LTCH PPS correspond to the DRGs under the IPPS for acute care hospitals. Thus, in this proposed rule, we are proposing to use the IPPS version 22.0 GROUPER for FY 2005 to process LTCH PPS claims. The proposed changes to the IPPS DRG classification system for FY 2005 (Grouper 22.0) are discussed in section II.B. of this preamble.

Under the LTCH PPS, we determine relative weights for each of the CMS DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCH patients. In a departure from the IPPS, as we discussed in the August 30, 2002 final rule (67 FR 55985), which implemented the LTCH PPS, and the August 1, 2003 IPPS final rule (68 FR 45374), we use low-volume quintiles in determining the LTC-DRG weights for LTC-DRGs with less than 25 LTCH cases, since LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. Specifically, we group those low-volume LTC-DRGs (LTC-DRGs with fewer than 25 cases) into 5 quintiles based on average charge per discharge. (A listing of the composition of low-volume quintiles for the FY 2004 LTC-DRGs (based on FY 2002 MedPAR data) appears in section II.D.3. of the August 1, 2003 IPPS final rule (68 FR 45377--45380).) We also adjust for cases in which the stay at the LTCH is less than or equal to five-sixths of the geometric average length of stay; that is, short- stay outlier cases (Sec. 412.529), as discussed below in section II.D.4. of this preamble. b. Patient Classifications Into DRGs

Generally, under the LTCH PPS, Medicare payment is made at a predetermined specific rate for each discharge; that is, payment varies by the LTC-DRG to which a beneficiary's stay is assigned. Similar to case classification for acute care hospitals under the IPPS (see section II.B. of this preamble), cases are classified into LTC-DRGs for payment under the LTCH PPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay, as well as age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the ICD-9-CM.

As discussed above in section II.B. of this preamble, the CMS DRGs are organized into 25 major diagnostic categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Some surgical and medical DRGs are further differentiated based on the presence or absence of CCs. (See section II.B. of this preamble for further discussion of surgical DRGs and medical DRGs.)

Because the assignment of a case to a particular LTC-DRG will help determine the amount that is paid for the case, it is important that the coding is accurate. As used under the IPPS, classifications and terminology used under the LTCH PPS are consistent with the ICD-9-CM and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to the Secretary by the National Committee on Vital and Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set, National Center for Health Statistics, April 1980'') and as revised in 1984 by the Health Information Policy Council (HIPC) of the U.S. Department of Health and Human Services. We wish to point out again that the ICD-9-CM coding terminology and the definitions of principal and other diagnoses of the UHDDS are consistent with the requirements of the Administrative Simplification Act of 1996 of the HIPAA (45 CFR Parts 160 and 162).

The emphasis on the need for proper coding cannot be overstated. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG and produce inappropriate weighting factors at recalibration and result in inappropriate payments under the LTCH PPS. LTCHs are to follow the same coding guidelines used by the acute care hospitals to ensure accuracy and consistency in coding practices. There will be only one LTC-DRG assigned per long-term care hospitalization; it will be assigned at the discharge. Therefore, it is mandatory that the coders continue to report the same principal diagnosis on all claims and include all diagnostic codes that coexist at the time of admission, that are subsequently developed, or that affect the treatment received. Similarly, all procedures performed during that stay are to be reported on each claim.

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the ICD-9-CM. As of October 16, 2002, a LTCH that was required to comply with the HIPAA Administrative Simplification Standards and that had not obtained an extension in compliance with the Administrative Compliance Act (Public Law 107-105) is obligated to comply with the standards at 45 CFR 162.1002 and 45 CFR 162.1102. Completed claim forms are to be submitted to the LTCH's Medicare fiscal intermediary. Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into an LTC-DRG can be made.

After screening through the MCE, each LTCH claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER is specialized computer software based on the same GROUPER used under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal intermediary determines the prospective payment by using the Medicare LTCH PPS PRICER program, which accounts for LTCH hospital-specific adjustments. As provided for under the IPPS, we provide an opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary and to submit additional information within a specified timeframe (Sec. 412.513(c)).

The GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the LTC-DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update (as discussed in section II. of this preamble). The LTC-DRG relative weights are based on data for the population of LTCH discharges, reflecting the fact that LTCH patients represent a different patient mix than patients in short-term acute care hospitals. 3. Development of the Proposed FY 2005 LTC-DRG Relative Weights a. General Overview of Development of the LTC-DRG Relative Weights

As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55981), one of the primary goals for the implementation of the LTCH PPS is to pay each LTCH an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each

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LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. To accomplish these goals, we adjust the LTCH PPS standard Federal prospective payment system rate by the applicable LTC- DRG relative weight in determining payment to LTCHs for each case.

Under the LTCH PPS, relative weights for each LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (Sec. 412.515). To ensure that Medicare patients classified to each LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in a LTC-DRG with a weight of 1. b. Data

To calculate the proposed LTC-DRG relative weights for FY 2005 in this proposed rule, we obtained total Medicare allowable charges from FY 2003 Medicare hospital bill data from the December 2003 update of the MedPAR file, and we used the proposed Version 22.0 of the CMS GROUPER for IPPS, as discussed in section II.B. of this preamble, to classify cases. Consistent with the methodology under the IPPS, we are proposing to recalculate the FY 2005 LTC-DRG relative weights based on the best available data for the final rule.

As we discussed in the August 1, 2003 final rule (68 FR 45376), we have excluded the data from LTCHs that are all-inclusive rate providers and LTCHs that are reimbursed in accordance with demonstration projects authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b- 1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1). Therefore, in the development of the proposed FY 2005 LTC-DRG relative weights, we have excluded the data of the 22 all-inclusive rate providers and the 3 LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2003 MedPAR file.

In the August 1, 2003 final rule (68 FR 45367), we discussed coding inaccuracies that were found in claims data for a large chain of LTCHs in the FY 2002 MedPAR file used to determine the LTC-DRG relative weights for FY 2004. Specifically, the principal diagnosis was not reported correctly on many of those LTCHs' claims, which resulted in those claims being incorrectly assigned to a LTC-DRG. As we explained in that same final rule, we were able to determine the correct diagnoses and procedure codes for the claims that contained the coding errors, and we used them to group each LTCH case to the appropriate LTC-DRG for determining the LTC-DRG relative weights for FY 2004. In addition, we stated that since the LTCH PPS was implemented for cost reporting periods beginning on or after October 1, 2002 (FY 2003), we believe that this problem will be self-correcting as LTCHs submit more completely coded data in the future.

As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 25673), an analysis of LTCH claims data from the September 2003 update of the FY 2003 MedPAR file contained coding errors. Specifically, a large hospital chain of LTCHs continued to consistently code diagnoses inaccurately on the claims it submitted, and these coding errors were reflected in the September 2003 update of the FY 2003 MedPAR file. Upon discovering the coding errors, we notified the large chain of LTCHs whose claims contained the coding inaccuracies to request that they resubmit those claims with the correct diagnoses codes by December 31, 2003, so that those corrected claims would be contained in the December 2003 update of the FY 2003 MedPAR file. As we discussed in that same final rule, it appears that those claims were submitted timely with the correct diagnoses codes. Therefore, it was not necessary to correct the FY 2003 MedPAR data for the development of the rates and factors established in the May 7, 2004 LTCH PPS final rule. Accordingly, we are proposing to use LTCH claims data from the December 2003 update of the FY 2003 MedPAR file for the determination of the proposed FY 2005 LTC- DRG relative weights in this proposed rule. c. Hospital-Specific Relative Value Methodology

By nature LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. Such nonarbitrary distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital- specific relative value method to calculate the LTC-DRG relative weights instead of the methodology used to determine the DRG relative weights under the IPPS described above in section II.C. of this preamble. We believe this method will remove this hospital-specific source of bias in measuring LTCH average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge.

Under the hospital-specific relative value method, we standardize charges for each LTCH by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the LTCH's case-mix. The adjustment for case-mix is needed to rescale the hospital-specific relative charge values (which, by definition, averages 1.0 for each LTCH). The average relative weight for a LTCH is its case-mix, so it is reasonable to scale each LTCH's average relative charge value by its case-mix. In this way, each LTCH's relative charge value is adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other LTCHs (the average case- mix of all LTCHs).

In accordance with the methodology established under Sec. 412.523, we standardize charges for each case by first dividing the adjusted charge for the case (adjusted for short-stay outliers under Sec. 412.529 as described in section II.D.4. (step 3) of this preamble) by the average adjusted charge for all cases at the LTCH in which the case was treated. Short-stay outliers under Sec. 412.529 are cases with a length of stay that is less than or equal to five-sixths the average length of stay of the LTC-DRG. The average adjusted charge reflects the average intensity of the health care services delivered by a particular LTCH and the average cost level of that LTCH. The resulting ratio is multiplied by that LTCH's case-mix index to determine the standardized charge for the case.

Multiplying by the LTCH's case-mix index accounts for the fact that the same relative charges are given greater weight in a LTCH with higher average costs than they would at a LTCH with low average costs which is needed to adjust each LTCH's relative charge value to reflect its case-mix relative to the average case-mix for all LTCHs. Because we standardize charges in this manner, we count charges for a Medicare patient at a LTCH with high average charges as less resource intensive than they would

[[Page 28228]]

be at a LTCH with low average charges. For example, a $10,000 charge for a case in a LTCH with an average adjusted charge of $17,500 reflects a higher level of relative resource use than a $10,000 charge for a case in a LTCH with the same case-mix, but an average adjusted charge of $35,000. We believe that the adjusted charge of an individual case more accurately reflects actual resource use for an individual LTCH because the variation in charges due to systematic differences in the markup of charges among LTCHs is taken into account. d. Low-Volume LTC-DRGs

In order to account for LTC-DRGs with low-volume (that is, with fewer than 25 LTCH cases), in accordance with the methodology discussed in the August 1, 2002 final rule (67 FR 55984), we group those low- volume LTC-DRGs into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. For this proposed rule, using LTCH cases from the December 2003 update of the FY 2003 MedPAR file, we identified 171 LTC-DRGs that contained between 1 and 24 cases. This list of proposed LTC-DRGs was then divided into one of the five low-volume quintiles, each containing a minimum of 34 LTC-DRGs (171/5 = 34 with 1 LTC-DRG as the remainder). For FY 2005, we are proposing to make an assignment to a specific low-volume quintile by sorting the 171 low-volume proposed LTC-DRGs in ascending order by average charge. Since the number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible by five, the average charge of the proposed low-volume LTC-DRG was used to determine which low-volume quintile received the proposed additional LTC-DRG. After sorting the 171 low-volume proposed LTC-DRGs in ascending order, we are proposing that the first fifth (34) of low-volume LTC-DRGs with the lowest average charge would be grouped into Quintile 1. The highest average charge cases would be grouped into Quintile 5. Since the average charge of the proposed 69th LTC-DRG in the sorted list is closer to the previous proposed LTC-DRG's average charge (assigned to Quintile 2) than to the average charge of the proposed 70th LTC-DRG in the sorted list (to be assigned to Quintile 3), we are proposing to place it into Quintile 2. This process was repeated through the remaining low-volume proposed LTC-DRGs so that 4 proposed low-volume quintiles contain 34 proposed LTC-DRGs and 1 proposed low-volume quintile contains 35 proposed LTC-DRGs.

In order to determine the proposed relative weights for the proposed LTC-DRGs with low volume for FY 2005, in accordance with the methodology described in the August 1, 2002 final rule (67 FR 55984), we are proposing to use the five proposed low-volume quintiles described above. The composition of each of the five proposed low- volume quintiles shown below in Table 1 would be used in determining the proposed LTC-DRG relative weights for FY 2005. We would determine a proposed relative weight and (geometric) average length of stay for each of the five proposed low-volume quintiles using the formula that we are proposing to apply to the regular proposed LTC-DRGs (25 or more cases), as described below in section II.D.4. of this preamble. We are proposing to assign the same proposed relative weight and proposed average length of stay to each of the proposed LTC-DRGs that make up that proposed low-volume quintile. We note that as this system is dynamic, it is possible that the number and specific type of LTC-DRGs with a low volume of LTCH cases will vary in the future. We use the best available claims data in the MedPAR file to identify low-volume LTC-DRGs and to calculate the relative weights based on our methodology.

Table 1.--Proposed Composition of Low-Volume Quintiles

Proposed LTC-DRG

Description

QUINTILE 1

11......................... NERVOUS SYSTEM NEOPLASMS W/O CC. 43......................... HYPHEMA. 45......................... NEUROLOGICAL EYE DISORDERS. 47......................... OTHER DISORDERS OF THE EYE AGE >17 W/O CC. 84......................... MAJOR CHEST TRAUMA W/O CC. 95......................... PNEUMOTHORAX W/O CC. 110........................ MAJOR CARDIOVASCULAR PROCEDURES W CC. 119........................ VEIN LIGATION & STRIPPING. 143........................ CHEST PAIN. 149........................ MAJOR SMALL & LARGE BOWEL PROCEDURES W/O CC. 178........................ UNCOMPLICATED PEPTIC ULCER W/O CC. 193........................ BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W CC. 208........................ DISORDERS OF THE BILIARY TRACT W/O CC. 229........................ HAND OR WRIST PROC, EXCEPT MAJOR JOINT PROC, W/O CC. 241........................ CONNECTIVE TISSUE DISORDERS W/O CC. 260........................ SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC. 273........................ MAJOR SKIN DISORDERS W/O CC. 284........................ MINOR SKIN DISORDERS W/O CC. 301........................ ENDOCRINE DISORDERS W/O CC. 323........................ URINARY STONES W CC, &/OR ESW LITHOTRIPSY. 324........................ URINARY STONES W/O CC. 326........................ KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W/O CC . 339........................ TESTES PROCEDURES, NON-MALIGNANCY AGE >17. 347........................ MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC. 367........................ MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC. 404........................ LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC. 414........................ OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O CC. 433........................ ALCOHOL/DRUG ABUSE OR DEPENDENCE, LEFT AMA. 450........................ POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC. 479........................ OTHER VASCULAR PROCEDURES W/O CC.

[[Page 28229]]

500........................ BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC. 509........................ FULL THICKNESS BURN W/O SKIN GRFT OR INH INJ W/O CC OR SIG TRAUMA. 522........................ ALC/DRUG ABUSE OR DEPEND W REHABILITATION THERAPY W/O CC 523........................ ALC/DRUG ABUSE OR DEPEND W/O REHABILITATION THERAPY W/O CC

QUINTILE 2

8.......................... PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O CC. 22......................... HYPERTENSIVE ENCEPHALOPATHY. 25......................... SEIZURE & HEADACHE AGE >17 W/O CC. 31......................... CONCUSSION AGE >17 W CC. 69*........................ OTITIS MEDIA & URI AGE >17 W/O CC. 109........................ CORONARY BYPASS W/O PTCA OR CARDIAC CATH. 128........................ DEEP VEIN THROMBOPHLEBITIS. 129........................ CARDIAC ARREST, UNEXPLAINED. 140........................ ANGINA PECTORIS. 175........................ G.I. HEMORRHAGE W/O CC. 177........................ UNCOMPLICATED PEPTIC ULCER W CC. 181........................ G.I. OBSTRUCTION W/O CC. 227........................ SOFT TISSUE PROCEDURES W/O CC. 228........................ MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC W CC. 234........................ OTHER MUSCULOSKELET SYS & CONN TISS O.R. PROC W/O CC. 237........................ SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS & THIGH. 250........................ FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W CC. 251........................ FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W/O CC . 276........................ NON-MALIGANT BREAST DISORDERS. 295........................ DIABETES AGE 0-35. 305........................ KIDNEY,URETER & MAJOR BLADDER PROC FOR NON- NEOPL W/O CC. 307........................ PROSTATECTOMY W/O CC. 325........................ KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W CC. 328........................ URETHRAL STRICTURE AGE >17 W CC. 348........................ BENIGN PROSTATIC HYPERTROPHY W CC. 349........................ BENIGN PROSTATIC HYPERTROPHY W/O CC. 399........................ RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/ O CC. 420........................ FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC. 427........................ NEUROSES EXCEPT DEPRESSIVE. 441........................ HAND PROCEDURES FOR INJURIES. 447........................ ALLERGIC REACTIONS AGE >17. 449........................ POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC. 467........................ OTHER FACTORS INFLUENCING HEALTH STATUS. 511........................ NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA 532........................ SPINAL PROCEDURES W/O CC

QUINTILE 3

17......................... NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC. 21......................... VIRAL MENINGITIS. 29......................... TRAUMATIC STUPOR & COMA, COMA 17 W/O CC. 44......................... ACUTE MAJOR EYE INFECTIONS. 53......................... SINUS & MASTOID PROCEDURES AGE >17. 83......................... MAJOR CHEST TRAUMA W CC. 122........................ CIRCULATORY DISORDERS W AMI W/O MAJOR COMP, DISCHARGED ALIVE. 124........................ CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH & COMPLEX DIAG. 136........................ CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O CC. 159........................ HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W CC. 185........................ DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AG >17. 200........................ HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON- MALIGNANCY. 262........................ BREAST BIOPSY & LOCAL EXCISION FOR NON- MALIGNANCY. 266........................ SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR CELLULITIS W/O CC. 270........................ OTHER SKIN, SUBCUT TISS & BREAST PROC W/O CC. 275........................ MALIGNANT BREAST DISORDERS W/O CC. 288........................ O.R. PROCEDURES FOR OBESITY. 299........................ INBORN ERRORS OF METABOLISM. 306........................ PROSTATECTOMY W CC. 319*....................... KIDNEY & URINARY TRACT NEOPLASMS W/O CC 336........................ TRANSURETHRAL PROSTATECTOMY W CC. 352........................ OTHER MALE REPRODUCTIVE SYSTEM DIAGNOSES. 369........................ MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM DISORDERS. 394........................ OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING ORGANS. 410........................ CHEMOTHERAPY W/O ACUTE LEUKEMIA AS SECONDARY DIAGNOSIS. 476........................ PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS.

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493........................ LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC. 496........................ COMBINED ANTERIOR/POSTERIOR SPINAL FUSION. 497........................ SPINAL FUSION EXCEPT CERVICAL W CC. 502........................ KNEE PROCEDURES W PDX OF INFECTION W/O CC. 517........................ PERC CARDIO PROC W NON-DRUG ELUTING STENT W/ O AMI. 518........................ PERC CARDIO PROC W/O CORONARY ARTERY STENT OR AMI. 538........................ LOCAL EXCIS & REMOV OF INT FIX DEV EXCEPT HIP & FEMUR W/O CC 539........................ LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W CC

QUINTILE 4

1.......................... CRANIOTOMY AGE >17 W CC. 63......................... OTHER EAR, NOSE, MOUTH & THROAT O.R. PROCEDURES. 86*........................ PLEURAL EFFUSION W/O CC. 102*....................... OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC. 108........................ OTHER CARDIOTHORACIC PROCEDURES. 115........................ PRM CARD PACEM IMPL W AMI/HR/SHOCK OR AICD LEAD OR GNRTR. 116........................ OTHER PERMANENT CARDIAC PACEMAKER IMPLANT. 157........................ ANAL & STOMAL PROCEDURES W CC. 168........................ MOUTH PROCEDURES W CC. 201........................ OTHER HEPATOBILIARY OR PANCREAS O.R. PROCEDURES. 216........................ BIOPSIES OF MUSCULOSKELETAL SYSTEM & CONNECTIVE TISSUE. 218........................ LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W CC. 224........................ SHOULDER, ELBOW OR FOREARM PROC,EXC MAJOR JOINT PROC, W/O CC. 226........................ SOFT TISSUE PROCEDURES W CC. 268........................ SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC PROCEDURES. 292........................ OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W CC. 303........................ KIDNEY, URETER & MAJOR BLADDER PROCEDURES FOR NEOPLASM. 304........................ KIDNEY, URETER & MAJOR BLADDER PROC FOR NON- NEOPL W CC. 308........................ MINOR BLADDER PROCEDURES W CC. 310........................ TRANSURETHRAL PROCEDURES W CC. 312........................ URETHRAL PROCEDURES, AGE >17 W CC. 345........................ OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR MALIGNANCY. 401........................ LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W CC. 408........................ MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER O.R. PROC. 419........................ FEVER OF UNKNOWN ORIGIN AGE >17 W CC. 455........................ OTHER INJURY, POISONING & TOXIC EFFECT DIAG W/O CC. 485........................ LIMB REATTACHMENT, HIP AND FEMUR PROC FOR MULTIPLE SIGNIFICANT TRA . 487........................ OTHER MULTIPLE SIGNIFICANT TRAUMA. 501........................ KNEE PROCEDURES W PDX OF INFECTION W CC. 503........................ KNEE PROCEDURES W/O PDX OF INFECTION. 505........................ EXTENSIVE BURNS OF FULL THICKNESS BURNS WITH MECH VENT 96+HRS WITHOUT SKIN GRAFT. 506........................ FULL THICKNESS BURN W SKIN GRAFT OR INHAL INJ W CC OR SIG TRAUMA. 519........................ CERVICAL SPINAL FUSION W CC 529........................ VENTRICULAR SHUNT PROCEDURES W CC

QUINTILE 5

46......................... OTHER DISORDERS OF THE EYE AGE >17 W CC. 55......................... MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES. 77......................... OTHER RESP SYSTEM O.R. PROCEDURES W/O CC. 117........................ CARDIAC PACEMAKER REVISION EXCEPT DEVICE REPLACEMENT. 118........................ CARDIAC PACEMAKER DEVICE REPLACEMENT. 125........................ CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O COMPLEX DIAG. 150........................ PERITONEAL ADHESIOLYSIS W CC. 152........................ MINOR SMALL & LARGE BOWEL PROCEDURES W CC. 154........................ STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE >17 W CC. 161........................ INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W CC. 171*....................... OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC. 191........................ PANCREAS, LIVER & SHUNT PROCEDURES W CC. 197........................ CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W CC. 206*....................... DISORDERS OF LIVER EXCEPT MALIG,CIRR,ALC HEPA W/O CC. 209........................ MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF LOWER EXTREMITY. 210........................ HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W CC. 230........................ LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP & FEMUR. 261........................ BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL EXCISION. 267........................ PERIANAL & PILONIDAL PROCEDURES. 338........................ TESTES PROCEDURES, FOR MALIGNANCY. 341........................ PENIS PROCEDURES. 365........................ OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES. 406........................ MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R. PROC W CC.

[[Page 28231]]

424........................ O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL ILLNESS. 443*....................... OTHER O.R. PROCEDURES FOR INJURIES W/O CC. 454........................ OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC. 486........................ OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT TRAUMA. 488........................ HIV W EXTENSIVE O.R. PROCEDURE. 499........................ BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC. 515........................ CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH. 531........................ SPINAL PROCEDURES W CC. 533........................ EXTRACRANIAL PROCEDURES W CC. 535........................ CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/ HF/SHOCK. 536........................ CARDIAC DEFIB IMPLANT W CARDIAC CATH W/O AMI/HF/SHOCK.

* One of the original 171 proposed low-volume LTC-DRGs initially assigned to this low-volume quintile; removed from the low-volume quintiles in addressing nonmonotonicity (see step 5 below).

4. Steps for Determining the Proposed FY 2005 LTC-DRG Relative Weights

As we noted previously, the proposed FY 2005 LTC-DRG relative weights are determined in accordance with the methodology described in the August 1, 2003 final rule (68 FR 45380). In summary, LTCH cases must be grouped in the appropriate LTC-DRG, while taking into account the low-volume LTC-DRGs as described above, before the proposed FY 2005 LTC-DRG relative weights can be determined. After grouping the cases in the appropriate proposed LTC-DRG, we are proposing to calculate the proposed relative weights for FY 2005 in this proposed rule by first removing statistical outliers and cases with a length of stay of 7 days or less. Next, we are proposing to adjust the number of cases in each proposed LTC-DRG for the effect of short-stay outlier cases under Sec. 412.529. The short-stay adjusted discharges and corresponding charges would be used to calculate ``relative adjusted weights'' in each proposed LTC-DRG using the hospital-specific relative value method described above.

Below we discuss in detail the steps for calculating the proposed FY 2005 LTC-DRG relative weights.

Step 1--Remove statistical outliers.

The first step in the calculation of the proposed FY 2005 LTC-DRG relative weights is to remove statistical outlier cases. We define statistical outliers as cases that are outside of 3.0 standard deviations from the mean of the log distribution of both charges per case and the charges per day for each LTC-DRG. These statistical outliers would be removed prior to calculating the proposed relative weights. We believe that they may represent aberrations in the data that distort the measure of average resource use. Including those LTCH cases in the calculation of the proposed relative weights could result in an inaccurate proposed relative weight that does not truly reflect relative resource use among the proposed LTC-DRGs.

Step 2--Remove cases with a length of stay of 7 days or less.

The proposed FY 2005 LTC-DRG relative weights should reflect the average of resources used on representative cases of a specific type. Generally, cases with a length of stay 7 days or less do not belong in a LTCH because such stays do not fully receive or benefit from treatment that is typical in a LTCH stay, and full resources are often not used in the earlier stages of admission to a LTCH. If we were to include stays of 7 days or less in the computation of the proposed FY 2005 LTC-DRG relative weights, the value of many proposed relative weights would decrease and, therefore, payments would decrease to a level that may no longer be appropriate.

We do not believe that it would be appropriate to compromise the integrity of the payment determination for those LTCH cases that actually benefit from and receive a full course of treatment at a LTCH, in order to include data from these very short-stays. Thus, in determining the proposed FY 2005 LTC-DRG relative weights, we remove LTCH cases with a length of stay of 7 days or less.

Step 3--Adjust charges for the effects of short-stay outliers.

The third step in the calculation of the proposed FY 2005 LTC-DRG relative weights is to adjust each LTCH's charges per discharge for short-stay outlier cases (that is, a patient with a length of stay that is less than or equal to five-sixths the average length of stay of the LTC-DRG).

We make this adjustment by counting a short-stay outlier as a fraction of a discharge based on the ratio of the length of stay of the case to the average length of stay for the proposed LTC-DRG for nonshort-stay outlier cases. This has the effect of proportionately reducing the impact of the lower charges for the short-stay outlier cases in calculating the average charge for the proposed LTC-DRG. This process produces the same result as if the actual charges per discharge of a short-stay outlier case were adjusted to what they would have been had the patient's length of stay been equal to the average length of stay of the proposed LTC-DRG.

As we explained in the August 1, 2003 final rule (68 FR 45380), counting short-stay outlier cases as full discharges with no adjustment in determining the proposed LTC-DRG relative weights would lower the proposed LTC-DRG relative weight for affected proposed LTC-DRGs because the relatively lower charges of the short-stay outlier cases would bring down the average charge for all cases within a proposed LTC-DRG. This would result in an ``underpayment'' to nonshort-stay outlier cases and an ``overpayment'' to short-stay outlier cases. Therefore, in this proposed rule, we adjust for short-stay outlier cases under Sec. 412.529 in this manner since it results in more appropriate payments for all LTCH cases.

Step 4--Calculate the Proposed FY 2005 LTC-DRG relative weights on an iterative basis.

The process of calculating the proposed LTC-DRG relative weights using the hospital specific relative value methodology is iterative. First, for each LTCH case, we calculate a hospital-specific relative charge value by dividing the short-stay outlier adjusted charge per discharge (see step 3) of the LTCH case (after removing the statistical outliers (see step 1)) and LTCH cases with a length of stay of 7 days or less (see step 2) by the average charge per discharge for the LTCH in which the case occurred. The resulting ratio is then multiplied by the LTCH's case-mix

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index to produce an adjusted hospital-specific relative charge value for the case. An initial case-mix index value of 1.0 is used for each LTCH.

For each proposed LTC-DRG, the proposed FY 2005 LTC-DRG relative weight is calculated by dividing the average of the adjusted hospital- specific relative charge values (from above) for the proposed LTC-DRG by the overall average hospital-specific relative charge value across all cases for all LTCHs. Using these recalculated proposed LTC-DRG relative weights, each LTCH's average proposed relative weight for all of its cases (case-mix) is calculated by dividing the sum of all the LTCH's proposed LTC-DRG relative weights by its total number of cases. The LTCHs' hospital-specific relative charge values above are multiplied by these hospital specific case-mix indexes. These hospital- specific case-mix adjusted relative charge values are then used to calculate a new set of proposed LTC-DRG relative weights across all LTCHs. In this proposed rule, this iterative process is continued until there is convergence between the weights produced at adjacent steps, for example, when the maximum difference is less than 0.0001.

Step 5--Adjust the proposed FY 2005 LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As explained in section II.B. of this preamble, the proposed FY 2005 CMS DRGs, upon which the proposed FY 2005 LTC-DRGs are based, contain ``pairs'' that are differentiated based on the presence or absence of CCs. The proposed LTC-DRGs with CCs are defined by certain secondary diagnoses not related to or inherently a part of the disease process identified by the principal diagnosis, but the presence of additional diagnoses does not automatically generate a CC. As we discussed in the August 1, 2003 final rule (68 FR 45381), the value of monotonically increasing relative weights rises as the resource use increases (for example, from uncomplicated to more complicated). The presence of CCs in a proposed LTC-DRG means that cases classified into a ``without CC'' proposed LTC-DRG are expected to have lower resource use (and lower costs). In other words, resource use (and costs) are expected to decrease across ``with CC''/''without CC'' pairs of proposed LTC-DRGs.

For a case to be assigned to a proposed LTC-DRG with CCs, more coded information is called for (that is, at least one relevant secondary diagnosis), than for a case to be assigned to a proposed LTC- DRG ``without CCs'' (which is based on only one principal diagnosis and no relevant secondary diagnoses). Currently, the LTCH claims data include both accurately coded cases without complications and cases that have complications (and cost more) but were not coded completely. Both types of cases are grouped to a proposed LTC-DRG ``without CCs'' since only one principal diagnosis was coded. Since the LTCH PPS was only implemented for cost reporting periods beginning on or after October 1, 2002 (FY 2003) and LTCHs were previously paid under cost- based reimbursement, which is not based on patient diagnoses, coding by LTCHs for these cases may not have been as detailed as possible.

Thus, in developing the FY 2003 LTC-DRG relative weights for the LTCH PPS based on FY 2001 claims data, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that the data suggested that cases classified to the LTC-DRG ``with CCs'' of a ``with CC''/``without CC'' pair had a lower average charge than the corresponding LTC-DRG ``without CCs.'' Similarly, based on FY 2003 claims data, we also found on occasion that the data suggested that cases classified to the proposed LTC-DRG ``with CCs'' of a ``with CC''/ ``without CC'' pair have a lower average charge than the corresponding proposed LTC-DRG ``without CCs'' for FY 2005.

We believe this anomaly may be due to coding that may not have fully reflected all comorbidities that were present. Specifically, LTCHs may have failed to code relevant secondary diagnoses, which resulted in cases that actually had CCs being classified into a ``without CC'' LTC-DRG. It would not be appropriate to pay a lower amount for the ``with CC'' LTC-DRG. Therefore, in this proposed rule, we grouped both the cases ``with CCs'' and ``without CCs'' together for the purpose of calculating the proposed FY 2005 LTC-DRG relative weights in this proposed rule. As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we will continue to employ this methodology to account for nonmonotonically increasing relative weights until we have adequate data to calculate appropriate separate weights for these anomalous LTC-DRG pairs. We expect that, as was the case when we first implemented the IPPS, this problem will be self-correcting, as LTCHs submit more completely coded data in the future.

There are three types of ``with CC'' and ``without CC'' pairs that could be nonmonotonic, that is, where the ``without CC'' proposed LTC- DRG would have a higher average charge than the ``with CC'' proposed LTC-DRG. For this proposed rule, using the LTCH cases in the December 2003 update of the FY 2003 MedPAR file, we identified two of the three types of nonmonotonic LTC-DRG pairs.

The first category of nonmonotonically increasing proposed relative weights for FY 2005 LTC-DRG pairs ``with and without CCs'' contains 2 pairs of proposed LTC-DRGs in which both the proposed LTC-DRG ``with CCs'' and the proposed LTC-DRG ``without CCs'' had 25 or more LTCH cases and, therefore, did not fall into one of the 5 low-volume quintiles. For those nonmonotonic LTC-DRG pairs, we would combine the LTCH cases and compute a new proposed relative weight based on the case-weighted average of the combined LTCH cases of the proposed LTC- DRGs. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined proposed LTC-DRG. This new proposed relative weight would then be assigned to both of the proposed LTC-DRGs in the pair. In this proposed rule, we are proposing that, for FY 2005, proposed LTC-DRGs 144 and 145 and LTC-DRGs 444 and 445 are in this category.

The second category of nonmonotonically increasing relative weights for proposed LTC-DRG pairs with and without CCs consists of zero pairs of proposed LTC-DRGs that has fewer than 25 cases, and each proposed LTC-DRG would be grouped to different proposed low-volume quintiles in which the ``without CC'' proposed LTC-DRG would be in a higher-weighted proposed low-volume quintile than the ``with CC'' proposed LTC-DRG. For those pairs, we would combine the LTCH cases and determine the case- weighted average charge for all LTCH cases. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined proposed LTC-DRG. Based on the case-weighted average LTCH charge, we determine which low- volume quintile the ``combined LTC-DRG'' would be grouped. Both proposed LTC-DRGs in the pair would then be grouped into the same proposed low-volume quintile, and thus would have the same proposed relative weight. For FY 2005, in this proposed rule, there are no proposed LTC-DRGs that fall into this category.

The third category of nonmonotonically increasing relative weights for proposed LTC-DRG pairs with and without CCs consists of 7 pairs of proposed LTC-DRGs where one of the proposed LTC-DRGs has fewer than

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25 LTCH cases and is grouped to a proposed low-volume quintile and the other proposed LTC-DRG has 25 or more LTCH cases and has its own proposed LTC-DRG relative weight, and the proposed LTC-DRG ``without CCs'' has the higher proposed relative weight. We remove the proposed low-volume LTC-DRG from the proposed low-volume quintile and combine it with the other proposed LTC-DRG for the computation of a new proposed relative weight for each of these proposed LTC-DRGs. This new proposed relative weight is assigned to both proposed LTC-DRGs, so they each have the same proposed relative weight. For FY 2005, in this proposed rule, we are proposing the following proposed LTC-DRGs would be in this category: LTC-DRGs 68 and 69; LTC-DRGs 85 and 86; LTC-DRGs 101 and 102; LTC-DRGs 170 and 171; LTC-DRGs 205 and 206; LTC-DRGs 318 and 319; and LTC-DRGs 442 and 443.

Step 6--Determine a proposed FY 2005 LTC-DRG relative weight for proposed LTC-DRGs with no LTCH cases.

As we stated above, we determine the proposed relative weight for each proposed LTC-DRG using charges reported in the December 2003 update of the FY 2003 MedPAR file. Of the 519 proposed LTC-DRGs for FY 2005, we identified 170 proposed LTC-DRGs for which there were no LTCH cases in the database. That is, based on data from the FY 2003 MedPAR file used in this proposed rule, no patients who would have been classified to those proposed LTC-DRGs were treated in LTCHs during FY 2003 and, therefore, no charge data were reported for those proposed LTC-DRGs. Thus, in the process of determining the proposed LTC-DRG relative weights, we are unable to determine proposed weights for these 170 proposed LTC-DRGs using the methodology described in steps 1 through 5 above. However, since patients with a number of the diagnoses under these proposed LTC-DRGs may be treated at LTCHs beginning in FY 2005, we assign proposed relative weights to each of the 170 ``no volume'' proposed LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 349 (519-170 = 349) proposed LTC- DRGs for which we are able to determine proposed relative weights, based on FY 2003 claims data.

As there are currently no LTCH cases in these ``no volume'' proposed LTC-DRGs, we determine proposed relative weights for the 170 proposed LTC-DRGs with no LTCH cases in the FY 2003 MedPAR file used in this proposed rule by grouping them to the appropriate proposed low- volume quintile. This methodology is consistent with our methodology used in determining proposed relative weights to account for the proposed low-volume LTC-DRGs described above.

Our methodology for determining proposed relative weights for the ``no volume'' proposed LTC-DRGs is as follows: First, we crosswalk the proposed no volume LTC-DRGs by matching them to other similar proposed LTC-DRGs for which there were LTCH cases in the FY 2003 MedPAR file based on clinical similarity and intensity of use of resources as determined by care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, post-operative care, and length of stay. We assign the proposed relative weight for the applicable proposed low-volume quintile to the proposed no volume LTC-DRG if the proposed LTC-DRG to which it is crosswalked is grouped to one of the proposed low-volume quintiles. If the proposed LTC-DRG to which the proposed no volume LTC- DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to one of the proposed low-volume quintiles, we compare the proposed relative weight of the proposed LTC-DRG to which the proposed no volume LTC-DRG is crosswalked to the proposed relative weights of each of the five quintiles and we assign the proposed no volume LTC-DRG the proposed relative weight of the proposed low-volume quintile with the closest proposed weight. For this proposed rule, a list of the proposed no volume FY 2005 LTC-DRGs and the proposed FY 2005 LTC-DRG to which it is crosswalked in order to determine the appropriate proposed low- volume quintile for the assignment of a proposed relative weight for FY 2005 is shown below in Table 2.

Table 2.--Proposed No Volume LTC-DRG Crosswalk and Proposed Quintile Assignment for FY 2005

Proposed low- Proposed cross- volume Proposed LTC-DRG

Description

walked LTC-DRG quintile assigned.

2.............................. CRANIOTOMY AGE >17 W/O CC......................

1 Quintile 4. 3.............................. CRANIOTOMY AGE 0-17............................

1 Quintile 4. 6.............................. CARPAL TUNNEL RELEASE..........................

251 Quintile 2. 26............................. SEIZURE & HEADACHE AGE 0-17....................

25 Quintile 2. 30............................. TRAUMATIC STUPOR & COMA, COMA 17 W/O CC......................

25 Quintile 2. 33............................. CONCUSSION AGE 0-17............................

25 Quintile 2. 36............................. RETINAL PROCEDURES.............................

47 Quintile 1. 37............................. ORBITAL PROCEDURES.............................

47 Quintile 1. 38............................. PRIMARY IRIS PROCEDURES........................

47 Quintile 1. 39............................. LENS PROCEDURES WITH OR WITHOUT VITRECTOMY.....

47 Quintile 1. 40............................. EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE >17....

47 Quintile 1. 41............................. EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0-17...

47 Quintile 1. 42............................. INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS &

47 Quintile 1. LENS. 48............................. OTHER DISORDERS OF THE EYE AGE 0-17............

47 Quintile 1. 49............................. MAJOR HEAD & NECK PROCEDURES...................

64 Quintile 4. 50............................. SIALOADENECTOMY................................

63 Quintile 4. 51............................. SALIVARY GLAND PROCEDURES EXCEPT

63 Quintile 4. SIALOADENECTOMY. 52............................. CLEFT LIP & PALATE REPAIR......................

63 Quintile 4. 54............................. SINUS & MASTOID PROCEDURES AGE 0-17............

53 Quintile 3. 56............................. RHINOPLASTY....................................

53 Quintile 3. 57............................. T&A PROC, EXCEPT TONSILLECTOMY &/OR

69 Quintile 2. ADENOIDECTOMY ONLY, AGE >17. 58............................. T&A PROC, EXCEPT TONSILLECTOMY &/OR

69 Quintile 2. ADENOIDECTOMY ONLY, AGE 0-17. 59............................. TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17.

69 Quintile 2. 60............................. TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0-17

69 Quintile 2.

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61............................. MYRINGOTOMY W TUBE INSERTION AGE >17...........

69 Quintile 2. 62............................. MYRINGOTOMY W TUBE INSERTION AGE 0-17..........

69 Quintile 2. 66............................. EPISTAXIS......................................

69 Quintile 2. 67............................. EPIGLOTTITIS...................................

63 Quintile 4. 70............................. OTITIS MEDIA & URI AGE 0-17....................

69 Quintile 2. 71............................. LARYNGOTRACHEITIS..............................

97 Quintile 1. 72............................. NASAL TRAUMA & DEFORMITY.......................

53 Quintile 3. 74............................. OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0-

69 Quintile 2. 17. 81............................. RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0-17

69 Quintile 2. 91............................. SIMPLE PNEUMONIA & PLEURISY AGE 0-17...........

90 Quintile 2. 98............................. BRONCHITIS & ASTHMA AGE 0-17...................

97 Quintile 1. 104............................ CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W

110 Quintile 1. CARD CATH. 105............................ CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W/

110 Quintile 1. O CARD CATH. 106............................ CORONARY BYPASS W PTCA.........................

110 Quintile 1. 107............................ CORONARY BYPASS W CARDIAC CATH.................

110 Quintile 1. 111............................ MAJOR CARDIOVASCULAR PROCEDURES W/O CC.........

110 Quintile 1. 137............................ CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0-

136 Quintile 3. 17. 146............................ RECTAL RESECTION W CC..........................

148 Quintile 5. 147............................ RECTAL RESECTION W/O CC........................

148 Quintile 5. 151............................ PERITONEAL ADHESIOLYSIS W/O CC.................

150 Quintile 5. 153............................ MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC....

152 Quintile 5. 155............................ STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE

154 Quintile 5. >17 W/O CC. 156............................ STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0-

154 Quintile 5. 17. 158............................ ANAL & STOMAL PROCEDURES W/O CC................

157 Quintile 4. 160............................ HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE

159 Quintile 3. >17 W/O CC. 162............................ INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W/

178 Quintile 1. O CC. 163............................ HERNIA PROCEDURES AGE 0-17.....................

178 Quintile 1. 164............................ APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC.

148 Quintile 5. 165............................ APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O

148 Quintile 5. CC. 166............................ APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W

148 Quintile 5. CC. 167............................ APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O

148 Quintile 5. CC. 169............................ MOUTH PROCEDURES W/O CC........................

53 Quintile 3. 184............................ ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS

183 Quintile 2. AGE 0-17. 186............................ DENTAL & ORAL DIS EXCEPT EXTRACTIONS &

185 Quintile 3. RESTORATIONS, AGE 0-17. 187............................ DENTAL EXTRACTIONS & RESTORATIONS..............

185 Quintile 3. 190............................ OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 0-17......

189 Quintile 3. 192............................ PANCREAS, LIVER & SHUNT PROCEDURES W/O CC......

191 Quintile 5. 194............................ BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/

193 Quintile 1. O C.D.E. W/O CC. 195............................ CHOLECYSTECTOMY W C.D.E. W CC..................

197 Quintile 5. 196............................ CHOLECYSTECTOMY W C.D.E. W/O CC................

197 Quintile 5. 198............................ CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O

197 Quintile 5. C.D.E. W/O CC. 199............................ HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR

200 Quintile 3. MALIGNANCY. 211............................ HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE

210 Quintile 5. >17 W/O CC. 212............................ HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0-

210 Quintile 5. 17. 219............................ LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT,

218 Quintile 4. FEMUR AGE >17 W/O CC ]. 220............................ LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT,

218 Quintile 4. FEMUR AGE 0-17. 223............................ MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER

224 Quintile 4. EXTREMITY PROC W CC. 232............................ ARTHROSCOPY....................................

234 Quintile 2. 252............................ FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT

234 Quintile 2. AGE 0-17. 255............................ FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT

234 Quintile 2. AGE 0-17. 257............................ TOTAL MASTECTOMY FOR MALIGNANCY W CC...........

275 Quintile 3. 258............................ TOTAL MASTECTOMY FOR MALIGNANCY W/O CC.........

275 Quintile 3. 259............................ SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC........

275 Quintile 3. 279............................ CELLULITIS AGE 0-17............................

273 Quintile 1. 282............................ TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0-

281 Quintile 3. 17. 286............................ ADRENAL & PITUITARY PROCEDURES.................

53 Quintile 3. 289............................ PARATHYROID PROCEDURES.........................

53 Quintile 3. 290............................ THYROID PROCEDURES.............................

53 Quintile 3. 291............................ THYROGLOSSAL PROCEDURES........................

53 Quintile 3. 293............................ OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O

292 Quintile 2. CC. 298............................ NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0-17

297 Quintile 2. 309............................ MINOR BLADDER PROCEDURES W/O CC................

308 Quintile 4. 311............................ TRANSURETHRAL PROCEDURES W/O CC................

310 Quintile 4. 313............................ URETHRAL PROCEDURES, AGE >17 W/O CC............

312 Quintile 4. 314............................ URETHRAL PROCEDURES, AGE 0-17..................

305 Quintile 2. 322............................ KIDNEY & URINARY TRACT INFECTIONS AGE 0-17.....

326 Quintile 1. 327............................ KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0-

326 Quintile 1. 17. 329............................ URETHRAL STRICTURE AGE >17 W/O CC..............

305 Quintile 2. 330............................ URETHRAL STRICTURE AGE 0-17....................

305 Quintile 2.

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333............................ OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0-17

332 Quintile 2. 334............................ MAJOR MALE PELVIC PROCEDURES W CC..............

345 Quintile 4. 335............................ MAJOR MALE PELVIC PROCEDURES W/O CC............

345 Quintile 4. 337............................ TRANSURETHRAL PROSTATECTOMY W/O CC.............

306 Quintile 3. 340............................ TESTES PROCEDURES, NON-MALIGNANCY AGE 0-17.....

339 Quintile 1. 342............................ CIRCUMCISION AGE >17...........................

339 Quintile 1. 343............................ CIRCUMCISION AGE 0-17..........................

339 Quintile 1. 344............................ OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES

345 Quintile 4. FOR MALIGNANCY. 351............................ STERILIZATION, MALE............................

339 Quintile 1. 353............................ PELVIC EVISCERATION, RADICAL HYSTERECTOMY &

365 Quintile 5. RADICAL VULVECTOMY. 354............................ UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL

365 Quintile 5. MALIG W CC. 355............................ UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL

365 Quintile 5. MALIG W/O CC. 356............................ FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE

303 Quintile 4. PROCEDURES. 357............................ UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL

303 Quintile 4. MALIGNANCY. 358............................ UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W CC..

303 Quintile 4. 359............................ UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W/O CC

303 Quintile 4. 360............................ VAGINA, CERVIX & VULVA PROCEDURES..............

303 Quintile 4. 361............................ LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION....

149 Quintile 1. 362............................ ENDOSCOPIC TUBAL INTERRUPTION..................

149 Quintile 1. 363............................ D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY

367 Quintile 1. 364............................ D&C, CONIZATION EXCEPT FOR MALIGNANCY..........

367 Quintile 1. 370............................ CESAREAN SECTION W CC..........................

369 Quintile 3. 371............................ CESAREAN SECTION W/O CC........................

367 Quintile 1. 372............................ VAGINAL DELIVERY W COMPLICATING DIAGNOSES......

367 Quintile 1. 373............................ VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES....

367 Quintile 1. 374............................ VAGINAL DELIVERY W STERILIZATION &/OR D&C......

367 Quintile 1. 375............................ VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR

367 Quintile 1. D&C. 376............................ POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R.

367 Quintile 1. PROCEDURE. 377............................ POSTPARTUM & POST ABORTION DIAGNOSES W O.R.

367 Quintile 1. PROCEDURE. 378............................ ECTOPIC PREGNANCY..............................

369 Quintile 3. 379............................ THREATENED ABORTION............................

367 Quintile 1. 380............................ ABORTION W/O D&C...............................

367 Quintile 1. 381............................ ABORTION W D&C, ASPIRATION CURETTAGE OR

367 Quintile 1. HYSTEROTOMY. 382............................ FALSE LABOR....................................

367 Quintile 1. 383............................ OTHER ANTEPARTUM DIAGNOSES W MEDICAL

367 Quintile 1. COMPLICATIONS. 384............................ OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL

367 Quintile 1. COMPLICATIONS. 385............................ NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE

367 Quintile 1. CARE FACILITY. 386............................ EXTREME IMMATURITY OR RESPIRATORY DISTRESS

367 Quintile 1. SYNDROME, NEONATE. 387............................ PREMATURITY W MAJOR PROBLEMS...................

367 Quintile 1. 388............................ PREMATURITY W/O MAJOR PROBLEMS.................

367 Quintile 1. 389............................ FULL TERM NEONATE W MAJOR PROBLEMS.............

367 Quintile 1. 390............................ NEONATE W OTHER SIGNIFICANT PROBLEMS...........

367 Quintile 1. 391............................ NORMAL NEWBORN.................................

367 Quintile 1. 392............................ SPLENECTOMY AGE >17............................

197 Quintile 5. 393............................ SPLENECTOMY AGE 0-17...........................

197 Quintile 5. 396............................ RED BLOOD CELL DISORDERS AGE 0-17..............

399 Quintile 2. 402............................ LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC

395 Quintile 4. W/O CC. 405............................ ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0-

404 Quintile 1. 17. 407............................ MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ

408 Quintile 4. O.R. PROC W/O CC. 411............................ HISTORY OF MALIGNANCY W/O ENDOSCOPY............

367 Quintile 1. 412............................ HISTORY OF MALIGNANCY W ENDOSCOPY..............

367 Quintile 1. 417............................ SEPTICEMIA AGE 0-17............................

416 Quintile 3. 422............................ VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0-

426 Quintile 1. 17. 432............................ OTHER MENTAL DISORDER DIAGNOSES................

427 Quintile 2. 446............................ TRAUMATIC INJURY AGE 0-17......................

445 Quintile 3. 448............................ ALLERGIC REACTIONS AGE 0-17....................

447 Quintile 2. 451............................ POISONING & TOXIC EFFECTS OF DRUGS AGE 0-17....

455 Quintile 4. 471............................ BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF

236 Quintile 2. LOWER EXTREMITY. 481............................ BONE MARROW TRANSPLANT.........................

394 Quintile 3. 482............................ TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES..

63 Quintile 4. 484............................ CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA.....

1 Quintile 4. 491............................ MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF

209 Quintile 5. UPPER EXTREMITY. 492............................ CHEMOTHERAPY W ACUTE LEUKEMIA OR W USE OF HI

410 Quintile 3. DOSE CHEMOAGENT. 494............................ LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/O CC.

493 Quintile 3. 498............................ SPINAL FUSION EXCEPT CERVICAL W/O CC...........

497 Quintile 3. 504............................ EXTENSIVE BURNS OF FULL THICKNESS BURNS WITH

468 Quintile 5. MECH VENT 96+HRS WITH SKIN GRAFT. 507............................ FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/

508 Quintile 3. O CC OR SIG TRAUMA. 516............................ PERCUTANEOUS CARDIOVASC PROC W AMI.............

518 Quintile 3.

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520............................ CERVICAL SPINAL FUSION W/O CC..................

497 Quintile 3. 525............................ OTHER HEART ASSIST SYSTEM IMPLANT..............

468 Quintile 5. 526............................ PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING

517 Quintile 3. STENT W AMI. 527............................ PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING

517 Quintile 3. STENT W/O AMI. 528............................ INTRACRANIAL VASCULAR PROC W PDX HEMORRHAGE....

1 Quintile 4. 530............................ VENTRICULAR SHUNT PROCEDURES W/O CC............

529 Quintile 4. 534............................ EXTRACRANIAL PROCEDURES W/O CC.................

500 Quintile 1. 540............................ LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W/O CC

399 Quintile 2.

To illustrate this methodology for determining the proposed relative weights for the 170 proposed LTC-DRGs with no LTCH cases, we are providing the following examples, which refer to the no volume proposed LTC-DRGs crosswalk information for FY 2005 provided above in Table 2:

Example 1: There were no cases in the FY 2003 MedPAR file used for this proposed rule for proposed LTC-DRG 163 (Hernia Procedures Age 0-17). Since the procedure is similar in resource use and the length and complexity of the procedures and the length of stay are similar, we determined that proposed LTC-DRG 178 (Uncomplicated Peptic Ulcer Without CC), which is assigned to proposed low-volume quintile 1 for the purpose of determining the proposed FY 2005 relative weights, would display similar clinical and resource use. Therefore, we assign the same proposed relative weight of proposed LTC-DRG 178 of 0.4964 (Quintile 1) for FY 2005 (Table 11 in the Addendum to this proposed rule) to LTC-DRG 163.

Example 2: There were no LTCH cases in the FY 2003 MedPAR file used in this proposed rule for proposed LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-17). Since the severity of illness in patients with bronchitis and asthma is similar in patients regardless of age, we determined that proposed LTC-DRG 90 (Simple Pneumonia and Pleurisy Age >17 Without CC) would display similar clinical and resource use characteristics and have a similar length of stay to LTC-DRG 91. There were over 25 cases in proposed LTC-DRG 90. Therefore, it would not be assigned to a low-volume quintile for the purpose of determining the LTC-DRG relative weights. However, under our established methodology, proposed LTC-DRG 91, with no LTCH cases, would need to be grouped to a low-volume quintile. We identified that the proposed low-volume quintile with the closest weight to proposed LTC-DRG 90 (0.7368; see Table 11 in the Addendum to this proposed rule) would be proposed low-volume quintile 2 (0.6685; see Table 11 in the Addendum to this proposed rule). Therefore, we assign proposed LTC-DRG 91 a proposed relative weight of 0.6885 for FY 2005.

Furthermore, we are proposing LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, pancreas, and simultaneous pancreas/ kidney transplants (LTC-DRGs 103, 302, 480, 495, 512, and 513, respectively) for FY 2005 because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified.

Based on our research, we found that most LTCHs only perform minor surgeries, such as minor small and large bowel procedures, to the extent any surgeries are performed at all. Given the extensive criteria that must be met to become certified as a transplant center for Medicare, we believe it is unlikely that any LTCHs would become certified as a transplant center. In fact, in the nearly 20 years since the implementation of the IPPS, there has never been a LTCH that even expressed an interest in becoming a transplant center.

However, if in the future a LTCH applies for certification as a Medicare-approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to determine appropriate weights for the LTC-DRGs affected. At the present time, we would only include these six transplant LTC-DRGs in the GROUPER program for administrative purposes. Since we use the same GROUPER program for LTCHs as is used under the IPPS, removing these LTC-DRGs would be administratively burdensome.

Again, we note that as this system is dynamic, it is entirely possible that the number of proposed LTC-DRGs with a zero volume of LTCH cases based on the system will vary in the future. We used the best most recent available claims data in the MedPAR file to identify zero volume LTC-DRGs and to determine the proposed relative weights in this proposed rule.

Table 11 in the Addendum to this proposed rule lists the proposed LTC-DRGs and their respective proposed relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay (to assist in the determination of short-stay outlier payments under Sec. 412.529) for FY 2005.

E. Proposed Add-On Payments for New Services and Technologies

[If you choose to comment on issues in this section, please include the caption ``New Technology Applications'' at the beginning of your comment.]

1. Background

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies under the IPPS. Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be considered new if it meets criteria established by the Secretary after notice and opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that the process must apply to a new medical service or technology if, ``based on the estimated costs incurred with respect to discharges involving such service or technology, the DRG prospective payment rate otherwise applicable to such discharges under this subsection is inadequate.''

The regulations implementing this provision establish three criteria for special treatment. First, Sec. 412.87(b)(2) defines when a specific medical service or technology will be considered new for purposes of new medical service or technology add-on payments. The statutory provision contemplated the special payment treatment for new medical services or technologies until such time as data are available to reflect the cost of the technology in the DRG weights through recalibration. There is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market and when data reflecting the use of the medical service or technology are used to calculate the DRG weights. For example, data from discharges occurring during FY 2003 are used to calculate the proposed FY 2005 DRG weights in this proposed rule. Section 412.87(b)(2) provides that a ``medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology (depending on when a new code is assigned and data on the new medical service or technology become

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available for DRG recalibration). After CMS has recalibrated the DRGs, based on available data, to reflect the costs of an otherwise new medical service or technology, the medical service or technology will no longer be considered `new' under the criterion for this section.''

The 2-year to 3-year period would ordinarily begin with FDA approval, unless there was some documented delay in bringing the product onto the market after that approval (for instance, component production or drug production had been postponed until FDA approval due to shelf life concerns). After the DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the special add-on payment for new medical services or technology ceases (Sec. 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2003 and entered the market at that time may be eligible to receive add-on payments as a new technology until FY 2006 (discharges occurring before October 1, 2005), when data reflecting the costs of the technology would be used to recalibrate the DRG weights. Because the FY 2006 DRG weights will be calculated using FY 2004 MedPAR data, the costs of such a new technology would likely be reflected in the FY 2006 DRG weights.

Section 412.87(b)(3) further provides that, to receive special payment treatment, new medical services or technologies must be inadequately paid otherwise under the DRG system. To assess whether technologies would be inadequately paid under the DRGs, we establish thresholds to evaluate applicants for new technology add-on payments. In the August 1, 2003 final rule (68 FR 45385), we established the threshold at the geometric mean standardized charge for all cases in the DRG plus 75 percent of 1 standard deviation above the geometric mean standardized charge (based on the logarithmic values of the charges and transformed back to charges) for all cases in the DRG to which the new medical service or technology is assigned (or the case- weighted average of all relevant DRGs, if the new medical service or technology occurs in many different DRGs). Table 10 in the Addendum to the August 1, 2003 final rule (68 FR 45648) listed the qualifying threshold by DRG, based on the discharge data that we used to calculate the FY 2004 DRG weights.

However, section 503(b)(1) of Public Law 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying a threshold* * *that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of one standard deviation for the diagnosis-related group involved.'' The provisions of section 503(b)(1) apply to classification for fiscal years beginning with FY 2005. We have updated Table 10 from the October 6, 2003 Federal Register correction document, which contains the thresholds that we are using to evaluate applications for new service or technology add-on payments for FY 2005, using the section 503(b)(1) measures stated above, and posted these new thresholds on our Web site at: http://www.cms.hhs.gov/providers/hipps/newtech.asp. The thresholds published in this FY 2005 proposed rule are

preliminary thresholds for FY 2006. The final thresholds published in the FY 2005 final rule will be used to evaluate applicants for new technology add-on payments during FY 2006. (Refer to section IV. D. of this preamble for a discussion of a revision of the regulations to incorporate the change made by section 503(b)(1) of Public Law 108- 173.)

Section 412.87(b)(1) of our existing regulations provides that a new technology is an appropriate candidate for an additional payment when it represents an advance in medical technology that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries. For example, a new technology represents a substantial clinical improvement when it reduces mortality, decreases the number of hospitalizations or physician visits or reduces recovery time compared to the technologies previously available. (See the September 7, 2001 final rule (66 FR 46902) for a complete discussion of this criterion.)

The new medical service or technology add-on payment policy provides additional payments for cases with high costs involving eligible new medical services or technologies while preserving some of the incentives under the average-based payment system. The payment mechanism is based on the cost to hospitals for the new medical service or technology. Under Sec. 412.88, Medicare pays a marginal cost factor of 50 percent for the costs of a new medical service or technology in excess of the full DRG payment. If the actual costs of a new medical service or technology case exceed the DRG payment by more than the 50- percent marginal cost factor of the new medical service or technology, Medicare payment is limited to the DRG payment plus 50 percent of the estimated costs of the new technology.

The report language accompanying section 533 of Public Law 106-554 indicated Congressional intent that the Secretary implement the new mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual DRG classifications and relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year at the same time we estimated the payment effect of changes to the DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts.

Section 503(d)(2) of Public Law 108-173 amended section 1886(d)(5)(K)(ii)(III) of the Act to provide that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, add-on payments for new medical services or technologies for FY 2005 and later years will not be budget neutral. We discuss the regulation change necessary to implement this provision in section IV.H. of this proposed rule.

Applicants for add-on payments for new medical services or technologies for FY 2006 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate the medical service or technology meets the high-cost threshold, no later than early October 2004. Applicants must submit a complete database no later than mid-December 2004. Complete application information, along with final deadlines for submitting a full application, will be available at our Web site after publication of the FY 2005 final rule at: http://www.cms.hhs.gov/providers/hipps/default.asp. To

allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2006, the Web site will also list the tracking forms completed by each applicant.

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2. Other Provisions of Section 503 of Public Law 108-173

Section 503(b)(2) of Public Law 108-173 amended section 1886(d)(5)(K) of the Act by adding a new clause (viii) to provide for a mechanism for public input before publication of a notice of proposed rule making regarding whether a medical service or technology represents a substantial improvement or advancement. The revised process for evaluating new medical service and technology applications requires the Secretary to--

Provide, before publication of a proposed rule, for public input regarding whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment of Medicare beneficiaries.

Make public and periodically update a list of the services and technologies for which an application for add-on payments is pending.

Accept comments, recommendations, and data from the public regarding whether a service or technology represents a substantial improvement.

Provide, before publication of a proposed rule, for a meeting at which organizations representing hospitals, physicians, manufacturers, and any other interested party may present comments, recommendations, and data regarding whether a new service or technology represents a substantial clinical improvement to the clinical staff of CMS.

In order to satisfy the requirements of this last provision, we published a notice in the Federal Register on February 27, 2004, and held a town meeting at the CMS Headquarters Office in Baltimore, MD, on March 15, 2004. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussions of the substantial clinical improvement criteria for each of the FY 2005 new medical service and technology add-on payment applications before the publication of this FY 2005 IPPS proposed rule.

Approximately 70 participants registered and attended in person, while additional participants listened over an open telephone line. The participants focused on presenting data on the substantial clinical improvement aspect of their products, as well as the need for additional payments to ensure access to Medicare beneficiaries. In addition, we also received many written comments regarding the substantial clinical improvement criterion for the applicants. We have considered these comments in our evaluation of each new application for FY 2005 in this proposed rule. We have summarized these comments, or if applicable, indicated that no comments were received, at the end of the discussion of the individual applications.

Section 503(c) of Public Law 108-173 amended section 1886(d)(5)(K) of the Act by adding a new clause (ix) requiring that before establishing any add-on payment for a new medical service or technology, that the Secretary shall seek to identify one or more DRGs associated with the new technology, based on similar clinical or anatomical characteristics and the costs of the technology and assign the new technology into a DRG where the average costs of care most closely approximate the costs of care using the new technology. No add- on payment shall be made with respect to such a new technology.

At the time an application is submitted, the DRGs associated with the new technology are identified. We only determine that a new technology add-on payment is appropriate when the reimbursement under these DRGs is not adequate for this new technology. The criterion for this determination is the cost threshold, which we discuss below. We discuss the assignments of several new technologies within the DRG payment system in section II.B. of this preamble.

In this proposed rule, we evaluate whether new technology add-on payments will continue in FY 2005 for the two technologies that currently receive such payments. In accordance with section 503(e)(2) of Public Law 108-173, we also reconsider one application for new technology add-on payments that was denied last year. Finally, we present our evaluations of 10 new applications for add-on payments in FY 2005. 3. FY 2005 Status of Technology Approved for FY 2004 Add-On Payments

a. Drotrecogin Alfa (Activated)--Xigris[reg]

Xigris[reg], a biotechnology product that is a recombinant version of naturally occurring Activated Protein C (APC), was approved by the FDA on November 21, 2001. In the August 1, 2002 IPPS final rule (67 FR 50013), we determined that cases involving the administration of Xigris[reg], (as identified by the presence of code 00.11 (Infusion of drotrecogin alfa (activated)) were eligible for additional payments in FY 2003. (The August 1, 2002 final rule contains a detailed discussion of this technology.)

In the August 1, 2003 final IPPS rule (68 FR 45387), we indicated that, for FY 2004, we would continue to make add-on payments for cases involving the administration of Xigris[reg] as identified by the presence of code 00.11. This was because we determined that Xigris[reg] was still within the 2-year to 3-year period before the costs of this new technology would be reflected in the DRG weights.

Xigris[reg] became available on the market at the time of its FDA licensure on November 21, 2001. Early in FY 2005, Xigris[reg] will be beyond the 2-year to 3-year period during which a technology can be considered new. Therefore, we are proposing that Xigris[reg] will not continue to receive new technology add-on payments in FY 2005. During the period of 2 years and 6 months since it came onto the market, Xigris[reg] has been used frequently in the appropriate DRGs. For FY 2005, we analyzed the number of cases involving this technology in the FY 2003 MedPAR file. We found 4,243 cases that received Xigris[reg], the majority of which fell appropriately into DRGs 415, 416, 475, and 483, with by far the most cases in DRG 416 (Septicemia Age >17). Accordingly, the costs of Xigris[reg] are now well-represented in those DRGs. Therefore, we are proposing that FY 2004 will be the final year for Xigris[reg] to receive add-on payments.

We received no public comments regarding the continuation of add-on payments for Xigris[reg].

The manufacturer also asked us to consider creating a DRG specifically for severe sepsis. We discuss this request in section II.B.16.c. of this proposed rule. b. InFUSETM(Bone Morphogenetic Proteins (BMPs) for Spinal Fusions)

InFUSETMwas approved by FDA for use on July 2, 2002, and became available on the market immediately thereafter. In the August 1, 2003 IPPS final rule (68 FR 45388), we approved InFUSETMfor add-on payments under Sec. 412.88, effective for FY 2004. This approval was on the basis of using InFUSETMfor single-level, lumbar spinal fusion, consistent with the FDA's approval and the data presented to us by the applicant. Therefore, we limited the add-on payment to cases using this technology for anterior lumbar fusions in DRGs 497 (Spinal Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical Without CC). Cases involving InFUSETMthat are eligible for the new technology add-on payment are identified by assignment to DRGs 497 and 498 as a lumbar spinal fusion, with the combination of ICD-9-CM procedure codes 84.51 (Insertion of

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interbody spinal fusion device) and 84.52 (Insertion of recombinant bone morphogenetic protein).

Because InFUSETMwas approved by the FDA for use on July 2, 2003, it is still within the 2-year to 3-year period during which a technology can be considered new under the regulations. Therefore, we are proposing to continue add-on payments for FY 2005 for cases receiving InFUSETMfor spinal fusions in DRGs 497 (Spinal Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical Without CC). We are also proposing to continue limiting the add-on payment for cases receiving InFUSETM, to those cases identified by the presence of procedure codes 84.51 and 84.52. However, we are proposing to eliminate add-on payment for the interbody fusion device that is used in combination with this recombinant human bone morphogenetic protein (rhBMP) product (procedure code 84.52). We note that currently add-on payments for InFUSETMinclude costs for the interbody fusion device (the LT cage, identified by procedure code 84.51), used in the spinal fusion procedure with the InFUSETMproduct. Because this device is not a new technology, but in fact has been in use for 9 years for spinal fusions, we believe that it is inappropriate to pay for this device in conjunction with the genuinely new rhBMP technology. Therefore, we are proposing no longer to pay for the interbody fusion device as bundled in the current maximum add-on payment amount of $4,450 for cases that qualify for additional payment. This proposal would reduce the add-on payment to account for no longer paying for the LT cage. This would reduce the cost of this new technology by $4,990, which results in a total cost of $3,910 for InFUSETM. Therefore, we are proposing a maximum add-on amount of $1,955 for cases that qualify for additional payment. Although we are proposing to eliminate payment for the LT cage, we would still require the presence of procedure code 84.51 (in combination with procedure code 84.52) when making add-on payments for new technology for InFUSETM. This is due to the fact that the LT cage is still required by the FDA when InFUSETMis used for single level spinal fusions.

We received the following public comments in accordance with section 503(b)(2) of Public Law 108-173 regarding the continuation of add-on payments for this technology.

Comment: Several commenters wrote expressing support for continued add-on payments for this technology. Many of these commenters were physicians who use the device. These commenters noted that the hospitals for which they work did not allow use of the device until the new technology add-on payments began on October 1, 2003. Therefore, they encouraged the continued add-on payment to ensure continued access of the device to patients. They also argued that, because utilization remained low in FY 2003, the DRG recalibration for FY 2005 would not supply adequate payment data for the cases using the device, further jeopardizing patient access to the technology.

Response: As discussed above, we are proposing to continue payments because this technology is still within the 2-year to 3-year period during which a technology can be considered new under the regulation. 4. Reevaluation of FY 2004 Applications That Were Not Approved

Section 503(e)(2) of Public Law 108-173 requires us to reconsider all applications for new medical service or technology add-on payments that were denied for FY 2004. We received two applications for new technologies to be designated eligible for add-on payments for new technology for FY 2004. We approved InFUSE for use in spinal fusions for new technology add-on payments in FY 2004. We denied the application for new technology add-on payments for the GLIADEL[reg] wafer.

GLIADEL[reg] Wafer

Gliablastoma Multiforme (GBM) is a very aggressive primary brain tumor. Standard care for patients diagnosed with GBM includes surgical resection followed by radiation and, in some cases, systemic chemotherapy. According to the manufacturer, the GLIADEL[reg] wafer is indicated for use at the time of surgery in order to prolong survival in patients with GBM. Implanted directly into the cavity that is created when a brain tumor is surgically removed, the GLIADEL[reg] wafer delivers chemotherapy directly to the site where the tumor is most likely to recur.

The FDA gave initial approval for the GLIADEL[reg] wafer on September 23, 1996, for use as an adjunct to surgery to prolong survival in patients with recurrent GBM for whom surgical resection is indicated. In 2003, Guilford Pharmaceuticals submitted an application for approval of the GLIADEL[reg] wafer for add-on payments and stated that the technology should still be considered new for FY 2004, despite its approval by the FDA on September 23, 1996. The manufacturer argued that the technology was still new because it had not been possible to specifically identify cases involving use of the GLIADEL[reg] wafer in the MedPAR data prior to the adoption of a new ICD-9-CM code 00.10 (Implantation of a chemotherapeutic agent) on October 1, 2002. However, as discussed in the September 7, 2001 final rule (66 FR 46914), the determination concerning whether a technology meets this criterion depends on the date of its availability for use in the Medicare population rather than the date a specific code may be assigned. A technology can be considered new for 2 or 3 years after data reflecting the costs of the technology begin to become available. Data on the costs of this technology began to become available in September 1996. As a result, the costs of this technology are currently reflected in the DRG weights. As discussed in the final rule for FY 2004 (68 FR 45391), on February 26, 2003, the FDA approved the GLIADEL[reg] wafer for use in newly diagnosed patients with high-grade malignant glioma as an adjunct to surgery and radiation. However, our understanding is that many newly diagnosed patients were already receiving this therapy. To the extent that this is true, the charges associated with this use of the GLIADEL[reg] wafer were also reflected in the DRG relative weights. Therefore, the GLIADEL[reg] wafer did not meet this criterion for FY 2004.

Section 503(e)(2) of Public Law 108-173 required us to reconsider this application, but did not revise the criterion for determining whether a medical service or technology is new. As stated above, the FDA originally approved the GLIADEL[reg] wafer on September 23, 1996. Therefore, this technology is beyond the period in which it can be considered new. Accordingly, we are proposing to deny this application for new technology add-on payments for FY 2005.

We received no public comments regarding our reconsideration of this application for add-on payments.

Guilford also asked us to consider reclassifying this device into another DRG. We discuss issues relating to the DRG assignment of the GLIADEL[reg] wafer in section II.B.16.c. of this preamble. 5. FY 2005 Applicants for New Technology Add-On Payments a. InFUSETMBone Graft (Bone Morphogenetic Proteins (BMPs) for Tibia Fractures)

Bone Morphogenetic Proteins (BMPs) have been shown to have the capacity to induce new bone formation and, therefore, to enhance healing. Using recombinant techniques, some BMPs

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(referred to as rhBMPs) can be produced in large quantities. This has cleared the way for their potential use in a variety of clinical applications such as in delayed unions and nonunions of fractured bones and spinal fusions. One such product, rhBMP-2, is developed for use instead of a bone graft with spinal fusions.

Medtronic Sofamor Danek submitted an application for the InFUSETMBone Graft for use in tibia fractures for approval as a new technology eligible for add-on payments in FY 2005. Medtronic submitted a similar application for new technology add-on payments in FY 2004 for InFUSETMBone Graft/LT-CAGE Lumbar Tapered Fusion Device. As discussed above, we approved this application for FY 2004, and we are proposing to continue to make new technology payments for FY 2005 for InFUSETMwhen used in spinal fusions (refer to section III.E.3.b. of this preamble).

In cases of open tibia fractures, InFUSETMis applied using an absorbable collagen sponge, which is then applied to the fractured bone in order to promote new bone formation. This use currently represents an off-label use of InFUSETM. The manufacturer contends that this use is severely limited due to the greatly increased costs for treating these cases with InFUSETMat the time of wound debridement and closure. The manufacturer has conducted a clinical trial and is awaiting FDA approval for the use of InFUSETMfor open tibia fractures. According to the manufacturer, this approval is expected before publication of the final rule. The application for add-on payments for the use of InFUSE for open tibia fractures proposes that such payment would encourage the use of InFUSETMfor treatment of these fractures of grade II or higher (up to and including grade III, which often must be amputated due to the severity of injury). The additional payment, according to the applicant, would encourage more hospitals to use the technology at the time of initial wound closure and would result in reduced rates of infection and nonunion currently associated with the treatment of these injuries.

The manufacturer submitted data on 315 cases using InFUSETMfor open tibia fractures in the FY 2002 MedPAR file, as identified by procedure code 79.36 (Reduction, fracture, open, internal fixation, tibia and fibula) and diagnosis codes of either 823.30 (Fracture of tibia alone, shaft, open) or 823.32 (Fracture of fibula and tibia, shaft, open). The applicant also submitted data for a hospital sample that included 63 cases using the same identifying codes. Based on the data submitted by the applicant, InFUSETMwould be used in four different DRGs: 217 (Wound Debridement and Skin Graft Except Hand, for Musculoskeletal and Connective Tissue Disorders), 218 and 219 (Lower Extremity and Humerus Procedures Except Hip, Foot, Femur Age > 17, With and Without CCs, respectively) and 486 (Other O.R. Procedures for Multiple Significant Trauma). The analysis performed by the applicant resulted in a case- weighted cost threshold of $27,111 for these four DRGs. The average case-weighted standardized charge for cases using InFUSE in these four DRGs would be $46,468. Therefore, the applicant maintains that InFUSETMfor open tibia fractures meets the cost criterion.

InFUSETMwas approved by the FDA for use in open tibia fractures on April 30, 2004. Because FDA approval was not received in time for full consideration of the application in this proposed rule, we are not presenting our full analysis of this application in this proposed rule. However, we have already determined that this technology still qualifies as new in the context of proposing to extend new technology add-on payments for InFUSETMfor single-level spinal fusions. We must still determine whether it is appropriate to approve add-on payments for InFUSETMin cases of open tibia fractures in light of the cost and substantial improvement criteria. Therefore, we invite comments on whether use of InFUSETMfor open tibia fractures should qualify for add-on payments under these criteria.

We note that, in the September 7, 2001 final rule (66 FR 46915), we stated that if an existing technology was assigned to different DRGs than those in which the technology was initially used, the new use may be considered for new technology add-on payments if it also meets the substantial clinical improvement and inadequacy of payment criteria. Under the policy suggested in that rule, approval of InFUSETMfor tibia fractures would start a new period of add-on payments for the new use of this technology. However, we have some reservations about whether this result would be appropriate. It might be possible, under the policy described in the September 7, 2001 final rule, for a technology to receive new technology add-on payments for many years after it is introduced, provided that use of the technology is continually expanded to treatment of new conditions. We invite comment on whether it would be more appropriate merely to extend the existing approval of InFUSETMfor spinal fusions to cases where InFUSETMis used for open tibia fractures, without extending the time period during which the technology will qualify for add-on payments.

We note that as part of its application, the applicant submitted evidence on the substantial clinical improvement criterion. The applicant cited data from a prospective, controlled study published on December 12, 2002 in The Journal of Bone and Joint Surgery (Govender, S., Crismma, C., Genant, H.K., Valentin-Opran, V., ``Recombinant Human Bone Morphogenetic Protein-2 for Treatment of Open Tibia Fractures,'' Vol. 84-A, No. 12. p. 2123). The study, also known as BESTT study group, involved 49 trauma centers in 11 countries. The study enrolled 450 patients who had sustained an open tibia shaft fracture that normally would be treated by intramedullary nail fixation and soft tissue management. The patients were randomly and blindly assigned to one of three groups: the standard of care as stated above, the standard of care plus implantation an absorbable collagen sponge soaked with .75 mg/ml of rhBmP-2, or the standard of care plus implantation of an absorbable collagen sponge soaked with 1.50 mg/ml of rhBMP-2. The study followed up with 421 (94 percent) of all patients. The applicant stated that the study found that patients who received the standard of care plus an absorbable collagen sponge soaked with 1.50 mg/ml of rhBMP-2 achieved the following results compared to the standard of care without the rhBMP: a 44-percent reduction in the rate of secondary surgery, an average of 39 days reduction in time of clinical healing and lower infection rates. As a result, the applicant maintains that InFUSETMin tibia fractures represents a substantial clinical improvement over previously available technologies.

We are not presenting a full analysis of this application under the substantial clinical improvement criterion because the technology had not yet received FDA approval for this use in time for consideration in this proposed rule. However, we note that although the cited study does provide some evidence of clinical efficacy, we have some concerns about whether the study conclusively demonstrates substantial clinical improvement over previously available technologies because of its design. (It is important to note, as we stated in the August 1, 2002 Federal Register (67 FR 50015), that we do not employ FDA guidelines to determine what drugs, devices, or technologies qualify for new technology add-on payments under Medicare. Our criteria

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do not depend on the standard of safety and efficacy that the FDA sets for general use, but on a demonstration of substantial clinical improvement in the Medicare population, particularly patients over age 65.) We will present our full analysis of the evidence regarding clinical improvement in the final rule.

We received no public comments regarding this application for add- on payments. b. Norian Skeletal Repair System (SRS)[reg] Bone Void Filler

Brigham and Women's Hospital submitted an application for approval of the Norian Skeletal Repair System (SRS)[reg] Bone Void Filler (Norian SRS[reg] Cement), manufactured by Synthes for new technology add-on payments for FY 2005. Synthes has been assisting the applicant with supplemental information and data to help the applicant with the application process. According to the manufacturer, Norian SRS[reg] Cement is an injectable, fast-setting carbonated apatite cement used to fill defects in areas of compromised cancellous bone during restoration or augmentation of the skeleton. The product provides a bone void filler that resorbs and is replaced with bone during the healing process.

On December 23, 1998, the FDA approved Norian SRS[reg] for use as an adjunct for fracture stabilization in the treatment of low impact, unstable, metaphyseal distal radius fractures, in cases where early mobilization is indicated. On December 20, 2001, the FDA approved Norian SRS[reg] Cement for use in bony voids or defects that are not intrinsic to the stability of the bony structure. Norian SRS[reg] Cement is intended to be placed or injected into bony voids or gaps in the skeletal system. These defects may be surgically created osseous defects or osseous defects caused by traumatic injury to the bone.

Despite the time that has elapsed since FDA approval, the manufacturer contends that Norian SRS[reg] Cement should still be considered new for several reasons. First, until April 2002, Norian SRS[reg] Cement was hand mixed using a mortar and pestle. Once Norian SRS[reg] Cement was approved by the FDA in December 2001 (for the indication of use in bony voids or defects that are not intrinsic to the stability of the bony structure), the manufacturer issued a new pneumatic mixer. According to the manufacturer, this new pneumatic mixer allows for better preparation, reliability, and ease of use. In addition, a new injection syringe mechanism was developed and made available in May 2002 and replaced the ``Norian Delivery Device''. The manufacturer believes these new procedures for mixing and delivery of the product to the patient should be considered new services as stated in section 1886(d)(5)(k)(ii) of the Act and Sec. 412.87(b)(1) of the regulations. Second, the manufacturer contends that the cement should still be considered new because there is no ICD-9-CM code to uniquely identify Norian SRS[reg] Cement within the DRGs.

Although there have been changes in the way Norian SRS[reg] Cement is mixed and delivered to the patient, we do not believe these changes are significant enough to regard the technology as new. While these changes may enhance the ease with which the technology is used, the product remains substantially the same as when it was initially developed. As we have indicated previously, technology can be considered new only for 2 to 3 years after data reflecting the costs of the technology begin to become available. Data on the costs of this technology began to become available after FDA approval in 1998, and these costs are currently reflected in the DRG weights. As we discussed in the September 7, 2001 final rule (66 FR 46914), the determination concerning whether a technology meets this criterion depends on the date of its availability for use in the Medicare population rather than the date a specific code may be assigned. Therefore, we are proposing that Norian SRS[reg] Cement does not meet the criterion that a medical service or technology be considered new.

Although we are not proposing to approve this application for add- on payments because the technology does not meet the newness criterion, we note that the manufacturer submitted information on the cost criterion and the substantial clinical improvement criterion. The manufacturer submitted 52 Medicare and non-Medicare cases using Norian SRS[reg] Cement. There are currently no ICD-9-CM codes that can distinctly identify Norian SRS[reg] Cement within the MedPAR data; therefore, we cannot track this technology with our own analysis of MedPAR data. Based on the data submitted by the manufacturer, cases using Norian SRS'' Cement were found in 12 DRGs, with 71.1 percent of the cases in DRGs 210, 218, 219, and 225. Based on the 52 cases submitted by the applicant, the case-weighted threshold across all DRGs was $22,493. The average case-weighted standardized charge was $29,032. As a result, the applicant and manufacturer maintain that Norian SRS[reg] Cement meets the cost criterion.

According to the manufacturer, Norian SRS[reg] Cement represents a substantial clinical improvement for the following reasons: It enhances short-term and long-term structural support, improves the rate and durability of healing, decreases donor site morbidity, decreases risk of infection at graft site, lowers the risk of operative complications from shorter operative procedures, lowers the rate of post-treatment hospitalizations and physician visits, and finally, reduces pain.

However, we are not presenting a full evaluation of the application for add-on payments for Norian SRS[reg] Cement under these criteria because the technology does not meet the newness criterion. Therefore, we are proposing to deny add-on payments for this technology.

We received no public comments on this application for add-on payments. c. InSync[reg] Defibrillator System (Cardiac Resynchronization Therapy with Defibrillation (CRT-D))

Cardiac Resynchronization Therapy (CRT), also known as bi- ventricular pacing, is a therapy for chronic heart failure. A CRT implantable system provides electrical stimulation to the right atrium, right ventricle, and left ventricle to recoordinate or resynchronize ventricular contractions and improve the oxygenated blood flow to the body (cardiac output).

Medtronic submitted an application for approval of the InSync[reg] Defibrillator System, a cardiac resynchronization therapy with defibrillation system (CRT-D), for new technology add-on payments for FY 2005. This technology combines resynchronization therapy with defibrillation for patients with chronic, moderate-to-severe heart failure who meet the criteria for an implantable cardiac defibrillator. Unlike conventional implantable cardiac defibrillators, which treat only arrhythmias, CRT- devices have a dual therapeutic nature intended to treat two aspects of a patient's heart disease concurrently: (1) The symptoms of moderate to severe heart failure (that is, the ventricular dysynchrony); and (2) cardiac arrhythmias, as documented by an electrophysiologic testing or clinical history or both, which would cause sudden cardiac arrest.

InSync[reg] Defibrillation System received FDA approval on June 26, 2002. However, another manufacturer, Guidant, received FDA approval for its CRT-D device on May 2, 2002. Guidant, and another competitor that has yet to receive FDA approval for its CRT-D device, have requested that their devices

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be included in any approval of CRT-D for new technology add-on payments. As we discussed in the September 7, 2001 final rule (66 FR 46915), an approval of a new technology for special payment should extend to all technologies that are substantially similar. Otherwise, our payment policy would bestow an advantage to the first applicant to receive approval for a particular new technology.

The applicant contends that, despite the approval of a similar device in May 2002, the InSync[reg] Defibrillator System should still be considered new for several reasons: First, an ICD-9-CM code was only issued in FY 2003, which falls within the 2-year to 3-year range provided in the regulations. Second, the utilization of CRT-Ds is still growing and has not reached full utilization and, therefore, CRT-Ds remain underreported within the FY 2003 MedPAR data that will be used to recalibrate the DRG weights for FY 2005. Finally, the applicant believes reporting of CRT-Ds may be insufficient to accurately recalibrate the DRGs because the new ICD-9-CM codes for CRT-Ds are unlikely to be used consistently and accurately by hospitals in the first year.

We have discussed the relationship between existence of a specific ICD-9-CM code for a technology and our determination of its status as a new technology. As discussed in the September 7, 2001 final rule (66 FR 46914), the determination of whether a technology is new depends on the date of its availability for use in the Medicare population, rather than the date a specific code may be assigned. Because CRT-Ds were available upon the initial FDA approval in May 2002, we consider the technology to be new from this date and not the date a code was assigned.

Using the December 2003 update file to the FY 2003 MedPAR file, we have identified 10,950 cases using CRT-D in the FY 2003 MedPAR database. Of these, 10,694 cases were reported in DRGs 514 and 515 (then Cardiac Defibrillator Implant With and Without Cardiac Catheter, respectively). In DRG 515, we found 3,948 cases with procedure code 00.51 (Implantation of cardiac resynchronization defibrillator, total system (CRT-D)) and 6,746 cases in DRG 514. DRG 514 is no longer valid, effective in FY 2004. In FY 2004, we assigned new cases of defibrillator implants with cardiac catheters from DRG 514 to new DRGs 535 (Cardiac Defibrillator Implant with Cardiac Catheter With Acute Myocardial Infarction (AMI) Heart Failure/Shock) and 536 (Cardiac Defibrillator Implant with Cardiac Catheter Without Acute Myocardial Infarction (AMI) Heart Failure/Shock). Using the 6,746 cases from the FY 2003 MedPAR found in DRG 514, we examined the primary diagnosis codes necessary for assignment to DRG 535 along with procedure code 00.51 and found 3,396 cases of CRT-D for DRG 535. The remaining 3,350 CRT-D cases found in DRG 514 using procedure code 00.51 fall into DRG 536. For FY 2003, the total number of cases of CRT-D found in the FY 2003 MedPAR data for DRGs 514 and 515 were 48,486. Cases reporting CRT- Ds thus represent 22 percent of all cases for these DRGs.

A medical service or technology can no longer be considered new after 2 to 3 years, when data reflecting the costs of the technology begin to become available. Data on the costs of this technology began to become available in May 2002. Our analysis of data from the FY 2003 MedPAR file also shows that the costs of CRT-D are represented by a substantial number of cases within the DRGs. However, as discussed above, the technology still remains within the 2-year to 3-year period during which it can be considered new. Therefore, we are considering whether the CRT-D technology still meets the newness criterion. We welcome comments on this issue as we analyze whether to approve this technology (which would included the InSync[reg] application) in the final rule.

We note that the applicant submitted information on the cost and substantial clinical improvement criteria. The applicant commissioned Navigant Consulting, Inc. to collect charge data on CRT-D. Navigant found 354 Medicare cases among 30 hospitals. Cases were identified using ICD-9-CM procedure code 00.51. Of these 354 cases, 44.1 percent were reported in DRG 515, 23.7 percent were reported in DRG 535, and 32.2 percent were reported in DRG 536. These DRGs result in a case- weighted threshold of $78,674. The average case-weighted standardized charge for the 354 cases mentioned above was $79,163. Based on these data, the manufacturer contends that InSync[reg] Defibrillator System would meet the cost criterion.

In the September 7, 2001 final rule, we stated that the data submitted must be of a sufficient sample size to demonstrate a significant likelihood that the sample mean approximates the true mean across all cases likely to receive the new technology. Using a standard statistical methodology for determining the needed (random) sample size based on the standard deviations of the DRGs identified by the applicant as likely to include cases receiving a CRT-D, we have determined that a random sample size of 354 cases can be reasonably expected to produce an estimate within $3,500 of the true mean.\3\ Of course, the data submitted do not represent a random sample of all cases in these DRGs across all hospitals.

\3\ The formula is n=4 [sigma]/B\2\, where [sigma] the standard deviation of the population, and B is the bound on the error of the estimate (the range within which the sample means can reliably predict the population mean). See Statistics for Management and Economics, Fifth Edition, by Mendenhall, W., Reinmuth, J., Beaver, R., and Duhan, D.

The manufacturer also contends that the added capability of the InSync[reg] Defibrillator System device provides significant benefits over and above a conventional defibrillator. The InSync[reg] Defibrillator System device treats both the comorbid conditions of ventricular arrhythmias and moderate to severe heart failure, and takes the place of the existing treatment of drug therapy for heart failure plus a conventional implantable cardiac defibrillator for ventricular arrhythmia. The applicant states this CRT-D is a substantial clinical improvement for patients who remain symptomatic despite drug therapy and have the comorbid condition of heart failure. According to the applicant, some of the improved outcomes that result from using a CRT-D device instead of existing treatments include: improved quality of life, improved exercise tolerance, improved homodynamic performance, and reduced hospitalizations and mortality due to chronic heart failure.

We welcome comments on whether this technology meets these criteria, but especially about whether it meets the newness criterion in the light of the extent to which it is represented cases within the relevant DRGs. We will determine whether to approve this technology in the light of these comments and our continuing analysis.

We received the following public comments in accordance with section 503(b)(2) of Public Law 108-173 regarding this application for add-on payments:

Comment: One commenter noted that CRT-D has had positive clinical outcomes by reversing remodeling of the heart and improving the heart's ability to pump more efficiently. The commenter added that CRT-D has helped decrease hospitalizations and length of stay.

Response: We appreciate the commenters' input on this criterion. We will consider these comments regarding the substantial clinical improvement criterion if we determine that the technology meets the other two criteria.

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d. GliaSite[reg] Radiation Therapy System (RTS)

The Pinnacle Health Group submitted an application for approval of GliaSite[reg] Radiation Therapy System (RTS) for new technology add-on payments. GliaSite[reg] RTS was approved by the FDA for use on April 15, 2001. The system involves several components, including a drug called Iotrex and a GliaSite[reg] catheter. Iotrex is an organically bound liquid form of Iodine \125\ used in intracavitary brachytherapy with GliaSite[reg] RTS. Iotrex is a single nonencapsulated (liquid) radioactive source. The liquid is a solution of sodium 3-(I\125\) iodo-4-hydroxybenzenesulfonate and is used to deliver brachytherapy for treatment of brain cancer.

The delivery system for Iotrex is the GliaSite[reg] RTS catheter. Iotrex is administered via injection through a self-sealing port into the primary lumen of the barium-impregnated catheter that leads to the balloon reservoir. After a malignant brain tumor has been resected, the balloon catheter (GliaSite[reg]) is implanted temporarily inside the cavity. The patient is released from the hospital. After a period of 3 days to 3 weeks, the patient is readmitted. During the second admission, the appropriate dose (200 to 600 millicuries) of radiation is then administered. Iotrex is infused into the GliaSite[reg] catheter and intracavitary radiation is delivered to the target area. The gamma radiation emitted by Iotrex is delivered directly to the margins of the tumor bed. After 3 to 7 days, the Iotrex is removed.

GliaSite[reg] RTS was approved by the FDA for use on April 15, 2001. Technology is no longer considered new 2 to 3 years after data reflecting the costs of the technology begin to become available. Because data regarding this technology began to become available in 2001, we have determined that GliaSite[reg] RTS does not meet the criterion that a medical service or technology be considered new. Therefore, we are proposing to deny approval of GliaSite[reg] RTS for new technology add-on payments.

Although we are proposing not to approve this application because GliaSite[reg] does not meet the newness criterion, we note that the applicant submitted information on the cost criterion and substantial clinical improvement criterion. The applicant stated that the number of cases in DRG 7 for FY 2004 was projected to be 14,782, and estimated that 10 percent (or about 1,478) of those patients would be candidates for GliaSite[reg] RTS. The applicant estimated that the standardized charge for all cases using the technology in DRG 7 was $49,406. Based on this calculation, the manufacturer stated in its application that this figure is greater than the cost threshold of $32,115 for DRG 7. Therefore, according to the manufacturer, it appears that GliaSite[reg] would meet the cost criterion.

The applicant also claims this way of delivering brachytherapy to the brain is significantly more patient friendly. The use of a single intracavitary applicator positioned inside the resection cavity during the initial surgery in place of an interstitial-seed implant removes the need for additional invasive procedures and the need for multiple puncture sites (up to 20). In addition, the manufacturer claims that the approach used in the GliaSite[reg] RTS system improves dose- delivery and provides a more practical means of delivering the brachytherapy.

However, as discussed above, GliaSite[reg] does not meet the newness criterion. Therefore, we are proposing to deny add-on payments for this technology in FY 2005.

We received no public comments on this application for add-on payments. e. Natrecor[reg]--Human B-Type Natriuretic Peptide (hBNP)

Scios, Inc. submitted an application for approval of Natrecor[reg] for new technology add-on payments. Natrecor is a member of a new class of drugs, Human B-type Natriuretic Peptide (hBNP), and it is manufactured from E. coli with recombinant DNA technology. It binds to the particulate guanylate cyclase receptor of vascular smooth muscle endothelial cells, leading to increased intracellular concentrations of guanosine 3'5'-cyclic monophosphate, and therefore to enhance smooth muscle cell relaxation, ultimately causing dilation of arteries and veins. The applicant states that Natrecor[reg] is more potent and relieves symptoms of heart failure more rapidly, while also causing less hemodynamic instability than intravenous nitroglycerin, the most commonly used vasodilator for heart failure.

Natrecor[reg] was approved by the FDA for the treatment of acute congestive heart failure on August 10, 2001. It is indicated for the intravenous treatment of patients with acutely decompensated congestive heart failure (dyspnea). Congestive heart failure is the result of impaired pumping capacity of the heart. It causes a variety of clinical consequences, including water retention, sodium retention, pulmonary congestion, and diminished perfusion of blood to all parts of the body.

The applicant concedes that the FY 2003 MedPAR file includes hospital charge information for patients receiving Natrecor[reg]. The manufacturer contends that Natrecor[reg] should still be considered new for several reasons. The first reason is that these data will not provide an accurate representation of hospital utilization of this product nor an adequate reimbursement rate for hospitals treating acute congestive heart failure patients with Natrecor[reg] in FY 2005. The FY 2003 MedPAR file represents the first full year in which the ICD-9-CM procedure code 00.13 (Injection or infusion of nesiritide) was in effect. Therefore, the manufacturer anticipates a slow increase in the accuracy of coding and billing in FY 2003. In addition, the manufacturer stated that market penetration for this product was 3 percent for FY 2003, but is expected to be significantly higher for FY 2005.

However, technology is no longer considered new 2 to 3 years after data reflecting its costs begin to become available. Because data reflecting the costs of Natrecor[reg] began to become available in 2001, these costs are currently reflected in the DRG weights. In addition, as discussed in the September 7, 2001 final rule (66 FR 46914), the determination of whether a technology is new depends on the date of its availability for use in the Medicare population rather than the date a specific code was assigned. Because Natrecor[reg] was available upon FDA approval, it does not meet the criterion that a medical service or technology be considered new.

Although we are proposing not to approve this application because Natrecor[reg] does not meet the newness criterion, we note that the applicant submitted information on the cost criterion and substantial clinical improvement criterion. Scios commissioned Premier, Inc. to search its database of 196 hospitals for cases in FY 2003 that used Natrecor[reg]. Premier identified 9,811 cases across many DRGs using National Drug Codes from pharmacy databases. The majority of cases (approximately 42 percent) were found in DRG 127 (Heart Failure and Shock), while the remaining cases were found in other DRGs that individually had a maximum of 8 percent of the 9,811 cases identified by Premier. The case-weighted threshold across all DRGs for Natrecor[reg], using data provided by Premier, was $26,509. (DRGs with less than 25 discharges were not included in this analysis.) The average charge for cases with Natrecor[reg] was $70,137. The average case-weighted standardized charge across all DRGs was $43,422.

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Because the average standardized charge is greater than the case- weighted threshold, the applicant stated that Natrecor[reg] meets the cost criterion.

The manufacturer stated that Natrecor[reg] represents a substantial clinical improvement over existing treatments for decompensated congestive heart failure because it provides novel clinical effects, leads to fewer complications, and improves overall clinical outcomes. Specifically, Natrecor[reg] reduces left ventricular preload, afterload, and pulmonary capillary wedge pressure without inducing tachyphylaxis, and it causes a balanced vasodilation of veins, arteries, and coronary arteries that increases cardiac output. It has also been shown to significantly reduce dyspnea, and it blocks the rennin-aldosterone-angiotensin system, thereby reducing sodium retention and enhancing diuresis and natriuresis. In addition, Natrecor[reg] is not pro-arrhythmic; it does not increase cardiac work by causing tachycardia, and it does not cause electrolyte imbalances.

However, as discussed above, Natrecor[reg] does not meet the newness criterion. Therefore, we are proposing to deny add-on payments for this technology in FY 2005.

We received no public comments on this application for add-on payments. f. Kinetra[reg] Implantable Neurostimulator for Deep Brain Stimulation

Medtronic, Inc. submitted an application for approval of the Kinetra[reg] implantable neurostimulator device for new technology add- on payments. The Kinetra[reg] device was approved by the FDA on December 16, 2003. The Kinetra[reg] implantable neurostimulator is designed to deliver electrical stimulation to the subthalamic nucleus (STN) or internal globus pallidus (GPi) in order to ameliorate symptoms caused by abnormal neurotransmitter levels that lead to abnormal cell- to-cell electrical impulses in Parkinson's Disease and essential tremor. Before the development of Kinetra[reg], treating bilateral symptoms of patients with these disorders required the implantation of two neurostimulators (in the form of a product called SoletraTMmanufactured by Medtronic): One for the right side of the brain (to control symptoms on the left side of the body), the other for the left side of the brain (to control symptoms on the right side of the body). Additional procedures are required to create pockets in the chest cavity to place the two generators required to run the individual leads. The Kinetra[reg] neurostimulator generator, implanted in the pectoral area, is designed to eliminate the need for two devices by accommodating two leads that are placed in both the left and right sides of the brain to deliver the necessary impulses. The manufacturer argues that the development of a single neurostimulator that treats bilateral symptoms provides a less invasive treatment option for patients, and for simpler implantation, followup, and programming procedures for physicians.

The device was approved by the FDA in December 2003. Therefore, it qualifies under the first criterion because it is not yet reflected in the DRG weights. Because there are no data available to evaluate costs associated Kinetra[reg], we conducted the cost analysis using SoletraTM, the predecessor technology used to treat this condition, as a proxy for Kinetra[reg]. The pre-existing technology provides the closest means to track cases that have actually used similar technology and serves to identify the need and use of the new device. The manufacturer informed us that the cost of the Kinetra[reg] device is twice the price of a single SoletraTMdevice. Since most patients would receive two SoletraTMdevices if the Kinetra[reg] device is not implanted, data regarding the cost of SoletraTMgive a good measure of the actual costs that will be incurred. Medtronic submitted data for 104 cases that involved the SoletraTMdevice (26 cases in DRG 1 (Craniotomy Age > 17 With CC), and 78 cases in DRG 2 (Craniotomy Age > 17 Without CC)). These cases were identified from the FY 2002 MedPAR file using procedure codes 02.93 (Implantation, intracranial neurostimulator) and 86.09 (Other incision of skin and subcutaneous tissue). In the analysis presented by the applicant, the mean standardized charges for cases involving SoletraTMin DRGs 1 and 2 were $69,018 and $44,779, respectively. The mean standardized charge for these SoletraTMcases according to Medtronic's data was $50,839.

We used the same procedure codes to identify 187 cases involving the SoletraTMdevice in DRGs 1 and 2 in the FY 2003 MedPAR file. Similar to the Medtronic data, 53 of the cases were found in DRG 1, and 134 cases were found in DRG 2. The average standardized charges for these cases in DRGs 1 and 2 were $51,163 and $44,874, respectively. Therefore, the case-weighted average standardized charge for cases that included implantation of the SoletraTMdevice was $46,656. The new cost thresholds established under the revised criteria in Public Law 108-173 for DRGs 1 and 2 are $43,245 and $30,129, respectively. Accordingly, the case-weighted threshold to qualify for new technology add-on payment using the data we identified would be $33,846. Under this analysis, Kinetra[reg] would qualify for the cost threshold.

We note that an ICD-9-CM code was approved for dual array pulse generator devices, effective October 1, 2004, for IPPS tracking purposes. The new ICD-9-CM code that will be assigned to this device is 86.95 (Insertion or replacement of dual array neurostimulator pulse generator), which includes dual array and dual channel generators for intracranial, spinal, and peripheral neurostimulators. The code will not identify cases with this specific device and will only be used to distinguish single versus dual channel-pulse generator devices.

The manufacturer claims that Kinetra[reg] provides a range of substantial improvements beyond previously available technology. These include a reduced rate of device-related complications and hospitalizations or physician visits and less surgical trauma because only one generator implantation procedure is required. Kinetra[reg] has a reed switch disabling function that physicians can use to prevent inadvertent shutoff of the device, as occurs when accidentally tripped by electromagnetic inference (caused by common products such as metal detectors and garage door openers). Kinetra[reg] also provides significant patient control, allowing patients to monitor whether the device is on or off, to monitor battery life, and to fine-tune the stimulation therapy within clinician-programmed parameters. While Kinetra[reg] provides the ability for patients to better control their symptoms and reduce the complications associated with the existing technology, it does not eliminate the necessity for two surgeries. Because the patients who receive the device are often frail, the implantation generally occurs in two phases: The brain leads are implanted in one surgery, and the generator is implanted in another surgery, typically on another day. However, implanting Kinetra[reg] does reduce the number of potential surgeries compared to its predecessor (which requires two surgeries to implant the two single- lead arrays to the brain).

Despite the improvement Kinetra[reg] represents over its immediate predecessor, SoletraTM, we have some concerns about whether the device is significantly different in terms of how it achieves its desired clinical result. The stimulation mechanism by which it treats patient symptoms remains substantially the same as the

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predecessor device. The enhancements cited by the manufacturer are primarily to features such as control, power, monitoring, and reliability. Nevertheless, these improvements, along with the reduced number of surgeries required, may be sufficient to warrant a determination that the device represents a substantial clinical improvement. We welcome further public comment on the issue of whether the device is sufficiently different from the previously used technology to qualify as a substantially improved treatment of the same patient symptoms.

We also invite comments concerning the cost of the device. If the new device, at twice the cost of the existing technology, merely replaces the costs of two of the previous devices, then the charges for Kinetra[reg] are not substantially different from current charges resulting from the use of either device alone. Because the costs for the predecessor device meet the statutory cost criterion, the successor technology would meet the criterion as well, at least under the manufacturer's assumption that a single Kinetra[reg] costs twice as much as each of the two SoletrasTMrequired to perform the same function. However, since there should be less surgery involved, more patient control, less risk of complications, and fewer office visits as a result of using Kinetra[reg], the costs for patients who receive the new device would be expected to drop. This suggests that it may not be appropriate to base the cost analysis for Kinetra[reg] on the manufacturer's assumption that total costs for SoletraTM and Kinetra[reg] are substantially the same.

In addition, we also invite public comment concerning the approval of the device for add-on payment, given the uncertainty over the frequency with which the patients receiving the device have the generator implanted in a second hospital stay, and the frequency with which this implantation occurs in an outpatient setting. Any hospital performing the implantation in two separate patient stays, whether they are both inpatient or whether one is inpatient and the second is outpatient, would be paid double for the single device. Therefore, we have some concern about the appropriateness of approving add-on payments for a device that may already receive payment at a nonbundled rate for a high percentage of patients who receive the device. We are currently investigating whether a second hospital stay is needed for implantation of Kinetra[reg].

Despite these issues, we are still considering whether it is appropriate to approve add-on status for Kinetra[reg] for FY 2005. If approved for add-on payments, the device would be reimbursed up to half of the costs for the device. Since the manufacturer has stated that the cost for Kinetra[reg] would be $16,570, the maximum add-on payment for the device would be $8,285. We will make a final determination in the light of public comments and our continuing analysis.

We received no public comments on this application for add-on payments.

We note that the manufacturer of Kinetra[reg] also submitted an application for pass-through payments under the hospital outpatient payment system (OPPS). This application was denied for pass-through payment in OPPS because the item was already described by a previously existing category of devices for pass-through payment (C1767, Generator, neurostimulator (implantable)). Therefore, no substantial improvement determination was made for that application, although one would have been required for approval if it had met all other criteria. The manufacturer subsequently applied for assignment of deep brain stimulation with Kinetra[reg] neurostimulator to a new technology ambulatory payment classification (APC) under the OPPS. This application is currently under consideration. These special APCs were initiated in OPPS to expedite recognition of and payment for innovative new technologies that do not qualify for pass-through payment. In contrast to the annual decisionmaking under the IPPS, applications for new technology APCs of the OPPS are accepted on an ongoing basis and updates are made quarterly. g. Intramedullary Skeletal Kinetic Distractor (ISKD)

Orthofix, Inc. submitted an application for approval of the Intramedullary Skeletal Kinetic Distractor (ISKD) Internal Limb Lengthener for new technology add-on payments for FY 2005. The device received FDA marketing approval on May 2, 2001. The ISKD System is a ``closed'' lengthening system. There are no fixation pins exiting the skin, thus eliminating this portal for entry of infectious organisms. The device is implanted in the intramedullary canal. This provides mechanical stability and support to the bone segments during the distraction, regeneration and consolidation phases, thus reducing the opportunity for misalignment.

We reviewed the application and technology, and we have determined that the device is not new and cannot be approved for new technology add-on payments because it came on the market on May 2, 2001. The costs of the device are thus reflected in the FY 2001 MedPAR file, as acknowledged by the manufacturer's data. As a result, the costs of the device are already reflected in the DRG weights.

The manufacturer submitted charge data for cases found in the FY 2001 MedPAR file, as well as data from several hospitals that have used the device. The manufacturer identified cases using ICD-9-CM codes 78.35 (Limb lengthening procedure, femur) and 78.37 (Limb lengthening, tibia/fibula). These procedure codes occur in four DRGs: DRGs 210 and 211 (Hip and Femur Procedures Except Major Joint Procedures Age > 17, With and Without CC, respectively) and DRGs 218 and 219 (Lower Extremity and Humerus Procedures Except Hip, Foot and Femur Age > 17, With and Without CC). The average charges for cases involving these procedure codes identified by the applicant were not standardized. The average charges provided for DRGs 210, 211, 218, and 219 were $26,692, $18,187, $32,959 and $20,228, respectively. The manufacturer then added the cost of the device, which the manufacturer states is $6,750. The manufacturer projects that, in FY 2005, there will be 9 cases in DRG 210, 4 cases in DRG 211, 28 cases in DRG 218, and 19 cases in DRG 219, which results in a case-weighted threshold of $22,347. Thus, according to the manufacturer's data, because the case-weighted average standardized charges of $27,003 for the technology are greater than the cost threshold of $22,347 for these projected 60 cases, the ISKD would qualify for new technology add-on payments.

The manufacturer also asserted that the ISKD met the substantial clinical improvement criteria because, in addition to the improvements mentioned above (reduces infection rates and provides mechanical stability), lengthening with the ISKD occurs gradually and with no soft tissue impingement, reducing two factors commonly associated with pain during distraction. The manufacturer also pointed out that with the ISKD, the lengthening procedure is discreet because there are no external pins. There is no cumbersome external frame that may hinder the patient's activities of daily living, or draw further attention to the discrepant limb. In addition, the patient may have partial weight bearing during the lengthening process and resume some activities of normal living.

However, because the device is already captured in our DRG weights, we are proposing to deny the application for the ISKD device for new technology add-on payments for FY 2005.

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We received no public comments on this application for add-on payments. h. ActiconTMNeosphincter

American Medical Systems submitted an application for approval of the ActiconTMNeosphincter for new technology add-on payments for FY 2005. The ActiconTMNeosphincter is a small, fluid-filled prosthesis that is completely implanted within the body. The ActiconTMNeosphincter prosthesis has been developed to treat severe fecal incontinence (the accidental loss of solid or liquid stool at least weekly). It is designed to mimic the natural process of bowel control and bowel movements. The prosthesis consists of three components: a occlusive cuff implanted around the anal canal, a pressure-regulating balloon implanted in the prevesical space, and a control pump with septum implanted in the scrotum. All components are connected with color-coded, kink-resistant tubing.

The FDA approved the Acticon Neosphincter for use on December 18, 2001. A technology can be considered new only 2 to 3 years after data reflecting the costs of the technology begin to become available. Data on the costs of this technology began to become available after the December 2001 FDA approval. As a result, the costs of this technology are currently reflected in the DRG weights. Therefore, we have determined that ActiconTMNeosphincter does not meet this criterion.

Although we are proposing not to approve this application because ActiconTMNeosphincter does not meet the newness criterion, we note that the applicant submitted information on the cost criterion and substantial clinical improvement criterion. The applicant submitted 23 cases (that are indistinguishable as to whether they are Medicare or non-Medicare) using ICD-9-CM procedure codes 49.75 (Implantation or revision of artificial anal sphincter) and 49.76 (Removal of artificial anal sphincter) in order to identify cases where the ActiconTMNeosphincter was used. Of these cases, 9 were in DRG 157 (Anal and Stomal Procedures With CC), and 14 were in DRG 158 (Anal and Stomal Procedures Without CC). The average standardized charge per case was $16,758. The case-weighted threshold for DRGs 157 and 158 (39.1 percent of cases in DRG 157 and 60.1 percent of cases in DRG 158) for this technology is $14, 426. Therefore, according to the applicant, the ActiconTMNeosphincter meets the cost criterion.

The applicant states in its application that the ActiconTMNeosphincter represents a substantial clinical improvement for the following reasons: First, there is no other existing device in the United States that can be used to treat severe fecal incontinence. Second, self-treatment for severe fecal incontinence has proven to be largely unsuccessful and surgical options have historically been more limited, including sphincteroplasty or muscle transposition.

However, since ActiconTMNeosphincter does not meet the newness criterion, we are proposing to deny add-on payments for this new technology. The applicant also requested a DRG reclassification for this technology. In section II.B.4 of the preamble of this proposed rule, we are proposing, in MDC 6 (Diseases and Disorders of the Digestive System) only, to remove codes 49.75 and 49.76 from DRGs 157 and 158, and reassign them to DRGs 146 (Rectal Resection With CC) and 147 (Rectal Resection Without CC). All other MDC and DRG assignments for codes 49.75 and 49.76 would remain the same.

We received the following public comments in accordance with section 50(b)(2) of Pub. L. 108-173 regarding this application for add- on payments.

Comment: One commenter noted that the implant of the ActiconTMNeosphincter avoids the life-altering and disfiguring consequences of a permanent stoma. Another commenter noted that the implant of the ActiconTMNeosphincter avoids the need for a colostomy, which limits a patient's ability to travel and work due to the fact they could have a fecal accident at any time.

Response: We appreciate the commenters' input on this criterion. However, as stated above, the ActiconTMNeosphincter is no longer new. Therefore, we are proposing that it is not eligible for add-on payments for new technologies. i. TandemHeartTMPercutaneous Left Ventricular Assist System

Brigham and Women's Hospital submitted an application for approval of the TandemHeartTMPercutaneous Ventricular Assist System (PVTA) manufactured by Cardiac Assists, Inc., for new technology add-on payments for FY 2005. Cardiac Assists, Inc. has been assisting the applicant with supplemental information and data to support the application process. According to the manufacturer, the device contains a controller, arterial and venous cannulae and the TandemHeartTMPercutaneous Ventricular Assist Device (pVAD) that works parallel with the left ventricle to provide left ventricular circulatory support. The device is intended for extracorporeal circulatory support using an extracorporeal bypass circuit. The duration of use approved by the FDA is for periods of up to 6 hours.

On November 11, 2000, FDA approved the AB-180 XC Blood Pump (also known as the TandemHeartTMpVAD) as a single use, disposable centrifugal blood pump designed to circulate blood through an extracorporeal circuit. On May 23, 2003, FDA approved the CardiacAssist Transseptal Cannula Set for transseptal catherization of the left atrium via the femoral vein for the purpose of providing a means for temporary (6 hours or less) left ventricular bypass when connected to a suitable extracorporeal blood pump unit that returns blood to the patient via the femoral artery or other appropriate site. The manufacturer stated that, although the TandemHeartTMpVAD was approved in November 2000, this device should still be considered new because the device was not marketed and sold to hospitals until the CardiacAssist Transseptal Cannula Set was approved by FDA in May 2003. We have received confirmation from hospitals that the TandemHeartTMpVAD was indeed not marketed until FDA approved the CardiacAssist Transseptal Cannula Set. Also, only half of a year's worth of data containing the TandemHeartTMpVAD is reflected within the FY 2003 MedPAR file. The manufacturer stated that approximately 60 TandemHeartTMpVADs have been used since FDA approved the Cardiac Arrest Transseptal Cannula Set in May 2003. Therefore, the costs of the TandemHeartTMpVAD are not adequately reflected within the DRGs. As a result, we consider the TandemHeartTMpVAD to be new under our criterion.

As stated above, according to the manufacturer, approximately 60 TandemHeartTMpVADs have been used since FDA approved the Cardiac Assist Transseptal Cannula Set in May 2003 (not all of these have been used in Medicare beneficiaries). However, only two actual cases were submitted by the applicant with an ICD-9-CM code of 37.65 (Implant of an external pulsatile heart assist system) used to identify the device. As stated in the September 7, 2001 final rule (66 FR 46916), data submitted by the applicant must be of a sufficient sample size to demonstrate a significant likelihood that the true mean across all cases likely to receive the technology will exceed the threshold established by CMS. Because we lack a significant sample of data reflecting the costs of this technology,

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we cannot accurately determine the average charge per case for the TandemHeartTMpVAD. Neither can we determine whether this technology meets our cost criterion. If we receive sufficient data to complete our analysis in time for inclusion in the final rule, we will assess whether this technology meets the cost criterion.

Although we are not proposing to approve this application because we have insufficient data to determine whether TandemHeartTM pVAD meets the cost criterion, we note that the applicant submitted information on the substantial clinical improvement criterion. The applicant stated in its application that the TandemHeartTM pVAD represents a substantial clinical improvement because, at present, the only alternative to intra-aortic balloon pump support is the surgical implantation of a ventricular assist device. The TandemHeartTMpVAD is the only therapeutic intervention that is capable of achieving effective circulatory support to stabilize cardiogenic shock patients that could be placed via a percutaneous approach. We will present a full analysis of this technology under the significant improvement criterion if we receive sufficient data in time for the final rule to evaluate whether the technology meets the cost criterion.

The applicant also requested an ICD-9-CM code for this technology. We discuss this request in section II.B.3. of the preamble of this proposed rule.

We received no public comments on this application for add-on payments. j. AquadexTMSystem 100 Fluid Removal System (System 100)

CHF Solutions, Inc. submitted an application for the approval of the System 100 for new technology add-on payments for FY 2005. The System 100 is designed to remove excess fluid (primarily excess water) from patients suffering from severe fluid overload through the process of ultrafiltration. Fluid retention, sometimes to an extreme degree, is a common symptom of patients with chronic congestive heart failure. This technology removes excess fluid without causing hemodynamic instability. It also avoids the inherent nephrotoxicity and tachyphylaxis associated with aggressive diuretic therapy, the mainstay of current therapy for fluid overload in congestive heart failure.

The System 100 consists of: (1) An S-100 console; (2) a UF 500 blood circuit; (3) an extended length catheter (ELC); and (4) a catheter extension tubing. The System 100 is designed to monitor the extracorporeal blood circuit and to alert the user to abnormal conditions. Vascular access is established via the peripheral venous system, and up to 4 liters of excess fluid can be removed in an 8-hour period.

On June 3, 2002, FDA approved the System 100 for use with peripheral venous access. On November 20, 2003, FDA approved the System 100 for expanded use with central venous access and catheter extension use for infusion or withdrawal circuit line with other commercial applicable venous catheters. According to the applicant, although the System 100 was first approved by FDA in June 2002, the System 100 was not used by hospitals until August 2002 because it took a substantial amount of time to market and sell the device to hospitals. As a result, the applicant believes that the System 100 should still be considered new. The applicant has presented data and evidence demonstrating that the System 100 was not marketed until August 2002. Therefore, we also believe August 1, 2002 is the relevant date for determining the availability of the System 100.

The applicant estimates that 308 patients (approximately 120 cases per year) have used the System 100 since its inception and the potential population for use of the device is 60,000 cases per year. These 308 cases represent a small percentage of the potential number of cases that can utilize the System 100. Therefore, the System 100 is not adequately reflected within the DRG weights (as discussed in the September 7, 2001 final rule (66 FR 46914)). In addition, the System 100 is within the 2 to 3 year period contemplated under Sec. 412.87(b)(2) of the regulations. Therefore, the System 100 could be considered new. However, the ultrafiltration process that the System 100 employs can also be considered to be a type of hemodialysis, which is an old and well-established technology. We have concerns about whether new technology add-on payments should be extended to a well- established technology, even when a new clinical application is developed for that technology. As discussed above, in the September 7, 2001 final rule (66 FR 46915), we noted that if an existing technology is used for treating patients not expected to be assigned to the same DRG as the patients already receiving the technology, it may be considered for approval if it also meets the other cost and clinical improvement criteria. In this case, the device does treat a different patient population of congestive heart failure than the patient population for renal dialysis. Under the policy described in the September 7, 2001 final rule, this technology may be considered new for the purposes of determining whether it qualifies for add-on payments. However, we have some concerns about whether this is an appropriate result, and about whether technologies that have been in use for many years, in some cases decades, should be able to qualify for add-on payments for new technologies. Therefore, we invite comments on whether this technology should be considered new, and on the general issue of whether existing technologies should be approved for add-on payments when new applications are developed for these technologies and whether special standards regarding, for example, clinical improvement, should be applied in such cases.

The applicant submitted five sets of data to demonstrate that the System 100 meets the cost criterion. Of these five, three sets of data were flawed in the analysis of the cost criterion. Therefore, we will discuss only the data that are most accurate and relevant. It is important to note at the outset of the cost analysis that the console is reusable and is, therefore, a capital cost. Only the circuits and catheters are components that represent operating expenses. Section 1886(d)(K)(i) of the Act requires that the Secretary establish a mechanism to recognize the costs of new medical services or technologies under the payment system established under that subsection, which establishes the system for paying for the operating costs of inpatient hospital services. The system of payment for capital costs is established under section 1886(g) of the Act, which makes no mention of any add-on payments for a new medical service or technology. Therefore, it is not appropriate to include capital costs in the add-on payments for a new medical service or technology and these costs should also not be considered in evaluating whether a technology meets the cost criterion. The applicant has applied for add-on payments only for the circuits and catheter, which represent the operating expenses of the device. However, catheters cannot be considered new technology in any sense. As a result, only the UF 500 disposable blood circuit is relevant to the evaluation of the cost criterion.

The applicant commissioned Covance to search the FY 2002 MedPAR file. The applicant used a combination of diagnosis codes to determine which cases could potentially use the System 100. Covance found 27,589 cases with the following combination of ICD-9-CM diagnosis codes: 428.0 through 428.9 (Heart Failure), 402.91 (Unspecified with Heart Failure), or 402.11

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(Hypertensive Heart Disease with Heart Failure), in combination with 276.6 (Fluid Overload) and 782.3 (Edema). The 27,589 cases were found among 281 DRGs with 49.4 percent of cases mapped across DRGs 88, 89, 127, 277 and 316. The applicant eliminated those DRGs with less than 150 cases, which resulted in a total of 22,024 cases that could potentially use the System 100. The case-weighted average standardized charge across all DRGs was $14,534. The case-weighted threshold across all DRGs was $17,789. Although the case-weighted threshold is greater than the case-weighted standardized charge, it is necessary to include the standardized charge for the circuits used in each case. In order to establish the charge per circuit, the manufacturer submitted data regarding 51 actual cases that used the System 100. Based on these 51 cases, the standardized charge per circuit was $2,209. The manufacturer also stated that an average of two circuits are used per case. Therefore, adding $4,418 for the charge of the two circuits to the case-weighted average standardized charge of $14,534 results in a total case-weighted standardized charge of $18,952. This is greater than the case-weighed threshold of $17,789. We welcome comments from the public on the charge information submitted by the applicant for the circuits.

Using the FY 2003 MedPAR file, we used the same combination of diagnosis codes to identify 28,660 cases across all DRGs. As in the applicant's analysis, we eliminated those DRGs with less than 150 cases, which resulted in 22,395 cases. The case-weighted average standardized charge for these cases is $15,447. The case-weighted threshold to qualify for new technology add-on payment using the data we identified would then be $18,029. Again, as in the applicant's analysis, it was necessary to include in the charge of $4,418 for the circuits. This results in a total case-weighted average standardized charge of $19,865, which is also greater than the case-weighted threshold of $18,029. Based on these two analyses, the System 100 meets the cost criterion.

The applicant contends that the System 100 represents a substantial clinical improvement for the following reasons: It removes excess fluid without the use of diuretics; it does not lead to electrolyte imbalance, hemodynamic instability or worsening renal function; it can restore diuretic responsiveness; it does not adversely affect the renin-angiotensin system; it reduces hospital length of stay for the treatment of congestive heart failure; and it requires only peripheral venous access.

Although we lack data from a large, multicenter, randomized, prospective clinical trial, we believe the applicant has submitted data that demonstrate the use of this technology in achieving the clinical benefits cited. We believe that there is some basis for concluding that the System 100 represents a substantial clinical improvement over current standard treatment of fluid overload in congestive heart failure. However, we invite comment on whether the data submitted are indeed adequate to demonstrate significant clinical improvement.

Based on the criteria, we believe that the System 100 could be approved for new technology add-on payments for FY 2005. However, we invite comments on this application, and especially on whether the System 100 is really new and on whether it represents a new technology within the meaning of the statute and regulations. If approved for add- on payments, the device would be reimbursed up to half of the costs for the disposable portion of the device. The manufacturer has stated that the cost for the disposable blood circuit and filter would be $900. As stated above, an average two circuits are used per case, which results in a total cost of $1,800 per case. Therefore, the maximum add-on payment for the disposable parts of the device would be $900 per case. We will determine whether to approve this application in the light of the comments we receive and our continuing analysis.

We received the following public comments in accordance with section 503(b)(2) of Pub. L. 108-173 regarding this application for add-on payments.

Comment: Several commenters noted that the System 100 provides physicians a new treatment option for patients with fluid overload who are unresponsive to diuretics and has been documented in clinical studies and other published articles to effectively treat fluid overload. Another commenter noted that patients who have been treated with the System 100 seem to have improved health versus those who have lingered on diuretic therapy or have been treated by hemodialysis. The commenter also noted that the system 100 reduces hospital stays. Other commenters noted that the System 100 is safer for those patients in terms of reduced electrolyte imbalance and renal dysfunction and is a major step forward in the treatment of decompensated heart failure.

Response: As we stated above, we believe that there is some basis for concluding that the System 100 offers substantial clinical improvement. We will consider these comments as we continue to evaluate whether the System 100 meets this criterion.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts ``for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.'' In accordance with the broad discretion conferred under the Act, we currently define hospital labor market areas based on the definitions of statistical areas established by the Office of Management and Budget (OMB). A detailed discussion of the proposed FY 2005 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan Areas, appears under section III.B of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey should measure, to the extent feasible, the earnings and paid hours of employment by occupational category, and must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The adjustment we are proposing for FY 2005 is discussed in section II.B. of the Addendum to this proposed rule.

As discussed below in section III.G. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. The budget neutrality adjustment we are proposing for FY

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2005 is discussed in section II.B. of the Addendum to this proposed rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short- term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the initial collection of these data and the occupational mix adjustment that we are proposing to apply beginning October 1, 2004 (the FY 2005 wage index) appears under section III.C. of this preamble.

B. Revised OMB Definitions for Geographical Statistical Areas

[If you choose to comment on issues in this section, please include the caption ``Revised MSAs'' at the beginning of your comment.]

1. Current Labor Market Areas Based on MSAs

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, we currently define hospital labor market areas based on the definitions of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New England County Metropolitan Areas (NECMAs) issued by OMB. OMB also designates Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of one million or more, comprising two or more PMSAs (identified by their separate economic and social character). For purposes of the hospital wage index, we use the PMSAs rather than CMSAs because they allow a more precise breakdown of labor costs. If a metropolitan area is not designated as part of a PMSA, we use the applicable MSA.

These different designations use counties as the building blocks upon which they are based. Therefore, hospitals are assigned to either an MSA, PMSA, or NECMA based on whether the county in which the hospital is located is part of that area. For purposes of the IPPS wage index, we combine all of the counties in a State outside a designated MSA, PMSA, or NECMA together to calculate a statewide rural wage index. 2. Core-Based Statistical Areas

OMB reviews its Metropolitan Area (MA) definitions preceding each decennial census. In the fall of 1998, OMB chartered the Metropolitan Area Standards Review Committee to examine the MA standards and develop recommendations for possible changes to those standards. Three notices related to the review of the standards were published on the following dates in the Federal Register, providing an opportunity for public comment on the recommendations of the Committee: December 21, 1998 (63 FR 70526); October 20, 1999 (64 FR 56628), and August 22, 2000 (65 FR 51060).

In the December 27, 2000 Federal Register (65 FR 82228 through 82238), OMB announced its new standards. According to that notice, OMB defines a Core-Based Statistical Area (CBSA), beginning in 2003, as ``a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and define two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas.'' (65 FR 82235)

According to OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters of at least 10,000 population but less than 50,000 population. Counties that do not fall within CBSAs are deemed ``Outside CBSAs.'' In the past, OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were ``Outside MSAs.''

The general concept of the CBSAs is that of an area containing a recognized population nucleus and adjacent communities that have a high degree of integration with that nucleus. The purpose of the standards is to provide nationally consistent definitions for collecting, tabulating, and publishing Federal statistics for a set of geographic areas. CBSAs include adjacent counties that have a minimum of 25 percent commuting to the central counties of the area. This is an increase over the minimum commuting threshold for outlying counties applied in the previous MSA definition of 15 percent.

On June 6, 2003, OMB announced the new CBSAs, comprised of MSAs and the new Micropolitan areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html. ) The new definitions

recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively revise the construct of many of the existing MSAs. There are 1,090 counties in MSAs under these new definitions (previously, there were 848 counties in MSAs). Of these 1,090 counties, 737 are in the same MSA as they were prior to the changes, 65 are in a different MSA, and 288 were not previously designated to any MSA. There are 674 counties in Micropolitan Areas. Of these, 41 were previously in an MSA, while 633 were not previously designated to an MSA. There are five counties that previously were designated to an MSA but are no longer designated to either an MSA or a new Micropolitan Area: Carter County, KY; St. James Parish, LA; Kane County, UT; Culpepper County, VA; and King George County, VA. 3. Revised Labor Market Areas

In its June 6, 2003 announcement, OMB cautioned that these new definitions ``should not be used to develop and implement Federal, State, and local nonstatistical programs and policies without full consideration of the effects of using these definitions for such purposes. These areas should not serve as a general-purpose geographic framework for nonstatistical activities, and they may or may not be suitable for use in program funding formulas.''

We have previously examined alternatives to the use of MSAs for the purpose of establishing labor market areas for the Medicare wage index. In the May 27, 1994, proposed rule (59 FR 27724), we presented our latest research concerning possible future refinements to the labor market areas. Specifically, we discussed and solicited comment on the proposal by the Prospective Payment Assessment Commission (ProPAC, a predecessor organization to the Medicare Payment Advisory Commission (MedPAC)) for hospital-specific labor market areas based on each hospital's nearest neighbors, and our research and analysis on alternative labor market areas. Even though we found that none of the alternative labor market areas that we studied provided a distinct improvement over the use of MSAs, we presented an option using the MSA- based wage index but generally giving a hospital's own wages a higher weight than under the current system. We also described for comment a State labor market option, under which hospitals would be allowed to design labor market areas within their own State boundaries.

We described the comments we received in the June 2, 1995 proposed rule (60 FR 29219). There was no consensus among the commenters on the choice for new labor market areas. Many individual hospitals that commented expressed dissatisfaction with all of the proposals. However, several State hospital associations commented that the options merited further study. Therefore, we contacted the association representatives that

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participated in our November 1993 meeting on labor market issues in which we solicited ideas for additional types of labor market research to conduct. None of the individuals we contacted suggested any ideas for further research.

Consequently, we have continued to use MSAs to define labor market areas for purposes of the wage index. While we recognize MSAs are not designed specifically to define labor market areas, we believe they do represent a useful proxy for this purpose, and our analysis and discussion here are focused on issues related to adopting the new CBSAs to define labor market areas. a. New England MSAs

As stated above, we currently use NECMAs to define labor market areas in New England, because these are county-based designations rather than the 1990 MSA definitions for New England, which used minor civil divisions such as cities and towns. Under the previous MSA definitions, NECMAs provided more consistency in labor market definitions for New England compared with the rest of the country, where MSAs are county-based. Under the new CBSAs, OMB has defined the MSAs and Micropolitan Areas in New England on the basis of counties. OMB also established New England City and Town Areas, which are similar to the previous New England MSAs. Therefore, to maintain consistency in the definition of labor market areas between New England and the rest of the country, we are proposing to use the New England MSAs under the new CBSA definition. b. Metropolitan Divisions

A Metropolitan Division is a county or group of counties within a CBSA that contains a core population of at least 2.5 million, representing an employment center, plus adjacent counties associated with the main county or counties through commuting ties. A county qualifies as a main county if 65 percent or more of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least .75. A county qualifies as a secondary county if 50 percent or more, but less than 65 percent, of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least .75. After all the main and secondary counties are identified and grouped, each additional county that already has qualified for inclusion in the MSA falls within the Metropolitan Division associated with the main/secondary county or counties with which the county at issue has the highest employment interchange measure. Counties in a Metropolitan Division must be contiguous. (65 FR 82236)

As noted above, in the past, OMB designated CMSAs as Metropolitan Areas with a population of one million or more and comprising two or more PMSAs. We currently use the PMSAs rather than CMSAs to define labor market areas because they comprise a smaller geographic area with potentially varying labor costs due to different local economies. Similarly, we are proposing to use the Metropolitan Divisions where applicable under the CBSA definitions.

Under the CBSA definitions, there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, D.C. Although these MSAs were also CMSAs under the prior definitions, in some cases their areas have been significantly altered. Under the prior definitions, Boston was a single NECMA. It is now comprised of 4 Divisions. Los Angeles went from 4 PMSAs to 2 Divisions because 2 MSAs became separate MSAs. The New York CMSA went from 15 MSAs down to only 4 Divisions. Five PMSAs in Connecticut now become separate MSAs, and the number of PMSAs in New Jersey goes from 5 to 2, with the consolidation of 2 New Jersey PMSAs (Bergen-Passaic and Jersey City) into the New York-Wayne-White Plains, NY-NJ Division. In San Francisco, only 2 Divisions remain where there were once 6 PMSAs, some of which are now separate MSAs.

Previously, Cincinnati, Cleveland, Denver, Houston, Milwaukee, Portland, Sacramento, and San Juan were all previously designated as CMSAs, but are not any longer. As noted previously, the population threshold to be designated a CMSA was one million. In most of these cases, counties formerly in a PMSA have become a separate, independent MSA, leaving only the MSA for the core area under the new CBSA definitions. c. Micropolitan Areas

One of the major issues with respect to the new definitions is whether to use Micropolitan Areas to define labor market areas for the purpose of the IPPS wage index. Because the new Micropolitan Areas are essentially a third area definition made up mostly of currently rural areas, but also some or all of current MSAs, how these areas are treated will have significant impacts on the calculation and application of the wage index. Treating Micropolitan Areas as separate and distinct labor market areas would affect both the wage indexes of the hospitals in the Micropolitan Areas and the hospitals in the labor market areas where those hospitals are currently located (both positively and negatively).

Because we currently use MSAs to define urban labor market areas and we group all the hospitals in counties within each State that are not assigned to an MSA together into a statewide rural labor market area, we have used the terms ``urban'' and ``rural'' wage indexes in the past for ease of reference. However, the introduction of Micropolitan Areas complicates this terminology because these areas include so many hospitals that are currently included in the statewide rural labor market areas. In order to facilitate the discussion below, we use the term ``rural'' hospitals to describe hospitals in counties that are not assigned to either an MSA or a Micropolitan Area. This should not be taken to indicate that hospitals in Micropolitan Areas are no longer ``rural'' hospitals. In fact, we are proposing that hospitals in Micropolitan Areas are included in the statewide rural labor market areas, for the reasons outlined below. The reader is referred to section IV.B. of the preamble of this proposed rule for a more specific discussion of the implications of these changes for defining urban and rural areas under Sec. 412.62(f).

Chart 1 below demonstrates the distributions of hospitals by their current and new designations. Approximately 50 percent of hospitals currently designated rural are now in either Micropolitan Areas (691 hospitals) or MSAs (197 hospitals). The vast majority of hospitals currently in MSAs remain in an MSA (2,478, although in some cases the MSAs have been reconfigured), while 2 are now in rural areas and 65 are now in Micropolitan Areas.

Chart 1.--Distribution of Hospitals by Current and New Designation

Currently Currently Statistical area

rural MSA.

Rural...........................................

861

2 Micropolitan....................................

691

65 MSA.............................................

197 2,478

Totals...................................... 1,749 2,545

In order to evaluate the impact of these changes, we grouped hospitals based on the county where they are located according to the new MSA and Micropolitan areas using the definitions

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on the Census Bureau's Web site: http://www.census.gov/population/www/estimates/metrodef.html. We then compared the proposed FY 2004 wage

indexes (using data from hospitals' FY 2001 cost reports) calculated based on the current MSAs, without any effects of hospital geographic reclassifications. Consistent with current policy, we applied the rural floor in the case where the statewide rural wage index is greater than the wage index for a particular urban area. We excluded Indian Health Service hospitals from the analysis due to the special characteristics of the prospective payment system for these hospitals. Hospitals in Maryland were excluded from the analysis because they remain excluded from the IPPS under the waiver at section 1814(b)(3) of the Act. Our analysis also does not reflect any changes to the Puerto Rico-specific wage index, which is applicable only to the Puerto Rico standardized amounts (the analysis does include the national wage index values for Puerto Rico hospitals).

Chart 2 below shows the impact on hospitals' wage indexes of recalculating new wage indexes based on the new MSAs, and treating the new Micropolitan Areas as separate labor market areas. Specifically, the table shows the impact of treating the new MSA and Micropolitan Areas as labor market areas and calculating a wage index for each one. The most dramatic impact of this change would be on hospitals that are currently classified as rural. Only 10 currently rural hospitals would experience no changes in their wage indexes after applying the new MSA definitions. Five of these hospitals are in Delaware and Connecticut (three and two hospitals respectively), where the only counties in the State currently considered rural are now part of Micropolitan Areas.

Approximately 62 percent (1,092 out of 1,749) of currently rural hospitals experience decreases in their wage indexes under this change. Among hospitals that remain rural after separately recognizing Micropolitan Areas (those hospitals in counties ``outside CBSAs''), rural hospitals in six States (Arizona, Florida, Idaho, Indiana, Minnesota, and Missouri) experience a positive impact after applying the new MSA definitions. These hospitals benefit because the net effect on their wage index of other hospitals moving into Micropolitan Areas is positive. The majority of the currently rural hospitals (762 out of 1,092) that experience decreases in their wage indexes are hospitals that would remain rural under the new definitions. Moreover, among the 646 rural hospitals whose wage indexes would increase under the new definitions, 547 would now be in an MSA or Micropolitan Area.

Furthermore, in many cases, the magnitude of the changes is quite large. Nearly one-half of all rural hospitals would experience payment changes of at least 5.0 percent, either negatively or positively, if we were to adopt labor market areas based in part on the new Micropolitan Areas.

In contrast, there are 938 currently urban hospitals (37 percent) with wage indexes that are unaffected by the new MSA definitions. These hospitals are in MSAs or PMSAs that are either unchanged (for example, the Austin, Buffalo, Milwaukee, Oakland, Phoenix, San Diego, and Tampa- St. Petersburg MSAs are all unchanged) or include new counties without any hospitals in those counties that are now part of the existing MSA (for example, Atlanta, Denver, Little Rock, Omaha, Portland, Richmond, Toledo, Virginia Beach-Norfolk added counties but not hospitals).

The most significant negative impact (more than a 20-percent decrease) among hospitals currently in an MSA is on those located in counties that become Micropolitan areas or rural areas. Among hospitals with the largest positive impacts (more than a 20-percent increase), the changes appear to be largely due to changes in the counties that are now included (under the CBSAs) in the MSA labor market area.

Chart 2.--Impact on Wage Indexes of New MSA, Micropolitan Areas, and Rural Labor Market Areas

Number of Number of currently currently Total Percent change in area wage index rural

MSA number of hospitals hospitals hospitals.

Decrease Greater Than 10.0.......

99

36

135 Decrease Between 5.0 and 10.0....

420

77

497 Decrease Between 2.0 and 5.0.....

238

95

333 Decrease Between 0 and 02.0......

335

585

920 No Change........................

10

938

948 Increase Between 0 and 2.0.......

168

495

663 Increase Between 2.0 and 5.0.....

138

145

283 Increase Between 5.0 and 10.0....

203

139

342 Increase Greater Than 10.0.......

138

35

173

Total........................

1,749

2,545

4,294

One of the reasons Micropolitan Areas have such a dramatic impact on the wage index is, because Micropolitan Areas encompass smaller populations than MSAs, they tend to include fewer hospitals per Micropolitan Area. Currently, there are only 25 MSAs with one hospital in the MSA. However, under the new definitions, there are 373 Micropolitan Areas with one hospital, and 49 MSAs with only one hospital.

This large number of labor market areas with only one hospital and the increased potential for dramatic shifts in the wage indexes from one year to the next is a problem for several reasons. First, it creates instability in the wage index from year to year for a large number of hospitals. Second, it reduces the averaging effect of the wage index, lessening some of the efficiency incentive inherent in a system based on the average hourly wages for a large number of hospitals. In labor market areas with a single hospital, high wage costs are passed directly into the wage index with no counterbalancing averaging with lower wages paid at nearby competing hospitals. Third, it creates an arguably inequitable system when so many hospitals have wage indexes based solely on their own wages, while other hospitals' wage indexes are based on an average hourly wage across many hospitals.

For these reasons, we are proposing not to adopt Micropolitan Areas as independent labor market areas. Although we considered alternative

[[Page 28252]]

approaches that would aggregate Micropolitan Areas in order to reduce the number of one-hospital labor market areas, these approaches created geographically disconnected labor market areas, an undesirable outcome. Therefore, we are proposing to maintain our current policy of defining labor market areas based on the new MSAs (and Divisions, where they exist) using OMB's new criteria and the 2000 Census data.

Chart 3 displays the impacts on hospital wage indexes of this proposed approach. The most apparent difference comparing this chart to Chart 2 is the reduction in the numbers of currently rural hospitals impacted by more than 2.0 percent. Recognizing Micropolitan Areas as independent labor market areas results in negative impacts of more than 2.0 percent for 757 currently rural hospitals, while the comparative number, when recognizing only MSAs, is 256. Conversely, the number of currently rural hospitals positively impacted by more than 2.0 percent declines from 479 to 154.

The greatest negative impacts among hospitals currently designated rural are in Idaho, where the statewide rural wage index falls 6.7 percent as a result of 6 formerly rural hospitals now being included in either new or redefined MSAs. The wage index for rural Utah hospitals declines by 5.7 percent, for similar reasons. Conversely, formerly rural hospitals that are not part of an MSA generally experience positive impacts.

Among hospitals that are currently in MSAs, the number of hospitals with decreases in their wage indexes of at least 10 percent increases under this proposal from 35 to 45. These are primarily hospitals that are now located in Micropolitan Areas that are included in the statewide labor market area. There are 46 counties with 72 hospitals that are currently in an MSA that would be treated as rural under our proposal.

Chart 3.--Impact on Wage Indexes of New MSA and Rural Labor Market Areas

Number of Number of currently currently Total Percent change in area wage index rural

MSA number of hospitals hospitals hospitals.

Decrease Greater Than 10.0.......

0

45

45 Decrease Between 5.0 and 10.0....

122

60

182 Decrease Between 2.0 and 5.0.....

134

73

207 Decrease Between 0 and 2.0.......

588

615

1,203 No Change........................

160

1,015

1,175 Increase Between 0 and 2.0.......

591

574

1,165 Increase Between 2.0 and 5.0.....

32

103

135 Increase Between 5.0 and 10.0....

64

25

89 Increase Greater Than 10.0.......

58

35

93

Total........................

1,749

2,545

4,294

d. Transition Period

We have in the past provided for transition periods when adopting changes that have significant payment implications, particularly large negative impacts. When we recently removed the wage costs of teaching physicians and residents from the wage index data of teaching hospitals, we spread out the impact over 3 years by blending the hospitals' average hourly wages with and without the data. Similarly, the regulations at Sec. 412.102 provide for a 3-year transition to the standardized amount and DSH adjustment payments to a hospital redesignated from urban to rural.

Given the significant payment impacts upon some hospitals of these changes, we considered options to transition from the current MSAs to the new MSAs. As noted above, the most dramatic negative impacts are among hospitals currently located in an MSA but would become rural under our proposal. Some negative impacts also occur among urban hospitals that remain in MSAs that have been reconfigured. However, these impacts are generally smaller than those among currently urban hospitals that would become rural. To help alleviate the decreased payments for currently urban hospitals that would become rural, we are proposing to allow them to maintain their assignment to the MSA where they are currently located for the 3-year period FY 2005, FY 2006, and FY 2007. Beginning in FY 2008, these hospitals would receive their statewide rural wage index, although they would be eligible to apply for reclassification by the MGCRB, both during this transition period as well as subsequent years.

We also considered the option of allowing a transition to the new MSAs for all hospitals, such as a blend of wage indexes based on the old and new MSAs for some specified period of time. Although this would help some hospitals that are negatively impacted by the changes to the MSAs, it would dampen the payment increases for those hospitals that are positively impacted by the changes. However, we are not proposing a blended transition. We note that OMB in the past has announced MSA changes on an annual basis due to population changes, and we have not transitioned these changes.

C. Proposed Occupational Mix Adjustment to Proposed FY 2005 Index

[If you choose to comment on issues in this section, please include the caption ``Occupational Mix'' at the beginning of your comment.]

As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index). The purpose of the occupational mix adjustment is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor.

[[Page 28253]]

1. Development of Data for the Occupational Mix Adjustment

In the September 19, 2003 Federal Register (68 FR 54905), we published a final notice of intent to collect occupational mix data from hospitals using the Medicare Wage Index Occupational Mix Survey, Form CMS-10079. (The survey and instructions may be accessed at the Web site: http://cms.hhs.gov/providers/hipps/ippswage.asp.) The survey

requires hospitals to report the number of total paid hours for directly hired and contract employees in occupations that provide the following services: Nursing, physical therapy, occupational therapy, respiratory therapy, medical and clinical laboratory, dietary, and pharmacy. These services each include several standard occupational classifications (SOCs), as defined by the Bureau of Labor Statistics (BLS) on its Occupational Employment Statistics (OES) survey (http://www.bls.gov/oes/2001/oes_tec.htm ), that may be used by hospitals in

different mixes to provide specific aspects of patient care. CMS decided to use BLS's SOCs to categorize employees for the occupational mix survey in an effort to ease hospitals' reporting burden; most hospitals have had experience with collecting and reporting their employment data according to the SOC definitions. The survey includes a total of 19 SOCs that provide services for the above 7 categories and an ``all other occupations'' category. The hours collected on the survey would be used to determine the proportion of a general service category total that is attributable to each of the category's SOCs, that is, the category's occupational mix.

In order to accurately reflect a hospital's employment, we initially planned to require all hospitals to provide occupational mix data collected from a 1-year period. Several hospitals and their representatives advised us that a 1-year reporting period was feasible because salary and wage data are maintained quarterly for revenue and tax reporting purposes. However, several hospitals expressed concern that their payroll and other personnel accounting systems are typically not set up to collect data on hours for contract employees. The hospitals and their representatives advised us that the approximately 2-month timeframe (see dates below) for collecting and submitting the occupational mix data to the fiscal intermediaries would not allow hospitals enough time to develop a year's worth of hours data for contract workers. Therefore, given the short timeframe for collecting the occupational mix data, and to reduce hospitals' reporting burden associated with the initial collection of the data, we decided to allow hospitals the option of providing their hours data for the 19 SOCs either prospectively for a 4-week period beginning on or between December 28, 2003 and January 11, 2004, and ending no later than February 7, 2004, or retrospectively for a 12-month period, that is, calendar year 2003. Although we recognize that using data from only a 4-week period increases our risk of obtaining results that reflect seasonal rather than normal employment trends, we believe that the 4- week prospective reporting period should enable hospitals to plan and provide more accurate data according to our survey instructions and definitions. (See the discussion below on the verification and validity of our occupational mix survey results.)

An advance copy of the occupational mix survey was provided to hospitals in mid-December 2003 so that hospitals could begin gathering their data and documentation necessary to complete the survey. The official survey was published as a CMS One-Time Notification (Pub. 100- 20, R47OTN) on January 23, 2004. We instructed our fiscal intermediaries to distribute and collect completed occupational mix surveys from any hospital that is subject to IPPS, or any hospital that would be subject to IPPS if not granted a waiver. If a hospital was not an IPPS provider during FY 2001 or, otherwise, did not submit a FY 2001 cost report, the hospital was not required to submit occupational mix data. Consistent with the wage data, CAHs were excluded from the occupational mix survey. In addition, the FY 2005 wage index does not include occupational mix data for hospitals that submitted FY 2001 wage data, but terminated participation in the Medicare program as IPPS providers before calendar year 2003. For such terminated hospitals, there would be no occupational mix data to collect for our survey period.

Hospitals were to submit their completed occupational mix surveys to their fiscal intermediaries by February 16, 2004. Our initial collection of these data was completed by March 1, 2004, the deadline for fiscal intermediaries to submit hospitals' survey data to CMS. We released a public use file containing the data on March 8, 2004 (through the Internet on our Web site at: http://cms/hhs.gov/providers/hipps/ippswage.asp. In a memorandum also dated March 8, 2004, we

instructed all fiscal intermediaries to inform the IPPS hospitals they service of the availability of the occupational mix data file and the process and timeframe for requesting corrections and revisions. If a hospital wished to request a change to its data as shown in that file, the hospital had to submit the changes to its fiscal intermediary by March 22, 2004. In addition, as this was hospitals' first experience with the occupational mix survey, we provided hospitals another opportunity, if they missed the February 16 filing deadline, to submit their completed surveys. The deadline for this one-time, final opportunity to submit occupational mix data to fiscal intermediaries for the FY 2005 wage index was also March 22, 2004. The final deadline for fiscal intermediaries to submit hospitals' data to CMS was April 16, 2004. (From April 16 until the final rule is published, the process, criteria, and timetable for correcting occupational mix data is the same as for Worksheet S-3 wage data, under Section H.) Occupational mix survey data received by us through March 15, 2004, are used in computing the proposed wage index in this proposed rule. Data received from intermediaries after March 15 through April 16, 2004 will be included in the final rule.

The response rate for the occupational mix survey, as of March 15, 2004, was 89.4 percent. We received occupational mix data from 3,593 hospitals. We expected to receive completed survey data from 4,018 hospitals that submitted cost report wage data for FY 2001 and were still IPPS hospitals during calendar year 2003 or on January 1, 2004. For any hospital that was expected to provide occupational mix data but did not, we are considering using proxy occupational mix data to adjust the hospital's wage data in the final wage index. One option would be to assume that the hospital only has employees in the highest level SOC for each of the general service categories included on the occupational mix survey. Another option would be to assume that such hospitals have the national SOC mix for each general service category. We invite public comment to this proposal. We note that the wage index in this proposed rule does not include proxy data for hospitals that did not complete and submit the occupational mix survey.

As this was the first administration of the occupational mix survey, we did not provide fiscal intermediaries an extensive program for reviewing the hours of data collected. However, hospitals were required to be able to provide any documentation that could be used by the fiscal intermediaries to verify the survey data. In addition, after reviewing the compiled survey data, we contacted fiscal intermediaries to

[[Page 28254]]

request corrections from a few hospitals that provided data for reporting periods that were out of range with our specified 12-month or 4-week data collection periods. As the wage index is a relative measure of labor costs across geographic areas, it is important that the data collected from hospitals reflects a common period. We also tested the validity of our occupational mix survey data by comparing our results to those of the 2001 BLS OES survey. As shown in Charts 4 and 5 below, the results of our survey are consistent with the findings of the BLS OES survey.

In addition, to compute the occupational mix adjustment, we collected data on the average hourly rates for the 19 SOCs so that we could derive a weighted average hourly rate for each labor market area. (More details about the occupational mix calculation are included in section III.C.2. of this preamble.) To decrease hospital's reporting burden for this initial collection of the occupational mix data, and to facilitate the timely collection of the data, we did not require hospitals to report data on their total wages or average hourly rates associated with the 19 SOCs. Instead, we used national average hourly rates from the BLS OES 2001 National Industry--Specific Occupational Employment and Wage Estimates, SIC--Hospitals (accessible at Web site: http://www.bls.gov/oes/2001/oesi3_806.htm), as reflected in Chart 4

below.

Chart 4.--BLS National Occupational Employment and Wage Estimates for Hospitals

Number of Percent of Percent of National General service categories

hospital

service

total average hourly employees category

employees

wage $

Nursing Services and Medical Assistant Services

Registered Nurses............................... 1,307,960

68.8

25.88

23.62 Licensed Practical Nurses.......................

194,900

10.2

3.86

14.65 Nursing Aides, Orderlies, & Attendants..........

351,910

18.5

6.96

10.01 Medical Assistants..............................

47,250

2.5

0.93

11.79

Total....................................... 1,902,020

100.0

37.63

Physical Therapy Services

Physical Therapists.............................

46,290

61.0

0.92

27.80 Physical Therapist Assistants...................

17,610

23.2

0.35

17.11 Physical Therapist Aides........................

12,020

15.8

0.24

10.40

Total.......................................

75,920

100.0

1.50

Occupational Therapy Services

Occupation Therapists...........................

24,110

75.3

0.48

25.62 Occupation Therapist Assistants.................

5,690

17.8

0.11

16.81 Occupation Therapist Aides......................

2,220

6.9

0.04

11.60

Total.......................................

32,020

100.0

0.63

Respiratory Therapy Services

Respiratory Therapists..........................

68,920

72.8

1.36

19.26 Respiratory Therapy Technicians.................

25,710

27.2

0.51

16.96

Total.......................................

94,630

100.0

1.87

Pharmacy Services

Pharmacists.....................................

48,630

48.8

0.96

34.58 Pharmacy Technicians............................

44,270

44.4

0.88

12.30 Pharmacy Assistants/Aides.......................

6,810

6.8

0.13

11.52

Total.......................................

99,710

100.0

1.97

Dietary Services

Dieticians......................................

16,820

56.4

0.33

20.02 Dietetic Technicians............................

13,020

43.6

0.26

11.64

Total.......................................

29,840

100.0

0.59

Medical & Clinical Lab Services

Medical & Clinical Lab Technologists............

87,380

57.8

1.73

20.74 Medical & Clinical Lab Technicians..............

63,900

42.2

1.26

14.90

Total.......................................

151,280

100.0

2.99

[[Page 28255]]

Total Nursing, Therapy, Pharmacy, Dietary,

2,385,420 ..............

47.19 and Medical & Clinical Occupations.........

All Other Occupations....................... 2,669,400 ..............

52.81

Total Hospital Employees.................... 5,054,820 ..............

100.0

Source: BLS, OES, 2001 National Industry-Specific Occupational Employment and Wage Estimates, http://www.bls.gov/ oes/2001

Chart 5.--Medicare Occupational Mix Survey Results

Percent of Percent of General Service Categories

Number of employee

service total employee hours

category hours hours

Nursing Services and Medical Assistant Services

Registered Nurses......................................

1,349,683,706.61

70.38

26.23 Licensed Practical Nurses..............................

148,480,984.66

7.74

2.89 Nursing Aides, Orderlies, & Attendants.................

349,482,222.23

18.22

6.79 Medical Assistants.....................................

70,155,219.44

3.66

1.36

Total..............................................

1,917,802,132.94

100.00

37.27

Physical Therapy Services

Physical Therapists....................................

42,728,556.90

60.87

0.83 Physical Therapist Assistants..........................

16,278,842.28

23.19

0.32 Physical Therapist Aides...............................

11,192,122.93

15.94

0.22

Total..............................................

70,199,522.11

100.00

1.36

Occupational Therapy Services

Occupation Therapists..................................

18,016,924.74

76.46

0.35 Occupation Therapist Assistants........................

3,912,014.51

16.60

0.08 Occupation Therapist Aides.............................

1,635,953.90

6.94

0.03

Total..............................................

23,564,893.16

100.00

0.46

Respiratory Therapy Services

Respiratory Therapists.................................

79,768,909.24

79.96

1.55 Respiratory Therapy Technicians........................

19,993,236.90

20.04

0.39

Total..............................................

99,762,146.14

100.00

1.94

Pharmacy Services

Pharmacists............................................

52,574,888.83

48.35

1.02 Pharmacy Technicians...................................

51,947,662.82

47.77

1.01 Pharmacy Assistants/Aides..............................

4,219,798.43

3.88

0.08

Total..............................................

108,742,350.08

100.00

2.11

Dietary Services

Dieticians.............................................

18,221,465.33

42.23

0.35 Dietetic Technicians...................................

24,929,864.59

57.77

0.48

Total..............................................

43,151,329.92

100.00

0.84

Medical & Clinical Lab Services

Medical & Clinical Lab Technologists...................

109,938,139.37

52.07

2.14 Medical & Clinical Lab Technicians.....................

101,208,507.21

47.93

1.97

Total..............................................

211,146,646.58

100.00

4.10

Total Nursing, Therapy, Pharmacy, Dietary, and

2,474,369,020.92 ..............

48.08 Medical & Clinical Occupations................

[[Page 28256]]

All Other Occupations..........................

2,671,751,872.61 ..............

51.92

Total Hospital Employees...................

5,146,120,893.53 ..............

100.00

Source: Medicare Wage Index Occupational Mix Survey, Form CMS-10079

2. Proposed Calculation of the Occupational Mix Adjustment Factor and the Proposed Occupational Mix Adjusted Wage Index

The method used to calculate the proposed occupational mix adjusted wage index follows:

Step 1--For each hospital, the percentage of the general service category attributable to an SOC is determined by dividing the SOC hours by the general service category's total hours. Repeat this calculation for each of the 19 SOCs.

Step 2--For each hospital, the weighted average hourly rate for an SOC is determined by multiplying the percentage of the general service category (from Step 1) by the national average hourly rate for that SOC from the 2001 BLS OES survey (see Chart 4 above). Repeat this calculation for each of the 19 SOCs.

Step 3--For each hospital, the hospital's adjusted average hourly rate for a general service category is computed by summing the weighted hourly rate for each SOC within the general category. Repeat this calculation for each of the 7 general service categories.

Step 4--For each hospital, the occupational mix adjustment factor for a general service category is calculated by dividing the national adjusted average hourly rate for the category by the hospital's adjusted average hourly rate for the category. (The national adjusted average hourly rate is computed in the same manner as Steps 1 through 3, using instead, the total SOC and general service category hours for all hospitals in the occupational mix survey database.) Repeat this calculation for each of the 7 general service categories. If the hospital's adjusted rate is less than the national adjusted rate (indicating the hospital employs a less costly mix of employees within the category), the occupational mix adjustment factor will be greater than 1.0000. If the hospital's adjusted rate is greater than the national adjusted rate, the occupational mix adjustment factor will be less than 1.0000.

Step 5--For each hospital, the occupational mix adjusted salaries and wage-related costs for a general service category is calculated by multiplying the hospital's total salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in section F) by the national percentage of total hospital workers attributable to the general service category (from the occupational mix survey data; see Chart 5 above) and by the general service category's occupational mix adjustment factor (from Step 4 above). Repeat this calculation for each of the 7 general service categories. The remaining portion of the hospital's total salaries and wage-related costs that is attributable to all other employees of the hospital is not adjusted for occupational mix.

Step 6--For each hospital, the total occupational mix adjusted salaries and wage-related costs for a hospital are calculated by summing the occupational mix adjusted salaries and wage-related costs for the 7 general service categories (from Step 5) and the unadjusted portion of the hospital's salaries and wage-related costs for all other employees. To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in Section F).

Step 7--To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 8--To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage- related costs for all hospitals in the nation, then sum the total hours for all hospitals in the nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The proposed national occupational mix adjusted average hourly wage is 26.2566.

Step 9--To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 7) by the proposed national occupational mix adjusted average hourly wage (Step 8).

Step 10--To compute the proposed Puerto Rico specific occupational mix adjusted wage index, follow the Steps 1 through 9 above. The proposed Puerto Rico occupational mix adjusted average hourly wage is 12.2035.

Example of Occupational Mix Adjustment

Percent of Percent of BLS national General service categories/SOCs

Number of

service total employee average hourly employee hours category hours

hours

wage

NATIONAL--Nursing and Medical Assistant Services

Registered Nurses.......................... 1,349,683,707

70.38

26.23

$23.62. Licensed Practical Nurses.................. 148,480,985

7.74

2.89

14.65. Nursing Aides, Orderlies, & Attendants..... 349,482,222

18.22

6.79

10.01 Medical Assistants.........................

70,155,219

3.66

1.36

11.79 .

[[Page 28257]]

Total.................................. 1,917,802,133

100.00

37.27

20.01. Hospital A:

Registered Nurses......................

1,642,116

79.84 ...............

18.86.

Licensed Practical Nurses..............

67,860

3.30 ...............

0.48.

Nursing Aides, Orderlies, & Attendants.

259,177

12.60 ...............

1.26

Medical Assistants.....................

87,622

4.26 ...............

0.50.

Total..................................

2,056,774

100.00 ...............

21.11

Occupational Mix Adjustment............ ................ ............... ...............

0.9481 Hospital B:

Registered Nurses......................

1,510,724

64.44 ...............

0.31

Licensed Practical Nurses..............

159,795

6.82 ...............

0.09

Nursing Aides, Orderlies, & Attendants.

391,201

16.69 ...............

0.08

Medical Assistants.....................

282,728

12.06 ...............

2.55

Total..............................

2,344,449

100.00 ...............

19.31

Occupational Mix Adjustment............ ................ ............... ...............

1.0362

NATIONAL--Physical Therapy Services

Physical Therapists........................

42,728,557

60.87

0.83

27.80 Physical Therapist Assistants..............

16,278,842

23.19

0.32

17.11 Physical Therapist Aides...................

11,192,123

15.94

0.22

10.40

Total..................................

70,199,522

100.00

1.36

22.55 Hospital A:

Physical Therapists....................

94,987

61.40 ...............

17.07

Physical Therapist Assistants..........

36,254

23.43 ...............

4.01

Physical Therapist Aides...............

23,460

15.16 ...............

1.58

Total..............................

154,701

100.00 ...............

22.66

Occupational Mix Adjustment............ ................ ............... ...............

0.9953

Hospital B:

Physical Therapists....................

60,337

57.37 ...............

15.95

Physical Therapist Assistants..........

22,391

21.29 ...............

3.64

Physical Therapist Aides...............

22,444

21.34 ...............

2.22

Total..............................

105,173

100.00 ...............

21.81

Occupational Mix Adjustment............ ................ ............... ...............

1.0339

NATIONAL--Occupational Therapy Services

Occupation Therapists......................

18,016,925

76.46

0.35

25.62 Occupation Therapist Assistants............

3,912,015

16.60

0.08

16.81 Occupation Therapist Aides.................

1,635,954

6.94

0.03

11.60

Total..................................

23,564,893

100.00

0.46

23.18. Hospital A:

Occupation Therapists..................

40,366

90.06 ...............

23.07

Occupation Therapist Assistants........

0

0.00 ...............

0.00

Occupation Therapist Aides.............

4,454

9.94 ...............

1.15

Total..............................

44,820

100.00 ...............

24.23

Occupational Mix Adjustment............ ................ ............... ...............

0.9568

Hospital B:

Occupation Therapists..................

26,547

79.48 ...............

20.36

Occupation Therapist Assistants........

1,610

4.82 ...............

0.81

Occupation Therapist Aides.............

5,242

15.70 ...............

1.82

Total..............................

33,399

100.00 ...............

22.99

Occupational Mix Adjustment............ ................ ............... ...............

1.0081

NATIONAL--Respiratory Therapy Services

Respiratory Therapists.....................

79,768,909

79.96

1.55

19.26 Respiratory Therapy Technicians............

19,993,237

20.04

0.39

16.96

Total..................................

99,762,146

100.00

1.94

18.80

[[Page 28258]]

Hospital A:

Respiratory Therapists.................

75,339

97.40 ...............

18.76

Respiratory Therapy Technicians........

2,008

2.60 ...............

0.44

Total..............................

77,347

100.00 ...............

19.20

Occupational Mix Adjustment............ ................ ............... ...............

0.9792 Hospital B:

Respiratory Therapists.................

73,592

65.62 ...............

12.64

Respiratory Therapy Technicians........

38,549

34.38 ...............

5.83

Total..............................

112,141

100.00 ...............

18.47

Occupational Mix Adjustment............ ................ ............... ...............

1.0179

NATIONAL--Pharmacy Services

Pharmacists................................

52,574,889

48.35

1.02

34.58 Pharmacy Technicians.......................

51,947,663

47.77

1.01

12.30 Pharmacy Assistants/Aides..................

4,219,798

3.88

0.08

11.52

Total.................................. 108,742,350

100.00

2.11

23.04 Hospital A:

Pharmacists............................

65,863

48.65 ...............

16.82

Pharmacy Technicians...................

69,525

51.35 ...............

6.32

Pharmacy Assistants/Aides..............

0

0.00 ...............

0.00

Total..............................

135,388

100.00 ...............

23.14

Occupational Mix Adjustment............ ................ ............... ...............

0.9957 Hospital B:

Pharmacists............................

45,856

39.23 ...............

13.57

Pharmacy Technicians...................

64,986

55.60 ...............

6.84

Pharmacy Assistants/Aides..............

6,039

5.17 ...............

0.60

Total..............................

116,881

100.00 ...............

21.00

Occupational Mix Adjustment............ ................ ............... ...............

1.0971

NATIONAL--Dietary Services

Dieticians.................................

18,221,465

42.23

0.35

20.02 Dietetic Technicians.......................

24,929,865

57.77

0.48

11.64

Total..................................

43,151,330

100.00

0.84

15.18 Hospital A:

Dieticians.............................

13,943

100.00 ...............

20.02

Dietetic Technicians...................

0

0.00 ...............

0.00

Total..............................

13,943

100.00 ...............

20.02

Occupational Mix Adjustment............ ................ ............... ...............

0.7582 Hospital B:

Dieticians.............................

27,458

16.29 ...............

3.26

Dietetic Technicians...................

141,148

83.71 ...............

9.74

Total..............................

168,606

100.00 ...............

13.00

Occupational Mix Adjustment............ ................ ............... ...............

1.1676

NATIONAL--Medical & Clinical Lab Services

Medical & Clinical Lab Technologists....... 109,938,139

52.07

2.14

20.74 Medical & Clinical Lab Technicians......... 101,208,507

47.93

1.97

14.90.

Total.................................. 211,146,647

100.00

4.10

17.94 Hospital A:

Medical & Clinical Lab Technologists...

166,522

90.82 ...............

18.84

Medical & Clinical Lab Technicians.....

16,841

9.18 ...............

1.37

Total..............................

183,363

100.00 ...............

20.20

Occupational Mix Adjustment............ ................ ............... ...............

0.8880 Hospital B:

Medical & Clinical Lab Technologists...

295,516

47.34 ...............

9.82

Medical & Clinical Lab Technicians.....

328,716

52.66 ...............

7.85

[[Page 28259]]

Total..............................

624,232

100.00 ...............

17.66

Occupational Mix Adjustment............ ................ ............... ...............

1.0156

Total Nursing, Therapy, Pharmacy, Dietary, 2,474,369,021 ...............

48.08 ............... and Medical & Clinical Occupations........ All Other Occupations...................... 2,671,751,873 ...............

51.92 ............... Total Hospital Employees................... 5,146,120,894 ...............

100.00 ...............

In implementing an occupational mix adjusted wage index based on the above calculation, the wage index values for 18 rural areas (36.7 percent) and 166 urban areas (51.2 percent) would decrease as a result of the adjustment. Nine (9) rural areas (18.4 percent) and 89 urban areas (27.5 percent) would experience a decrease of 1 percent or greater in their wage index values. The largest negative impact for a rural area would be 2.2 percent and for an urban area, 4.5 percent. Meanwhile, 31 rural areas (63.3 percent) and 158 urban areas (48.8 percent) would experience an increase in their wage index values. Although these results show that rural hospitals would gain the most from an occupational mix adjustment to the wage index, their gains may not be as great as might have been expected. Further, it might not have been anticipated that over one-third of rural hospitals would actually fare worse under the adjustment. Overall, a fully implemented occupational mix adjusted wage index would have a redistributive effect on Medicare payments to hospitals.

D. Worksheet S-3 Wage Data for the Proposed FY 2005 Wage Index Update

[If you choose to comment on issues in this section, please include the caption ``Wage Data'' at the beginning of your comment.]

The proposed FY 2005 wage index values (effective for hospital discharges occurring on or after October 1, 2004 and before October 1, 2005) in section VI. of the Addendum to this proposed rule are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2001 (the FY 2004 wage index was based on FY 2000 wage data).

The proposed FY 2005 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

Salaries and hours from short-term, acute care hospitals (including paid lunch hours and hours associated with military leave and jury duty).

Home office costs and hours.

Certain contract labor costs and hours (which includes direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services).

Wage-related costs (The September 1, 1994 Federal Register included a list of core wage-related costs that are included in the wage index, and discussed criteria for including other wage-related costs (59 FR 45356)).

Consistent with the wage index methodology for FY 2004, the proposed wage index for FY 2005 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The proposed FY 2005 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397).

Data collected for the IPPS wage index are also currently used to calculate wage indexes applicable to other providers, such as SNFs, home health agencies, and hospices. In addition, they are used for prospective payments to rehabilitation, psychiatric, and long-term care hospitals, and for hospital outpatient services.

E. Verification of Worksheet S-3 Wage Data

[If you choose to comment on issues in this section, please include the caption ``Wage Data'' at the beginning of your comment.]

The wage data for the proposed FY 2005 wage index were obtained from Worksheet S-3, Parts II and III of the FY 2001 Medicare cost reports. Instructions for completing the Worksheet S-3, Parts II and III are in the Provider Reimbursement Manual, Part I, sections 3605.2 and 3605.3. The data file used to construct the proposed wage index includes FY 2001 data submitted to us as of March 15, 2004. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries to revise or verify data elements that resulted in specific edit failures. Some unresolved data elements are included in the calculation of the proposed FY 2005 wage index, pending their resolution before calculation of the final FY 2005 index. We instructed the fiscal intermediaries to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 16, 2004. We believe all unresolved data elements will be resolved by the date the final rule is issued. The revised data will be reflected in the final rule.

In addition, as part of our editing process, we removed data for 222 hospitals from our database: 147 hospitals became critical access hospitals by the time we published the February public use file, and 75 hospitals were low Medicare utilization hospitals or failed edits that could not be corrected because the hospitals terminated the program or changed ownership. In addition, we removed the wage data for 15 hospitals with incomplete or inaccurate data resulting in zero or negative, or otherwise aberrant, average hourly wages. We have notified the fiscal intermediaries of these hospitals and will continue to work with the fiscal intermediaries to correct these data until we finalize our database to compute the final wage index. As a result, the proposed FY 2005 wage index is calculated based on FY 2001 wage data for 3,954 hospitals.

[[Page 28260]]

In constructing the proposed FY 2005 wage index, we include the wage data for facilities that were IPPS hospitals in FY 2001, even for those facilities that have terminated their participation in the program as hospitals, as long as those data do not fail any of our edits for reasonableness. We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period. However, we exclude the wage data for CAHs (as discussed in 68 FR 45397). The proposed wage index in this proposed rule excludes hospitals that are designated as CAHs by February 24, 2004, the date of the latest available Medicare CAH listing at the time we released the proposed wage index public use file on February 27, 2004.

F. Computation of the Unadjusted Wage Index

[If you choose to comment on issues in this section, please include the caption ``Wage Index'' at the beginning of your comment.]

The method used to compute the proposed FY 2005 wage index without an occupational mix adjustment follows:

Step 1--As noted above, we based the proposed FY 2005 wage index on wage data reported on the FY 2001 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2000 and before October 1, 2001. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2000 and reported a cost reporting period covering all of FY 2001. These data were included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2001 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2001 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2000 and before October 1, 2001), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2--Salaries--The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS. In calculating a hospital's average salaries plus wage-related costs, we subtracted from Line 1 (total salaries) the GME and CRNA costs reported on lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and excluded salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtracted from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage-related costs, we added to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage- related costs (Lines 13, 14, and 18).

We note that contract labor and home office salaries for which no corresponding hours are reported were not included. In addition, wage- related costs for nonteaching physician Part A employees (Line 18) are excluded if no corresponding salaries are reported for those employees on Line 4.

Step 3--Hours--With the exception of wage-related costs, for which there are no associated hours, we computed total hours using the same methods as described for salaries in Step 2.

Step 4--For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocated overhead costs to areas of the hospital excluded from the wage index calculation. First, we determined the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then computed the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determined the ratio of overhead hours (Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, and 7); (2) we computed overhead wage- related costs by multiplying the overhead hours ratio by wage-related costs reported on Part II, Lines 13, 14, and 18; and (3) we multiplied the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtracted the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5--For each hospital, we adjusted the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimated the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2000 through April 15, 2002 for private industry hospital workers from the Bureau of Labor Statistics' Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period

After

Before

Adjustment factor.

10/14/2000

11/15/2000

1.07771 11/14/2000

12/15/2000

1.07273 12/14/2000

1/15/2001

1.06767 01/14/2001

02/15/2001

1.06245 02/14/2001

03/15/2001

1.05706 03/14/2001

04/15/2001

1.05168 04/14/2001

05/15/2001

1.04645 05/14/2001

06/15/2001

1.04139 06/14/2001

07/15/2001

1.03638 07/14/2001

08/15/2001

1.03134 08/14/2001

09/15/2001

1.02627 09/14/2001

10/15/2001

1.02133 10/14/2001

11/15/2001

1.01665 11/14/2001

12/15/2001

1.01224 12/14/2001

01/15/2002

1.00803 01/14/2002

02/15/2002

1.00395 02/14/2002

03/15/2002

1.00000 03/14/2002

04/15/2002

0.99610

For example, the midpoint of a cost reporting period beginning January 1, 2001 and ending December 31, 2001 is June 30, 2001. An adjustment factor of 1.03638 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any

[[Page 28261]]

cost reporting period that began in FY 2001 and covered a period of less than 360 days or more than 370 days, we annualized the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplish annualization.

Step 6--Each hospital was assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or rural labor market area, we added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

Step 7--We divided the total adjusted salaries plus wage-related costs obtained under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) for all hospitals in each labor market area to determine an average hourly wage for the area.

Step 8--We added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the nation and then divided the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the proposed national average hourly wage is $26.2939.

Step 9--For each urban or rural labor market area, we calculated the hospital wage index value by dividing the area average hourly wage obtained in Step 7 by the national average hourly wage computed in Step 8.

Step 10--Following the process set forth above, we developed a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We added the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divided the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall proposed average hourly wage of 12.2038 for Puerto Rico. For each labor market area in Puerto Rico, we calculated the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11--Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate IPPS payments are not greater or less than those that would have been made in the year if this section did not apply. For FY 2005, this change affects 195 hospitals in 51 MSAs. The MSAs affected by this provision are identified by a footnote in Table 4A in the Addendum of this proposed rule.

G. Computation of the Proposed FY 2005 Blended Wage Index

[If you choose to comment on issues in this section, please include the caption ``Wage Index'' at the beginning of your comment.]

For the FY 2005 wage index, we are proposing a blend of the occupational mix adjusted wage index and the unadjusted wage index, in order to minimize the redistributive impact of the occupational mix adjustment (as discussed in section III.C.2. of this preamble) for the first year of its implementation. Specifically, we are proposing to base the FY 2005 wage index on a blend of 10 percent of an average hourly wage, adjusted for occupational mix, and 90 percent of an average hourly wage, unadjusted for occupational mix. Using this blend, the national average hourly wage is 26.2902 and the Puerto Rico specific average hourly wage is 12.2038. We chose this blend for FY 2005 in recognition that this was the first time, for the administration of the occupational mix survey, hospitals had a short timeframe for collecting their occupational mix survey data and documentation, and we could not collect optimum data (that is, wages and hours data from a 1-year period for all hospitals) within the mandatory timeframe for implementing the adjustment, and we had no baseline data to use in developing a desk review program that could ensure the accuracy of the occupational mix survey data.

In addition, we are moving cautiously with implementing the occupational mix adjustment in recognition of changing trends in the hiring of nurses, the largest group in our survey. Since the enactment of section 304(c) of Public Law 106-554, the law requiring the occupational mix adjustment to the wage index, some States have implemented laws that establish floors on the minimum level of registered nurse staffing that hospitals must maintain in order to continue to be licensed and certified by the State. In addition, some rural areas that are facing a shortage of physicians may be hiring more registered nurses as extenders or substitutes for physicians. Such trends may explain why the occupational mix impacts in section III.C.2. of this preamble are not as expected for rural areas in particular.

Further, we are proposing this blend because, although we want to minimize the immediate impact of the occupational mix adjustment on hospitals' wage index values, we do not want to nullify the value and intent of the occupational mix adjustment. We believe that the blended wage index we are proposing satisfies both of these goals. With only 10 percent of the wage index adjusted for occupational mix, the wage index values for 17 rural areas (34.7 percent) and 159 urban areas (49.1 percent) would decrease as a result of the adjustment. However, the decreases would be minimum; the largest negative impact for a rural area would be only 0.22 percent and for an urban area, 0.45 percent. Conversely, 32 rural areas (65.3 percent) and 165 urban areas (50.9 percent) would benefit from this adjustment, but each area's gain would be less than 1 percent. Overall, a wage index that has only 10 percent of the salaries adjusted for occupational mix would have a minimal redistributive effect on Medicare payments to hospitals. (See Appendix A to this proposed rule for further analyses of the impact of the proposed occupational mix adjustment on the FY 2005 wage index.)

The wage index values in Tables 4A, 4B, 4C, 4F, 4G, and 4H and the average hourly wages in Tables 2, 3A, and 3B in the Addendum to this proposed rule include the occupational mix adjustment as proposed. We note that, although we are proposing a blended wage index for FY 2005, at this time we are not proposing an incremental phase-in of the occupational mix adjustment beyond FY 2005. The application of the occupational mix adjustment beyond FY 2005 will be determined and discussed in subsequent IPPS updates.

H. Proposed Revisions to the Wage Index Based on Hospital Redesignation

[If you choose to comment on issues in this section, please include the caption ``Hospital Redesignations'' at the beginning of your comment.]

1. General

Under section 1886(d)(10) of the Act, the Medicare Geographic Classification Review Board (MGCRB) considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify by September 1 of the year preceding the year during which reclassification is sought.

[[Page 28262]]

Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassification to become effective for the following fiscal year (beginning October 1). The regulations applicable to reclassifications by the MGCRB are located in Sec. Sec. 412.230 through 412.280.

Section 1886(d)(10)(D)(v) of the Act provides that, beginning with FY 2001, a MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use the 3 most recent years' average hourly wage data in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year.

Section 304(b) of Public Law 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at Sec. 412.235.

Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute if: The rural county would otherwise be considered part of an urban area under the standards for designating MSAs if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs. In light of the new CBSA definitions and the Census 2000 data, we undertook to identify those counties meeting these criteria. The eligible counties are identified below, as well as a discussion of counties that no longer meet the criteria under this provision. 2. Effects of Reclassification

Section 1886(d)(8)(C) of the Act provides that the application of the wage index to redesignated hospitals is dependent on the hypothetical impact that the wage data from these hospitals would have on the wage index value for the area to which they have been redesignated. These requirements for determining the wage index values for redesignated hospitals is applicable both to the hospitals located in rural counties deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the Act,\4\ the wage index values were determined by considering the following:

\4\ Although section 1886(d)(8)(C)(iv)(I) of the Act also provides that the wage index for an urban area may not decrease as a result of redesignated hospitals if the urban area wage index is below the wage index for rural areas in the State in which the urban area is located, this was effectively made moot by section 4410 of Public Law 105-33, which provides that the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State.

Also, section 186(d)(8)(C)(iv)(II) of the Act provides that an urban area's wage index may not decrease as a result of redesignated hospitals if the urban area is located in a State that is composed of a single urban area.

If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals (the combined wage index value) applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.

The wage data for a reclassified urban hospital is included in both the wage index calculation of the area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.

Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index).

The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located. 3. FY 2005 Issues

Recent policies and decisions that will affect hospitals' geographic classifications for FY 2005 are discussed below. First, we describe decisions by the MGCRB on applications received in accordance with the ongoing reclassification process described in the regulations at Sec. Sec. 412.230 through 412.280. Second, we describe the implications for reclassification decisions by the MGCRB to be effective during FY 2005 of our proposal to adopt new MSA definitions for the FY 2005 wage index. Third, we discuss the new counties identified under the standards at section 1886(d)(8)(B) of the Act, based on the new CBSAs and the Census 2000 data. Fourth, we discuss the interactions of these changes with reclassifications approved under the one-time appeal process for hospital wage index reclassifications at section 508 of Public Law 108-173. Fifth, we discuss our proposed implementation of section 505 of Public Law 108-173. Under this provision, the Secretary must establish a new process, similar to the current wage index reclassification process, to make adjustments to the hospital wage index, based on commuting patterns of hospital employees. a. FY 2005 MGCRB Reclassifications

In the August 1, 2003 IPPS final rule, we indicated that hospitals submitting applications for reclassification by the MGCRB for FY 2005 should base those applications on the current (for Medicare payment purposes) MSAs (68 FR 45401). At the time this proposed rule was constructed, the MGCRB had completed its review of FY 2005 reclassification requests. There were 339 hospitals approved for wage index reclassifications by the MGCRB for FY 2005. Because MGCRB wage index reclassifications are effective for 3 years, hospitals reclassified during FY 2003 or FY 2004 are eligible to continue to be reclassified based on prior reclassifications to current MSAs during FY 2005. There were 55 hospitals reclassified for wage index in FY 2003 and 102 hospitals reclassified for wage index in FY 2004.

In the past, hospitals have been able to apply to be reclassified for purposes of either the wage index or the standardized amount. Existing regulations at Sec. 412.230(a)(5)(ii) state

[[Page 28263]]

that, after 2002, a hospital may not be reclassified for purposes of the standardized amount if the area to which the hospital seeks reclassification does not have a higher standardized amount than the standardized amount the hospital currently receives. Standardized amount reclassifications are only effective for 1 year, so hospitals must reapply every year. At the time the FY 2005 reclassification applications were due, hospitals applied on the basis that the law still provided for a higher standardized amount for hospitals in large urban areas. However, section 401 of Public Law 108-173 established that all hospitals would be paid on the basis of the large urban standardized amount beginning with FY 2004. Consequently, all hospitals will be paid on the basis of the same standardized amount, which effectively makes standardized amount reclassifications moot, at least for purposes of the standardized amount. As a result, the MGCRB denied all applications for standardized amount reclassifications for FY 2005. In light of the fact that all hospitals are now paid on the basis of the same standardized amount, we are proposing to eliminate standardized amount reclassifications (a discussion appears under section IV.C. of this preamble). Although there could still be some benefit in terms of payments for some hospitals under the DSH adjustment for operating IPPS, section 402 of Public Law 108-173 equalized DSH payments for rural and urban hospitals, with the exception that the rural DSH adjustment is capped at 12 percent (except that rural referral centers have no cap) (a detailed discussion appears in section IV.H. of this preamble). b. Implementation of New MSAs

As discussed above, we are proposing to implement the new CBSAs for FY 2005. Under these new CBSAs definitions, many existing MSAs are reconfigured. Therefore, because hospitals applied for reclassification during FY 2005 on the basis of the MSAs currently used to define labor market areas for FY 2004, the definition of the MSA to which they have been reclassified, or the area where they are located, may have changed under our proposed implementation. Hospitals that have been reclassified for FY 2005 should verify that the reclassified wage index for the labor market area into which they have been reclassified (in Table 4C or 4D in the Addendum to this proposed rule) exceeds the wage index of the labor market area where they are located (in Table 4A or 4B in the Addendum of this proposed rule) after our proposed implementation of the new MSAs. Hospitals may withdraw their FY 2005 reclassifications within 45 days of the publication of this proposed rule.

In some cases, the new CBSA definitions result in previously existing MSAs being divided into two or more separate MSAs. In these situations, we are proposing to assign the hospital to the nearest county in the current MSA, and the hospital's FY 2005 reclassification would be to the new MSA (under the CBSA definitions) that includes that county to which it has been assigned.

For example, the Ann Arbor, MI MSA currently includes the counties of Lenawee, MI; Livingston, MI; and Washtenaw, MI. Under the new CBSA definitions, the Ann Arbor, MI MSA is comprised solely of the county of Washtenaw, MI. Lenawee, MI now comprises the Adrian, MI Micropolitan Area, and Livingston, MI is now in the Warren-Farmington Hills-Troy, MI Metropolitan Division of Detroit. Therefore, a hospital that was reclassified by the MGCRB into Ann Arbor for either FY 2003, FY 2004, or FY 2005, would be assigned to either the Ann Arbor, MI MSA or the Warren-Farmington Hills-Troy, MI Metropolitan Division, depending on whether the hospital was closer to Washtenaw or Livingston (a reclassified hospital located closest to Lenawee County would be assigned to the Ann Arbor MSA, based on Lenawee County's prior inclusion in this MSA).

Reclassified hospitals that have been assigned to a new MSA on this proposed basis are identified in Table 9 in the Addendum of this proposed rule by the identification of the county used to designate them. We have determined the hospital is in closest proximity to the county listed based on mapping data available to us at the time of the preparation of this proposed rule. Hospitals that disagree with our determination of the closest proximate county on which to assign them to a new MSA must submit a comment (as specified under the ``Comment Period'' and Addresses sections at the beginning of this proposed rule) indicating the basis for their disagreement. Changes to a hospital's MSA assignment on the basis of a hospital's disagreement will be announced in the final rule. c. Redesignations Under Section 1886(d)(8)(B) of the Act

Beginning October 1, 1988, section 1886(d)(8)(B) of the Act required us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards published in the Federal Register on January 3, 1980 (45 FR 956) for designating MSAs (and for designating NECMAs), and if the commuting rates used in determining outlying counties (or, for New England, similar recognized areas) were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs (or NECMAs). Hospitals that met the criteria using the January 3, 1980 version of these OMB standards were deemed urban for purposes of the standardized amounts and for purposes of assigning the wage data index.

Section 402 of Public Law 106-113 provides that, with respect to FYs 2001 and 2002, a hospital may elect to have the 1990 standards applied to it for purposes of section 1886(d)(8)(B) of the Act and that, beginning with FY 2003, hospitals will be required to use the standards published in the Federal Register by the Director of OMB based on the most recent decennial census. We implemented section 402 in the August 1, 2001 Federal Register (66 FR 39868). However, at that time, updated standards based on the Census 2000 data were not available.

We have used OMB's 2000 CBSA standards and the Census 2000 data to identify counties qualifying under section 1886(d)(8)(B) of the Act for FY 2005. The number of qualifying counties, shown in the following chart, increases from 28 to 97. On the basis of the evaluation of these data, we are proposing that, effective for discharges on or after October 1, 2004, hospitals located in the rural counties listed in the first column of the following table will be redesignated for purposes of assigning the wage index to the urban area listed in the second column.

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Chart 6.--Counties Redesignated as Urban Under Section 1886(d)(8)(B) of the Act [Based on CBSAs and Census 2000 Data]

Rural county

MSA.

Cherokee, AL................................ Rome, GA. Macon, AL................................... Auburn, AL. Talladega, AL............................... Anniston, AL. Hot Spring, AR.............................. Hot Spring, AR. Litchfield, CT.............................. Hartford, CT. Windham, CT................................. Hartford, CT. Bradford, FL................................ Gainesville, FL. Flagler, FL................................. Deltona-Daytona Beach-Ormond Beach, FL. Hendry, FL.................................. Miami, FL. Levy, FL.................................... Gainesville, FL. Walton, FL.................................. Ft. Walton Beach, FL. Banks, GA................................... Gainesville, FL. Chattooga, GA............................... Chattanooga, TN-GA. Jackson, GA................................. Atlanta, GA. Lumpkin, GA................................. Atlanta, GA. Morgan, GA.................................. Atlanta, GA. Peach, GA................................... Macon, GA. Polk, GA.................................... Atlanta, GA. Talbot, GA.................................. Columbus, GA-AL. Bingham, ID................................. Idaho Falls, ID. Christian, IL............................... Springfield, IL. DeWitt, IL.................................. Bloomington-Normal, IL. Iroquois, IL................................ Kankakee, IL. Logan, IL................................... Springfield, IL. Mason, IL................................... Peoria, IL. Ogle, IL.................................... Rockford, IL. Clinton, IN................................. Lafayette, IN. Henry, IN................................... Indianapolis, IN. Spencer, IN................................. Evansville, IN-KY. Starke, IN.................................. Chicago, IL-IN. Warren, IN.................................. Lafayette, IN. Boone, IA................................... Ames, IA. Buchanan, IA................................ Waterloo, IA. Cedar, IA................................... Iowa City, IA. Allen, KY................................... Bowling Green, KY. Assumption Parish, LA....................... Baton Rouge, LA. St. James Parish, LA........................ Baton Rouge, LA. Allegan, MI................................. Holland, MI. Montcalm, MI................................ Grand Rapids, MI. Oceana, MI.................................. Muskegon, MI. Shiawassee, MI.............................. Lansing, MI. Tuscola, MI................................. Saginaw, MI. Fillmore, MN................................ Rochester, MN. Dade, MO.................................... Springfield, MO. Pearl River, MS............................. Biloxi-Gulfport, MS. Caswell, NC................................. Burlington, NC. Granville, NC............................... Durham, NC. Harnett, NC................................. Raleigh, NC. Lincoln, NC................................. Charlotte NC-SC. Polk, NC.................................... Spartanburg, NC. Los Alamos, NM.............................. Sante Fe, NM. Lyon, NV.................................... Carson City, NV. Cayuga, NY.................................. Syracuse, NY. Columbia, NY................................ Albany, NY. Genesee, NY................................. Rochester, NY. Greene, NY.................................. Albany, NY. Schuyler, NY................................ Ithaca, NY. Sullivan, NY................................ Poughkeepsie-Newburgh, NY. Wyoming, NY................................. Buffalo, NY. Ashtabula, OH............................... Cleveland, OH. Champaign, OH............................... Springfield, OH. Columbiana, OH.............................. Youngstown, OH-PA. Cotton, OK.................................. Lawton, OK. Linn, OR.................................... Corvalis, OR. Adams, PA................................... York, PA. Clinton, PA................................. Williamsport, PA. Greene, PA.................................. Pittsburgh, PA. Monroe, PA.................................. New York-Newark, NY-NJ-CT. Schuylkill, PA.............................. Reading, PA. Susquehanna, PA............................. Binghamton, NY-PA.

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Clarendon, SC............................... Sumter, SC. Lee, SC..................................... Sumter, SC. Oconee, SC.................................. Greenville, SC. Union, SC................................... Spartanburg, SC. Meigs, TN................................... Cleveland, TN. Bosque, TX.................................. Waco, TX. Falls, TX................................... Waco, TX. Fannin, TX.................................. Dallas-Fort Worth-Arlington, TX. Grimes, TX.................................. College Station-Bryan, TX. Harrison, TX................................ Longview, TX. Henderson, TX............................... Dallas-Fort Worth-Arlington, TX. Milam, TX................................... Austin, TX. Van Zandt, TX............................... Dallas-Fort Worth-Arlington, TX. Willacy, TX................................. Brownsville, TX. Buckingham, VA.............................. Charlottesville, VA. Floyd, VA................................... Blacksburg, VA. Middlesex, VA............................... Virginia Beach, VA. Page, VA.................................... Harrisonburg, VA. Shenandoah, VA.............................. Winchester, VA. Island, WA.................................. Seattle, WA. Mason, WA................................... Olympia-Lacey, WA. Wahkiakum, WA............................... Longview, WA-OR. Jackson, WV................................. Charleston, WV. Roane, WV................................... Charleston, WV. Green, WI................................... Madison, WI. Green Lake, WI.............................. Fond du Lac, WI. Jefferson, WI............................... Milwaukee, WI. Walworth, WI................................ Chicago, IL-IN.

As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals should compare the reclassified wage index for the labor market area in Table 4C or 4D in the Addendum of this proposed rule into which they have been reclassified by the MGCRB to the wage index for the area to which they are redesignated under section 1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB reclassification within 45 days of the publication of this proposed rule.

When we apply the OMB 2000 CBSA standards, 16 rural counties no longer meet the qualifying criteria, either because they are now included in a metropolitan area (with the exception of Barry, MI and Cass, MI, most of the counties are now in the metropolitan area in which they were grouped in accordance with section 402) or they fail to meet the 25-percent cumulative out-migration threshold when we apply the new OMB standards. Counties that are now identified as metropolitan are:

Chilton, AL Macoupin, IL Piatt, IL Brown, IN Carroll, IN Jefferson, KS Barry, MI Cass, MI Ionia, MI Hartnett, NC Preble, PA

Counties that failed to meet the 25-percent threshold are: Marshall, AL; Putnam, FL; Wilson, NC; Van Wert, OH; and Lawrence, PA. d. Reclassifications Under Section 508 of Public Law 108-173

Under section 508 of Public Law 108-173, a qualifying hospital may appeal the wage index classification otherwise applicable to the hospital and apply for reclassification to another area of the State in which the hospital is located (or, at the discretion of the Secretary, to an area within a contiguous State). Hospitals were required to submit their applications by February 15, 2004. We implemented this process through notices published in the Federal Register on January 6, 2004 (69 FR 661) and February 13, 2004 (69 FR 7340). Such reclassifications are applicable to discharges occurring during the 3- year period beginning April 1, 2004 and ending March 31, 2007. Under section 508(b), reclassifications under this process do not affect the wage index computation for any area or for any other hospital and cannot be effected in a budget neutral manner.

The applications submitted under this process were reviewed and decided upon by the MGCRB. The MGCRB issued notifications of its decisions on April 16, 2004. Reclassifications under this one-time appeal process interact with: FY 2005 MGCRB reclassification decisions under the ongoing reclassification process described in the regulations at Sec. Sec. 412.230 through 412.280; the proposed implementation of the new MSA definitions; and the new redesignations under section 1886(d)(8)(B) of the Act.

In the notices implementing this process, we indicated that, with limited exceptions, hospitals eligible for reclassification under section 508 of Public Law 108-173 are not otherwise reclassified, effective for discharges on or after October 1, 2004. Therefore, aside from the exceptions specified in the notices, hospitals reclassified under this one-time appeal process are not otherwise reclassified by the MGCRB for FY 2005. For those hospitals that were exempted from this requirement and that were granted reclassification under this one-time appeal process, the reclassification under the one-time appeal process takes precedence over any other MGCRB reclassification. We show the reclassifications effective under the one-time appeal process in Table 9B, in the Addendum to this proposed rule.

With regard to the proposed implementation of the new MSAs, we are proposing to apply the reclassified

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wage indexes on the basis of the new MSAs. Hospitals reclassified under the one-time appeal process may terminate their reclassifications that would otherwise be effective on or after October 1, 2004, under the normal termination and withdrawal process at Sec. 412.273 (these reclassifications may not be terminated prior to October 1, 2004). Table 9B in the Addendum to this proposed rule shows the areas to which hospitals have been reclassified under the one-time appeal process. Therefore, similar to other hospitals reclassified by the MGCRB under the ongoing reclassification process for FY 2005, hospitals reclassified under the one-time appeal process should verify that the reclassified wage index for the labor market area into which they have been reclassified (in Table 4C or 4D in the Addendum to this proposed rule) exceeds the wage index of the labor market area where they are located (in Table 4A or 4B in the Addendum to this proposed rule) after our proposed implementation of the new MSAs. Affected hospitals may withdraw their one-time appeal process reclassifications within 45 days of the publication of this proposed rule.

As we have discussed above, in some cases, the new CBSA definitions result in the division of previously existing MSAs into two or more separate MSAs. (See the example in section III.H.3.b of this preamble.) In these situations, we are proposing to assign a hospital reclassified under the one-time appeal process to the nearest county in the current MSA, and the hospital's FY 2005 reclassification would be to the new MSA (under the CBSA definitions) that includes that county to which it has been assigned. Hospitals reclassified under the one-time appeals process that have been assigned to a new MSA on this proposed basis are identified in Table 9B, column 7, in the Addendum of this proposed rule. We have determined the county to which a hospital is in closest proximity based on mapping data available to us at the time of the preparation of this proposed rule. Hospitals that disagree with our determination of the closest proximate county must submit a comment (as specified under the ``Comment Period'' and ``Addresses'' sections at the beginning of this proposed rule) indicating the basis for their disagreement. Changes to a hospital's MSA assignment on the basis of a hospital's disagreement will be announced in the final rule.

Similarly, hospitals reclassified under the section 508 one-time appeal process that are also in counties identified under the redesignation process in accordance with section 1886(d)(8)(B) of the Act should compare the wage index applicable to the area to which they were reclassified under section 508 with the wage index applicable to the area to which they are redesignated under section 1886(d)(8)(B) of the Act, if those areas are different. Again, affected hospitals may withdraw their one-time appeal process reclassifications within 45 days of the publication of this proposed rule. e. Proposed Wage Index Adjustment Based on Commuting Patterns of Hospital Employees (Section 505 of Pub. L. 108-173)

[If you choose to comment on issues in this section, please include the caption ``Out-Migration of Hospital Employees'' at the beginning of your comment.]

Section 505 of Public Law 108-173 established new section 1886(d)(13) of the Act. The new section 1886(d)(13) requires that the Secretary establish a new process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. The process provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county with a higher wage index. Such adjustments to the wage index are effective for 3 years beginning with discharges occurring on or after October 1, 2004. Adjustments under this provision are not subject to the budget neutrality requirements at section 1886(d)(3)(E) or section 1886(d)(8)(D) of the Act.

The Secretary is required to establish criteria to identify ``qualifying counties,'' and hospitals located in such qualifying counties are to receive an adjustment to their wage index. Section 1886(d)(13)(B)(i) of the Act directs the Secretary to establish a threshold percentage difference between the county's wage index and the weighted average of the wage indexes of the surrounding higher wage index area(s) to which hospital employees commute that must be met in order for the county to qualify. Section 1886(d)(13)(B)(ii) of the Act specifies that the Secretary is also to establish the minimum out- migration threshold in order to qualify, which may not be less than 10 percent. Section 1886(d)(13)(iii) of the Act requires that the average hourly wage for all hospitals in the county must be equal to or exceed the average hourly wage for all hospitals in the labor market area. Section 1886(d)(13)(E) of the Act indicates this process may be based on the process used by the MGCRB. This section also gives the Secretary the authority to require hospitals to submit data necessary to implement this provision, or to use other data sources as available.

Hospitals located in counties that qualify for the payment adjustment are to receive an increase in the wage index that is equal to a weighted average of the differences between the wage indexes of the MSA(s) with higher wage indexes and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any MSA with a higher wage index. As discussed below, we have employed the prereclassified wage indexes in making these calculations. The wage index increase is effective for 3 years, unless a hospital requests to waive the application of the payment adjustment. Hospitals that receive this payment adjustment are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. (1) Data

To implement this provision, we analyzed commuting data compiled by the U.S. Census Bureau. The data derive from a special tabulation of Census 2000 journey-to-work data, compiled from responses to the long- form (sample) census survey questions on where people worked. When the Census conducts its decennial survey, each household receives either a short form or a long form. On average, about 1 in every 6 households receive the long form. The results from the long form are used to formulate descriptive population estimates. Thus, the data set is based on the Census 2000 sample and represents estimates of the actual figures that would be obtained from a complete count.

The data provide information about commuting patterns of workers at the county level for residents of the 50 States and the District of Columbia. Each record within the dataset represents a combination of a particular resident county, a workplace county, and a particular industry category. Thus, the record shows the county-of-residence by county-of-work commuter flows. The resident county represents the county where the worker resides, while the workplace county represents the county where the worker works. The industry category associated with workers is based on the 108 Industrial Structure codes developed by the Bureau of Economic Analysis. These Industrial Structure codes break down economic activities by defining industries (such as ``fabricated metal product manufacturing,'' ``legal services,'' and ``gasoline stations''). We

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limited the data set to those employees working in the category designated ``hospitals'' (BEA code 622000).

Using these data, we are able to identify the total number of hospital workers who live in each county and the number of workers within that county who commute to hospitals in other counties. For example, the data can be used to determine that, from a sample of 100 hospital employees who live in County A, 50 commute to work at hospitals within County A, 20 commute to work at hospitals within County B, and 30 commute to work at hospitals within County C.

There are some intrinsic limitations to the data. The file shows the weighted worker estimate for flows using a threshold or minimum size of 50 unweighted worker (from all industry codes) records. This means that only county-to-county flows that are comprised of at least 50 unweighted worker records are shown in this file. The Census Bureau omitted all other county-to-county flows from the file for confidentiality reasons. While this could eliminate the workflows of some hospital residents, we believe the eliminations would not have a major impact on the policy.

When Census calculated this special tabulation, the estimates of workers numbering from 1 through 7 have been rounded to 4. Values of 8 or greater have been rounded to the nearest multiple of 5, unless the estimate already ended in 5 or 0, in which case it was not changed. In addition, in this special tabulation, workers are defined as people 16 years and older who were employed and at work during the Census long form reference week. This is the week prior to when the questionnaire was filled out, which was the last week of March 2000 for most people.

In addition, because these data derive from the decennial census, the data file will not change until the census is taken again in 2010. This does not mean that the list of qualifying counties will not change from year to year. The out-migration percentage for each county is a function both of the commuting data and changes in the wage index values. Because the wage indices associated with each work and resident county change each year, a county's out-migration percentages can still vary each year because a higher wage index area in one year, might not be a higher wage index area in the next year. For example, if 100 hospital employees living in County A (wage index 1.00 in FY 2004) commute to County B (wage index 1.10 in FY 2004), then County B would be a higher wage index area for 2004. If in FY 2005, County A's wage index increases to 1.02 and County B's wage index decreases to 1.01, those 100 workers commuting from County A to County B will not be commuting to a higher wage index area for 2005. Consequentially, County A's out-migration percentage would decrease from 100 percent in 2004 to 0 percent in 2005. These normal changes in wage index values could also result in a county not deemed a qualifying county for FY 2005, becoming a qualifying county in FY 2006 or later.

We believe these data provide a useable data source to implement this provision. However, we welcome and encourage comments on the availability and value of alternative data sources. Although the statute authorizes the Secretary to require all hospitals to submit data on the commuting patterns of their employees, such a requirement would be a major undertaking for the hospital industry and CMS. It was not possible to pursue this approach in time to implement the provision by FY 2005. However, in addition to welcoming comments on the merits of relying on the Census data, we welcome comments on the feasibility of surveying hospitals on the residence and commuting patterns of all their hospital employees for purposes of developing future year adjustments. (2) Qualifying Counties

As noted previously, section 1886(d)(13)(B)(iii) of the Act requires that, to qualify for this commuting wage index adjustment, the average hourly wage for all hospitals in the county must be equal to or exceed the average hourly wage for all hospitals in the labor market area in which the county is located. To determine which counties meet this requirement, we calculated the average of hospitals' 3-year average hourly wages for all hospitals in a given county. We compared this county average 3-year average hourly wage to the 3-year average hourly wage for the labor market area where the county is located. We chose to use the 3-year average hourly wage because we believe it provides a more accurate and stable estimate for the wages paid by a given hospital over a period of time. This statutory requirement limits the number of eligible counties, as counties with a 3-year average hourly wage less than the 3-year average hourly wage of the MSA where the county is located were not considered to meet this requirement.

Some resident counties do not have average hourly wages because either there is no hospital located in the county, or the only hospital in the county is new and has not yet submitted wage data. We did not consider these counties to have met the average hourly wage criteria and thus hospitals in these counties are not yet eligible to receive an increase in wage index. This is consistent with our regulations at 42 CFR 412.230(e)(2)(iii), which require a new hospital to accumulate at least 1 year of wage data, before it is eligible to apply for reclassification.

As noted previously, section 1886(d)(13)(B)(ii) of the Act specifies that the Secretary is to establish the minimum out-migration threshold in order to qualify, which may not be less than 10 percent. To determine the out-migration percentage for each county, we identified higher wage index areas, by comparing 2005 prereclassified wage index of a resident county with the 2005 prereclassified wage index of the MSA or rural statewide area where the work county is located. We use the prereclassified wage index so that hospitals in the county are not disadvantaged by reclassification of other hospitals into the county.

Once we limited the dataset to those county-to-county flows where hospital employees were commuting to a higher wage index area, we calculated the out-migration percentage for resident counties. To calculate the out-migration percentage, we calculated the total number of hospital employees in a resident county who were commuting to a higher wage area as a percentage of the total number of hospital employees residing in the resident county. For example, there are 100 hospital employees who live in County A (wage index 1.0). Of those 100 employees, 50 commute to County B (wage index 1.10), 20 commute to County C (wage index 1.05), and 30 work within County A. Because 70 out of 100 people commute to higher wage areas (assuming County C also qualifies as a higher wage area), County A's out-migration percentage is equal to 70 percent.

To implement section 1886(d)(13)(B)(ii) of the Act, we are proposing that the out-migration threshold to qualify for this adjustment would be the statutory minimum of 10 percent. We believe that this threshold provides an opportunity for a reasonable number of hospitals that would not have recourse to the normal reclassification process to receive an appropriate adjustment to their wage index. We welcome comments on this proposed threshold.

As noted previously, section 1886(d)(13)(B)(i) of the Act directs the Secretary to establish a threshold percentage difference between the county's wage index and the weighted average wage indexes of the higher wage index areas to which hospital

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employees commute. However, unlike the threshold for the level of out- migration, the statute does not designate a minimum level for this threshold. Because of the nature of the adjustment provided under this provision, we are proposing to establish that the minimum difference in the wage indexes between the resident county and the work county can be any percentage greater than zero. We are proposing this threshold because the wage index increment for hospitals in qualifying counties under the statutory formula is a function of the differences between that county's wage index and the wage indices of the areas into which resident hospital workers of that county are commuting. In those cases where that difference is very small, the adjustment to the wage index will also be very small. (See the discussion of the statutory formula in section III.H.3.e.(3) of this preamble.) Therefore, we believe that a threshold of anything greater than zero is justifiable and consistent with the purposes of this provision.

Our analysis indicates that 224 counties qualify under these proposed criteria. There are 411 hospitals located in these qualifying counties. Hospitals located in qualifying counties are identified in Table 4J in the Addendum to this proposed rule. (3) The Adjustment

Hospitals located in the qualifying counties identified in Table 4J in the Addendum to this proposed rule that have not already been reclassified for purposes of the wage index would receive the wage index adjustment listed in the table. This increase is equal to the percentage of the hospital employees residing in the qualifying county who are employed in any higher wage area, multiplied by the sum of: the products, for each higher wage index area, of the difference between the wage index for such higher wage index area and the wage index of the qualifying county, and the percentage of hospital employees residing in the qualifying county who are employed in any higher wage index area who are employed in such higher wage index area. This increase in wage index is depicted using the following equation:

Adjustment = A * [Sigma][(B - C) * (D/E)]

A is the percentage of hospital employees residing in a qualifying county who are employed in any higher wage index area. B represents the wage index of the higher wage index area. C represents the wage index of the qualifying resident county. D represents the number of hospital employees residing in the qualifying county involved who are employed in such higher wage index area. E represents the total number of hospital employees residing in qualifying county who are employed in any higher wage index area.

For example, County A is identified as a qualifying county. As illustrated before, if 100 hospital employees live in County A (wage index = 1.00), 50 commute to County B (wage index = 1.10), 20 commute to County C (wage index = 1.05); and 30 commute within County A, the out-migration percentage is equal to 70 percent.

The adjustment for hospitals in County A would be:

= .70 * (((1.10 - 1.00)*(50/70)) + ((1.05 - 1.00)*(20/70))) = .70 * ((.10 * .714) + (.05 * .285)) = .70 * (0.0714 + 0.01428) = .70 * (0.0856) = 0.05998

So, hospitals in County A could receive a new wage index of 1.05998, instead of 1.000.

The proposed adjustments calculated for qualifying hospitals are listed in Table 4J in the Addendum to this proposed rule. These proposed adjustments are effective for each county for a period of 3 fiscal years beginning with discharges occurring on or after October 1, 2004. The commuting adjustments for each county will remain static for the 3-year period, after which the county's status as a qualifying county and the adjustment will be recalculated. (4) Automatic Adjustments

Section 1886(d)(13)(A) of the Act allows the Secretary to establish the process for receiving this increase in wage index through application or otherwise. Listed in Table 4J in the Addendum to this proposed rule are the counties and corresponding hospitals that qualify for an increase in wage index through our proposed implementation of the section. We are proposing that all hospitals located in qualifying counties will automatically receive the increase in wage index, unless the hospital has already been reclassified to another geographic area for purposes of the wage index amount (including reclassifications under section 508 of Pub. L. 108-173). This commuting wage index adjustment will be effective for the county for a period of 3 fiscal years, FY 2005 through FY 2007. As discussed previously, yearly changes in the wage indices associated with areas could result in changes in the out-migration percentage for a given county. Irrespective of these changes, a county will not lose its status as a qualifying county due to wage index changes during the 3-year period, and counties will receive the same wage index increase for those 3 years. However, a county that qualifies in FY 2005 may no longer qualify in FY 2008, or it may qualify but receive a different adjustment level.

We encourage comments on the automatic application of such a wage index adjustment, and whether an application process should be developed under which individual hospitals would have to apply in order to receive the adjustment. We note that, given the short timeframe before implementation of this provision on October 1, 2004, we believe that there is no practical alternative to providing for an automatic adjustment for FY 2005. However, one possibility is to employ an automatic adjustment process this year, and to replace the automatic process with an application process for future years. We invite comments on whether to establish the automatic process permanently, or to devise an application process for future years. We also invite comments on whether any application process should be the responsibility of the MGCRB or some other entity.

Hospitals receiving this wage index increase under section 1886(d)(13)(F) of the Act are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. As previously noted, the wage index increase is effective for 3 years, unless a hospital elects to waive the application of the wage index adjustment. Hospitals that wish to waive the application of this wage index adjustment must notify CMS within 45 days of the publication of this proposed rule. Waiver notifications should be sent to the following address: Centers for Medicare & Medicaid Services, Center for Medicare Management, Attention: Wage Index Adjustment Waivers, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. However, consistent with Sec. 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of this proposed rule in the Federal Register. Hospitals that have been reclassified by the MGCRB (including reclassifications under section 508 of the MMA) may terminate an existing 3-year reclassification within 45 days of the publication of this proposed rule in order to receive the wage index adjustment under this provision. Hospitals that are eligible for this adjustment and that withdraw their application for reclassification will then

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automatically receive the wage index adjustment listed in Table 4J in the Addendum of this proposed rule. The request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2005 must be received by the MGCRB within 45 days of the publication of this proposed rule. Hospitals should carefully review the wage index adjustment that they would receive under this provision (as listed in Table 2 in the Addendum to this proposed rule) in comparison with the wage index that they would receive under MGCRB reclassification (Table 9 in the Addendum to this proposed rule). 4. Proposed FY 2005 Reclassifications

The proposed wage index values for FY 2005 (except those for hospitals receiving wage index adjustments under section 505 of Pub. L. 108-173) are shown in Tables 4A, 4B, 4C, and 4F in the Addendum to this proposed rule. Hospitals that are redesignated will be required to use the wage index values shown in Table 4C. Areas in Table 4C may have more than one wage index value because the wage index value for a redesignated urban or rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located. Therefore, those areas with more than one wage index shown have hospitals from more than one State reclassified into them, and the rural wage index for a State in which at least one hospital is physically located is higher than the wage index for the area to which the hospital is reclassified.

Tables 3A and 3B in the Addendum to this proposed rule list the 3- year average hourly wage for each labor market area before the redesignation of hospitals, based on FYs 1999, 2000, and 2001 cost reporting periods. Table 3A lists these data for urban areas and Table 3B lists these data for rural areas. In addition, Table 2 in the Addendum to this proposed rule includes the adjusted average hourly wage for each hospital from the FY 1999 and FY 2000 cost reporting periods, as well as the FY 2001 period used to calculate the proposed FY 2005 wage index. The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously) across all 3 years, by the sum of the hours. If a hospital is missing data for any of the previous years, its average hourly wage for the 3-year period is calculated based on the data available during that period.

At the time this proposed wage index was constructed, the MGCRB had completed its review of FY 2005 reclassification requests. We are including in the Addendum of this proposed rule Table 9A, which shows hospitals that have been reclassified under either section 1886(d)(8) or section 1886(d)(10)(D) of the Act. This table includes 400 hospitals reclassified for FY 2005 by the MGCRB (for wage index purposes), as well as hospitals that were reclassified for the wage index in either FY 2003 53 or FY 2004 102 and are, therefore, in either the second or third year of their 3-year reclassification. This table also includes hospitals located in urban areas that have been redesignated rural in accordance with section 1886(d)(8)(E) of the Act (17). In addition, it includes rural hospitals redesignated to urban areas under section 1886(d)(8)(B) of the Act for purposes of the wage index (98).

Under Sec. 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of this proposed rule. The request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2004 must be received by the MGCRB within 45 days of the publication of this proposed rule. If a hospital elects to withdraw its wage index application after the MGCRB has issued its decision but prior to the above date, it may later cancel its withdrawal in a subsequent year and request the MGCRB to reinstate its wage index reclassification for the remaining fiscal year(s) of the 3-year period (Sec. 412.273(b)(2)(i)). The request to cancel a prior withdrawal must be made in writing to the MGCRB no later than the deadline for submitting reclassification applications for the following fiscal year (Sec. 412.273(d)). For further information about withdrawing, terminating, or canceling a previous withdrawal or termination of a 3-year reclassification for wage index purposes, we refer the reader to Sec. 412.273, as well as the August 1, 2002 IPPS final rule (67 FR 50065) and the August 1, 2001 IPPS final rule (66 FR 39887).

Any changes to the wage index that result from withdrawals of requests for reclassification, wage index corrections, appeals, and the Administrator's review process will be incorporated into the wage index values published in the final rule following this proposed rule. Therefore, the final wage indexes will likely be different from those published in this proposed rule, and in some cases, they may be quite different.

Although, as described above, the statute provides that a reclassified rural hospital may not have a lower wage index after reclassification than before, there is not similar protection for urban hospitals. Therefore, hospitals should carefully evaluate the impacts of their reclassifications prior to the deadline for withdrawing from an approved reclassification.

Applications for FY 2006 reclassifications are due to the MGCRB by September 1, 2004. We note that this is also the deadline for canceling a previous wage index reclassification withdrawal or termination under Sec. 412.273(d). Applications and other information about MCGRB reclassifications may be obtained, beginning in mid-July 2004, via the CMS Internet Web site at: http://cms.hhs.gov/providers/prrb/mgcinfo.asp , or by calling the MCGRB at (410) 786-1174. The mailing

address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

I. Process for Requests for Wage Index Data Corrections

[If you choose to comment on issues in this section, please include the caption ``Wage Data Corrections'' at the beginning of your comment.]

1. Worksheet S-3 Wage Data

In the August 1, 2003 final rule (68 FR 27194), we revised the process and timetable for application for development of the wage index, beginning with the FY 2005 wage index. The preliminary and unaudited Worksheet S-3 wage data file was made available on October 8, 2003 through the Internet on CMS's Web site at: http://cms.hhs.gov/providers/hipps/ippswage.asp. In a memorandum dated October 10, 2003,

we instructed all Medicare fiscal intermediaries to inform the IPPS hospitals they service of the availability of the wage data file and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries to advise hospitals that these data are also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in that wage data file, the hospital was to submit corrections along with complete, detailed supporting documentation to its intermediary by November 24, 2003. Hospitals were notified of this deadline and of all other possible deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage data file on the Internet, through the October 10, 2003 memorandum referenced above.

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The fiscal intermediaries notified the hospitals in early February of any changes to the wage data as a result of the desk reviews and the resolution of the hospitals' early November change requests. The fiscal intermediaries also submitted the revised data to CMS in early February. CMS published the proposed wage index public use file that included hospitals' revised wage data on February 27, 2004. In a memorandum also dated March 1, 2004, we instructed fiscal intermediaries to notify all hospitals regarding the availability of the proposed wage index public use file and the criteria and process for requesting corrections and revisions to the wage data. Hospitals had until March 12, 2004 to submit requests to the fiscal intermediaries for reconsideration of adjustments made by the fiscal intermediaries as a result of the desk review, and to correct errors due to CMS's or the intermediary's mishandling of the wage data. Hospitals were also required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries are to submit additional revisions resulting from the hospitals' reconsideration requests by April 16, 2004. The deadline for hospitals to request CMS intervention in cases where the hospital disagrees with the fiscal intermediary's policy interpretations is April 23, 2004.

Hospitals should also examine Table 2 in the Addendum to this proposed rule. Table 2 contains each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2001 data used to construct the proposed FY 2005 wage index. We note that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by March 15, 2004.

We will release a final wage data file in early May to hospital associations and the public on the Internet at http://www.cms.hhs.gov/providers/hipps/ippswage.asp. The May 2004 public use file will be made

available solely for the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary in the entry of the final wage data that result from the correction process described above (revisions submitted to CMS by the fiscal intermediaries by April 16, 2004). If, after reviewing the May 2004 final file, a hospital believes that its wage data are incorrect due to a fiscal intermediary or CMS error in the entry or tabulation of the final wage data, it should send a letter to both its fiscal intermediary and CMS that outlines why the hospital believes an error exists and provide all supporting information, including relevant dates (for example, when it first became aware of the error).

CMS and the fiscal intermediaries must receive these requests no later than June 11, 2004. Requests mailed to CMS should be sent to: Centers for Medicare & Medicaid Services, Center for Medicare Management, Attention: Wage Index Team, Division of Acute Care, C4-08- 06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Each request also must be sent to the hospital's fiscal intermediary. The intermediary will review requests upon receipt and contact CMS immediately to discuss its findings.

At this point in the process, that is, after the release of the May 2004 wage index file, changes to the hospital wage data will only be made in those very limited situations involving an error by the intermediary or CMS that the hospital could not have known about before its review of the final wage data file. Specifically, neither the intermediary nor CMS will approve the following types of requests:

Requests for wage data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries on or before April 16, 2004.

Requests for correction of errors that were not, but could have been, identified during the hospital's review of the March 1, 2004 wage data file (or the March 8 occupational mix data; see section III.H.2. of this preamble).

Requests to revisit factual determinations or policy interpretations made by the intermediary or CMS during the wage index data correction process. 2. Occupational Mix Data

The process and criteria for requesting corrections to the occupational mix survey data are described in section III.C.1 of this preamble. As stated in that section, from April 16, 2004 forward, the process for correcting the final occupational mix survey data is the same, and on the same schedule, as described above for correcting the final Worksheet S-3 wage data. 3. All FY 2005 Wage Index Data

Verified corrections to the wage index received timely (that is, by June 11, 2004) will be incorporated into the final wage index in the final rule to be published by August 1, 2004, and to be effective October 1, 2004.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2005 payment rates. Accordingly, hospitals that did not meet the procedural deadlines set forth above will not be afforded a later opportunity to submit wage data corrections or to dispute the intermediary's decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the Provider Reimbursement Review Board, the failure of CMS to make a requested data revision (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001), also Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003)).

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage data to the fiscal intermediaries' attention. Moreover, because hospitals will have access to the final wage index data by early May 2004, they will have the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or CMS before the development and publication of the FY 2005 wage index by August 1, 2004, and the implementation of the FY 2005 wage index on October 1, 2004. If hospitals avail themselves of this opportunity, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified after that date, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with Sec. 412.63(x)(2) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show: (1) That the intermediary or CMS made an error in tabulating its data; and (2) that the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of FY 2005 (that is, by the June 11, 2004 deadline). This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index. As described earlier, the requesting hospital must show that it could not have known about the error, or that it did not have the opportunity to correct the error, before the publication of the FY 2005 wage index. As indicated earlier, since a hospital will have the opportunity to verify its data, and the fiscal intermediary will notify the hospital of any changes, we do not expect that midyear corrections will be necessary. However, if the correction of a data error

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changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is approved.

J. Proposed Revision of the Labor-Related Share of the Wage Index

[If you choose to comment on issues in this section, please include the caption ``Labor-Related Share'' at the beginning of your comment.]

Section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of the national prospective payment system base payment rates that are attributable to wages and wage-related costs by a factor that reflects the relative differences in labor costs among geographic areas. It also directs the Secretary to estimate from time to time the proportion of hospital costs that are labor-related: ``The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage- related costs of the DRG prospective payment rates. * * *'' The portion of hospital costs attributable to wages and wage-related costs is referred to as the labor-related share. The labor-related share of the prospective payment rate is adjusted by an index of relative labor costs, which is referred to as the wage index. In the past, we have defined the labor-related share for prospective payment acute care hospitals as the national average proportion of operating costs that are related to, influenced by, or vary with the local labor market. The labor-related share for the acute care hospital inpatient prospective payment system has been calculated as the sum of the weights for wages and salaries, fringe benefits, nonmedical professional fees, contract labor, postage, and labor-intensive services.

In its June 2001 Report to Congress, MedPAC recommended that the Secretary ``should reevaluate current assumptions about the proportion of providers'' costs that reflect resources purchased in local and national markets.'' (Report to the Congress: Medicare in Rural America, Recommendation 4D, page 80.) MedPAC recommended that the labor-related share include the weights for wages and salaries, fringe benefits, contract labor, and other labor-related costs for locally purchased inputs only. MedPAC noted that this would likely result in a lower labor share, which would decrease the amount of the national base payment amount adjusted by the wage index. As a result, hospitals located in low-wage markets (those with a wages index less than 1.0) would receive higher payments, while those located in high-wage labor markets would receive lower payments.

In our proposed and final regulations updating the IPPS for FY 2003 (67 FR 31404, May 9, 2002 and 67 FR 49982, August 1, 2002), we discussed the methodology that we have used to determine the labor- related share. We noted that, at that time, the results of employing that methodology suggested that an increase in the labor-related share (from 71.066 percent to 72.495 percent) was warranted. However, we decided not to propose such an increase in the labor-related share until we conducted further research to determine whether a different methodology for determining the labor-related share should be adopted. The labor-related share has thus remained 71.066 percent.

Section 403 of Pub. L. 108-173 amended sections 1886(d)(3)(E) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this ``would result in lower payments than would otherwise be made.'' However, this provision of Pub. L. 108-173 did not the change the legal requirement that the Secretary estimate ``from time to time'' the proportion of hospitals'' costs that are ``attributable to wages and wage-related costs.'' In fact, section 404 of Pub. L. 108-173 requires the Secretary to develop a frequency for revising the weights used in the hospital market basket, including the labor share, to reflect the most current data more frequently than once every 5 years. This reflects Congressional intent that hospitals will receive payment based on a 62-percent labor share, or the labor share estimated from time to time by the Secretary, whichever is higher.

Section 404 further requires us to include in the final IPPS rule for FY 2006 an explanation of the reasons for, and options considered, in determining the frequency for revising the weights used in the hospital market basket, including the labor share. In the meantime, we are also continuing our research into the assumptions employed in calculating the labor-related share. Our research involves analyzing the compensation share separately for urban and rural hospitals, using regression analysis to determine the proportion of costs influenced by the area wage index, and exploring alternative methodologies to determine whether all or only a portion of professional fees and nonlabor intensive services should be considered labor-related. We will present our analysis and conclusions regarding the frequency and methodology for updating the labor share in the proposed and final rules for FY 2006.

In section IV.F. of this preamble, we discuss our proposal to incorporate the requirements of section 403 of Pub. L. 108-173 in a new Sec. 412.64(h) of the regulations.

As discussed above, the Secretary had determined, prior to the enactment of Pub. L. 108-173, that the labor-related share would be 71.066 percent. As a result, application of a 62-percent labor share would result in lower payments for any hospital with a wage index greater than 1.0. Therefore, we are modifying our payment system software for FY 2005 to apply wage indexes greater than 1.0 to 71.066 percent of the standardized amount, and to apply wage indexes less than or equal to 1.0 to 62 percent of the standardized amount.

IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

A. Postacute Care Transfer Payment Policy (Sec. 412.4)

[If you choose to comment on issues in this section, please include the caption ``Postacute Care Transfers'' at the beginning of your document.]

1. Background

Existing regulations at Sec. 412.4(a) define discharges under the IPPS as situations in which a patient is formally released from an acute care hospital or dies in the hospital. Section 412.4(b) defines transfers from one acute care hospital to another, and Sec. 412.4(c) defines transfers to certain postacute care providers. Our policy provides that, in transfer situations, full payment is made to the final discharging hospital and each transferring hospital is paid a per diem rate for each day of the stay, not to exceed the full DRG payment that would have been made if the patient had been discharged without being transferred.

The per diem rate paid to a transferring hospital is calculated by dividing the full DRG payment by the geometric mean length of stay for the DRG. Based on an analysis that showed that the first day of hospitalization is the most expensive (60 FR 45804), our policy provides for payment that is double the per diem amount for the first day (Sec. 412.4(f)(1)). Transfer cases are also eligible for outlier payments. The outlier threshold for transfer cases is equal to the fixed-loss outlier threshold for nontransfer cases, divided by the geometric mean length of stay for the DRG, multiplied by the length of stay for the case, plus one day.

Medicare adopted its IPPS transfer policy because, if the program were to pay the full DRG payment regardless of

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whether a patient is transferred or discharged, there would be a strong incentive for hospitals to transfer patients to another IPPS hospital early in the patients' stay in order to minimize costs while still receiving the full DRG payment. The transfer policy adjusts the payments to approximate the reduced costs of transfer cases.

Previously, when a patient chose to depart from a hospital against the medical opinion of treating physicians, the case was treated as a left against medical advice (LAMA) discharge and coded as discharge status ``07-Left Against Medical Advice (LAMA)'' on the inpatient billing claim form. Because, by definition, LAMA discharges were assumed not to involve the active participation of the hospital administration, our policy had been to treat LAMA cases as discharges. This policy applied even if the patient was admitted to another hospital on the date of the LAMA discharge. Consequently, until FY 2004, we made a full DRG payment for any discharge coded as a LAMA case.

Last year, in response to an Office of Inspector General (OIG) report issued in March 2002 (A-06-99-00045), we became concerned that some hospitals were incorrectly coding transfers as LAMA cases. Therefore, in the August 1, 2003 final IPPS rule (68 FR 45405), we expanded our definition of a transfer under Sec. 412.4(b) to include all patients who are admitted to another IPPS hospital on the same day that the patient is discharged from an IPPS hospital, unless the first (transferring) hospital can demonstrate that the patient's treatment was completed at the time of discharge from that hospital. In other words, unless the same-day readmission is to treat a condition that is unrelated to the condition treated during the original admission (for example, the beneficiary is in a car accident later that day), any situation where the beneficiary is admitted to another IPPS hospital on the same date that he or she is discharged from an IPPS hospital would be considered a transfer, even if the patient left against medical advice from the first hospital.

Hospitals are now allowed to report a patient as left against medical advice only if they have no knowledge that the patient has been admitted to another hospital on the same day. If a hospital later leans that a patient was admitted to another facility on the same day, the hospital must resubmit the claim and correctly code the patient as a ``transfer.'' This change prohibits payment of two claims for the same patient on the same day. Therefore, if a hospital believes a claim has been wrongly denied, the original discharging hospital must resubmit the claim with documentation that the discharge was appropriate and unrelated to the subsequent same-day admission. 2. Proposed Changes to DRGs Subject to the Postacute Care Transfer Policy (Sec. Sec. 412.4(c) and (d))

Under section 1886(d)(5)(J) of the Act, a ``qualified discharge'' from one of 10 DRGs selected by the Secretary to a postacute care provider is treated as a transfer case beginning with discharges on or after October 1, 1998. This section required the Secretary to define and pay as transfers all cases assigned to one of 10 DRGs selected by the Secretary, if the individuals are discharged to one of the following postacute care settings:

A hospital or hospital unit that is not a subsection 1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the hospitals and hospital units that are excluded from the term ``subsection (d) hospital'' as psychiatric hospitals and units, rehabilitation hospitals and units, children's hospitals, long-term care hospitals, and cancer hospitals.)

A SNF (as defined at section 1819(a) of the Act).

Home health services provided by a home health agency, if the services relate to the condition or diagnosis for which the individual received inpatient hospital services, and if the home health services are provided within an appropriate period (as determined by the Secretary).

In the July 31, 1998 IPPS final rule (63 FR 40975 through 40976), we specified the appropriate time period during which we would consider a discharge to postacute home health services to constitute a transfer as within 3 days after the date of discharge. In addition, in the July 31, 1998 final rule, we did not include in the definition of postacute care transfer cases patients transferred to a swing-bed for skilled nursing care (63 FR 40977).

Section 1886(d)(5)(J) of the Act directed the Secretary to select 10 DRGs based upon a high volume of discharges to postacute care and a disproportionate use of postacute care services. As discussed in the July 31, 1998 final rule, these 10 DRGs were selected in 1998 based on the MedPAR data from FY 1996. Using that information, we identified and selected the first 20 DRGs that had the largest proportion of discharges to postacute care (and at least 14,000 such transfer cases). In order to select 10 DRGs from the 20 DRGs on our list, we considered the volume and percentage of discharges to postacute care that occurred before the mean length of stay and whether the discharges occurring early in the stay were more likely to receive postacute care. We identified 10 DRGs to be subject to the postacute care transfer rule starting in FY 1999.

Section 1886(d)(5)(J)(iv) of the Act authorizes the Secretary to expand the postacute care transfer policy beyond 10 DRGs for FY 2001 or subsequent fiscal years. In the FY 2004 IPPS final rule (68 FR 45412), we expanded the postacute care transfer policy to include additional DRGs. We established the following criteria that a DRG must meet, for both of the 2 most recent years for which data are available, in order to be added to the postacute care transfer policy:

At least 14,000 postacute care transfer cases;

At least 10 percent of its postacute care transfers occurring before the geometric mean length of stay;

A geometric mean length of stay of at least 3 days; and

If a DRG is not already included in the policy, a decline in its geometric mean length of stay during the most recent 5 year period of at least 7 percent.

We identified 21 new DRGs that met these criteria. We also determined that one DRG from the original group of 10 DRGs (DRG 263) no longer met the volume criterion of 14,000 transfer cases. Therefore, we removed DRGs 263 and 264 (DRG 264 is paired with DRG 263) from the policy and the postacute care transfer policy to include payments for transfer cases in the new 21 DRGs, effective October 1, 2003. As a result, a total of 29 DRGs were subject to the postacute care transfer policy in FY 2004.

We indicated in last year's rule that we would review and update this list periodically to assess whether additional DRGs should be added or existing DRGs should be removed. We have analyzed the available data from the FY 2003 MedPAR file. For the 2 most recent years of available data (FY 2002 and FY 2003), we have found that no additional DRGs qualify under the four criteria set forth in the IPPS final rule for FY 2004. We have also analyzed the DRGs included under the policy for FY 2004 to determine if they still meet the criteria to remain under the policy. In addition, we have analyzed the special circumstances arising from a change to one of the DRGs included under the policy in FY 2004.

As discussed in section II.B.9. of this preamble, we are proposing to eliminate DRG 483. The cases that would have been placed into DRG 483 would now be split into two proposed new DRGs, 541 (Tracheostomy With Mechanical

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Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major O.R. Procedure) and 542 (Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses Without Major O.R. Procedure). This would be done by subdividing the cases in the existing DRG 483 based on the presence of a major O.R. procedure, in addition to the tracheotomy code that is currently required to be assigned to this DRG. Therefore, if the patient's case involves a major O.R. procedure (a procedure whose code is included on the list that is assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), except for tracheostomy codes 31.21 and 31.29), the case would be assigned to the proposed new DRG 541. If the patient does not have an additional major O.R. procedure (that is, there is only a tracheotomy code assigned to the case), the case would be assigned to proposed new DRG 542.

Neither of the proposed new DRGs 541 and 542 would have enough cases to meet the first criterion for inclusion in the postacute care transfer policy. DRG 483 had 44,788 total cases with 15,520 transfer cases in FY 2002, and 44,618 total cases with 20,034 transfer cases in FY 2003. These cases would now split between proposed new DRG 541 (20,812 total cases) and proposed new DRG 542 (23,387 total cases). As a result, neither of these proposed new DRGs would meet the existing threshold of 14,000 transfer cases (6,779 projected transfer cases for proposed DRG 541, and 8,570 projected transfer cases for proposed DRG 542). Nevertheless, we believe the cases that would now be incorporated into these two proposed new DRGs remain appropriate candidates for application of the postacute care transfer policy. The proposed new DRGs 541 and 542 would contain the same cases that were included in existing DRG 483, which qualified for inclusion in the postacute care transfer policy. Furthermore, many of the cases in the proposed new DRGs 541 and 542 would continue to require postacute care.

When we analyzed the cases that we projected would fall into the two proposed new DRGs in the FY 2003 GROUPER Version 22.0, we found that a high proportion of cases in both the proposed new DRGs are projected to be transfer cases: 33 percent of all cases in proposed DRG 541, and 37 percent in proposed DRG 542. In addition, a high proportion of the transfer cases in these proposed new DRGs, based on the data from cases in DRG 483 in the FY 2003 MedPAR file, are projected to fall into the short-stay transfer category: 41 percent of transfer cases in proposed new DRG 541 and 42 percent of transfer cases in proposed new DRG 542 are projected to occur before the geometric mean length of stay for these proposed new DRGs. By contrast, among all DRGs, approximately 15 percent of transfer cases are short-stay transfer cases. The percentage of transfer cases that are short-stay cases that would be in both proposed new DRGs 541 and 542 would be more than 2 standard deviations above the mean percentage of short-stay cases across all DRGs. (Two standard deviations above the mean across all DRGs is 37 percent for FY 2005.) Therefore, we believe this proposed subdivision of DRG 483 should not change the original application of the postacute care transfer policy to the cases once included in that DRG. We do not believe that it is appropriate for these cases to fall outside the scope of this policy solely because of the proposed revision to the DRG structure that was driven by policy reasons unrelated to the postacute care transfer provision. The high proportion of transfer cases among all cases that would be assigned to these proposed new DRGs, along with the unusually high proportion of short-stay cases among those transfer cases, provide solid reasons for considering whether alternate criteria might better address the special circumstances that can arise from changes in DRGs unrelated to the postacute care transfer policy.

Therefore, we are proposing alternate criteria to be applied in cases where DRGs do not satisfy the existing criteria, for discharges occurring on or after October 1, 2004. These proposed new criteria are designed to address situations such as those posed by the proposed split of DRG 483, where there remain substantial grounds for inclusion of cases within the postacute care transfer policy, although one or more of the original criteria may no longer apply. Therefore, we are proposing to examine DRGs for inclusion within the policy against two sets of criteria, first, the original four criteria, and then, the proposed alternate set of criteria. DRGs that do not satisfy the first set of criteria would still be included if they satisfy the second set. Specifically, a DRG would still be subject to the postacute care transfer policy under the alternative set of criteria if, for the 2 most recent years for which data are available, there are at least 5,000 total transfers to postacute care among the cases included in the DRG, and if, among the cases included in the DRG, the percentage of transfer cases that are short-stay transfer cases is at least 2 standard deviations above the geometric mean length of stay across all DRGs (which is 37 percent for FY 2005). We would also continue to require a geometric mean length of stay of at least 3 days among the cases included in the DRG. Finally, we would require that, if a DRG is not already included in the policy, it either experienced a decline in its geometric mean length of stay during the most recent 5 year period of at least 7 percent or contains only cases that would have been included in a DRG to which the policy applied in the prior year.

Under these proposed alternate criteria, DRGs 430, 541, and 542 would qualify for inclusion in the postacute care transfer policy. DRG 430 meets the proposed threshold of 5,000 transfer cases in both of the 2 most recent years, with 11,973 transfer cases and 46 percent short- stay transfer cases in FY 2002, and 12,202 transfer cases and 38 percent short-stay transfers in FY 2003. In addition, DRG 430 experienced a 7-percent decline in length of stay from FY 2000 to FY 2004. DRG 430 also had a 5.8 day average length of stay during those years. As discussed above, the cases that would be included in proposed new DRGs 541 and 542 contain a sufficient number of transfers to meet the first alternate criterion, and among the cases that would be included in these DRGs, the percentages of transfer cases occurring before the geometric mean length of stay for these two proposed new DRGs exceed 2 standard deviations above the geometric mean length of stay for all DRGs. The average lengths of stay for the cases that would be included in proposed new DRGs 541 and 542 are 37.7 days and 28.9 days, respectively.

We are proposing to revise the regulations governing the postacute transfer policy to include the alternative criteria described above (Sec. 412.4(d)). We are also proposing that DRG 430 and proposed new DRGs 541 and 542 would be included in the postacute care transfer policy.

We would also like to call attention to the data concerning DRG 263, which was subject to the postacute care transfer policy until FY 2004. We removed DRG 263 from the postacute care transfer policy last year because it did not have the minimum number of cases (14,000) transferred to postacute care (13,588 transfer cases in FY 2002, with more than 50 percent of transfer cases being short-stay transfers). The FY 2003 MedPAR data show that there were 15,602 transfer cases in the DRG in FY 2003, of which 46 percent were short-stay transfers. Because we

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removed the DRG from the postacute care transfer policy in FY 2004, it must meet all criteria to be included under the policy in subsequent fiscal years. Because the geometric mean length of stay for DRG 263 shows only a 6-percent decrease since 1999, DRG 263 does not qualify to be added to the policy for FY 2005 under the existing criterion that was included in last year's rule. However, DRG 263 would qualify under the volume threshold and percent of short-stay transfer cases under the proposed new alternate criteria in this proposed rule, but it still does not meet the proposed required decline in length of stay to qualify to be added to the policy in FY 2005.

The table below displays the 31 DRGs that we are proposing to include in the postacute care transfer policy, effective for discharges occurring on or after October 1, 2004. These 31 DRGs include the effects of dropping DRG 483, which we are proposing to delete from the DRG list, and adding the two proposed new DRGs 541 and 542 that would now incorporate the cases formerly assigned to DRG 483. They also include the proposed addition of DRG 430 to the list. These DRGs meet the criteria specified above during both of the 2 most recent years available prior to the publication of the FY 2005 IPPS proposed rule (FYs 2002 and 2003), as well as their paired-DRG if one of the DRGs meeting the criteria includes a CC/no-CC split.

DRG

DRG title.

12................................ Degenerative Nervous System Disorders. 14................................ Intracranial Hemorrhage and Stroke with Infarction. 24................................ Seizure and Headache Age > 17 With CC. 25................................ Seizure and Headache Age > 17 Without CC. 88................................ Chronic Obstructive Pulmonary Disease. 89................................ Simple Pneumonia and Pleurisy Age > 17 With CC. 90................................ Simple Pneumonia and Pleurisy Age > 17 Without CC. 113............................... Amputation for Circulatory System Disorders Except Upper Limb and Toe. 121............................... Circulatory Disorders With AMI and Major Complication, Discharged Alive. 122............................... Circulatory Disorders With AMI Without Major Complications Discharged Alive. 127............................... Heart Failure & Shock. 130............................... Peripheral Vascular Disorders With CC. 131............................... Peripheral Vascular Disorders Without CC. 209............................... Major Joint and Limb Reattachment Procedures of Lower Extremity. 210............................... Hip and Femur Procedures Except Major Joint Age > 17 With CC. 211............................... Hip and Femur Procedures Except Major Joint Age > 17 Without CC. 236............................... Fractures of Hip and Pelvis. 239............................... Pathological Fractures and Musculoskeletal and Connective Tissue Malignancy. 277............................... Cellulitis Age > 17 With CC. 278............................... Cellulitis Age > 17 Without CC. 294............................... Diabetes Age > 35. 296............................... Nutritional and Miscellaneous Metabolic Disorders Age > 17 With CC. 297............................... Nutritional and Miscellaneous Metabolic Disorders Age > 17 Without CC. 320............................... Kidney and Urinary Tract Infections Age > 17 With CC. 321............................... Kidney and Urinary Tract Infections Age > 17 Without CC. 395............................... Red Blood Cell Disorders Age > 17. 429............................... Organic Disturbances and Mental Retardation. 430............................... Psychoses. 468............................... Extensive O.R. Procedure Unrelated to Principal Diagnosis. Proposed 541...................... Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major O.R. Procedure. Proposed 542...................... Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses Without Major O.R. Procedure.

Section 1886(d)(5)(J)(i) of the Act recognizes that, in some cases, a substantial portion of the costs of care is incurred in the early days of the inpatient stay. Similar to the policy for transfers between two acute care hospitals, the transferring hospital in a postacute care transfer receives twice the per diem rate for the first day of treatment and the per diem rate for each following day of the stay before the transfer, up to the full DRG payment. However, three of the DRGs subject to the postacute care transfer policy exhibit a disproportionate share of costs very early in the hospital stay in postacute care transfer situations. For these DRGs, hospitals receive 50 percent of the full DRG payment plus the single per diem (rather than double the per diem) for the first day of the stay and 50 percent of the per diem for the remaining days of the stay, up to the full DRG payment.

In previous years, we determined that DRGs 209 and 211 met this cost threshold and qualified to receive this special payment methodology. Because DRG 210 is paired with DRG 211, we include payment for cases in that DRG for the same reason we include paired DRGs in the postacute care transfer policy (to eliminate any incentive to code incorrectly in order to receive higher payment for those cases). The FY 2003 MedPAR data show that DRGs 209 and 211 continue to have charges on the first day of the stay that are higher than 50 percent of the average charges in the DRGs. Therefore, we are proposing to continue the special payment methodology for DRGs 209, 210, and 211 for FY 2005.

B. Payments for Inpatient Care in Providers That Change Classification Status During a Patient Stay (Sec. Sec. 412.2(b)(3) and 412.521(e))

[If you choose to comment on issues in this section, please include the caption ``Crossover Patients'' at the beginning of your document.]

Different Medicare payment systems apply to care furnished to Medicare beneficiaries during inpatient stays, depending on the classification status of the provider. For example, payments made to an acute care hospital for inpatient services are made under the IPPS on a per discharge basis, using a

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DRG classification system. Payments to LTCHs that are classified under section 1886(d)(1)(B)(iv)(I) and (II) of the Act are made under the LTCH PPS on a per discharge basis, using a LTC-DRG classification system. The main difference between a LTCH that is classified under section 1886(d)(1)(B)(iv)(I) of the Act and an acute care hospital is the average length of stay at the hospital. Specifically, section 1886(d)(1)(B)(iv)(I) hospitals must have a greater than 25 day average Medicare inpatient length of stay. (section 1886(d)(1)(B)(iv)(II) hospitals, among other requirements, must have a greater than 20 day Medicare and non-Medicare inpatient length of stay to qualify as LTCHs.) Situations occur in hospital inpatient care settings in which a Medicare provider changes its Medicare payment classification status during a patient's stay, for example, an acute care hospital changes to a LTCH. (We refer to the patients in these situations as ``crossover patients.'')

Questions have arisen as to how Medicare should pay for an inpatient stay in a hospital when the hospital changes its classification status during the course of the beneficiary's single hospital stay. Specifically, how should Medicare pay for an inpatient stay when a patient is in an acute care hospital and the acute care hospital changes to a LTCH during the beneficiary's hospitalization. In other words, how does Medicare pay for the first part of the stay that occurs before the change in classification status and how does Medicare pay for the part of the stay that occurs after the change in classification status. Although the situation may occur in other settings, this payment issue is most prevalent for services furnished to crossover patients in a newly established LTCH. This is because all new LTCHs begin as other provider types, generally as acute care hospitals, and generally after at least 5 months of experience showing an average length of stay in excess of 25 days, and are then paid as LTCHs. Therefore, as explained further below, we are currently addressing this problem in the context of crossover patients discharged from LTCHs.

To address payment for inpatient care for such crossover patients, we had issued instructions for hospital billing purposes (paper-based manual, Hospital Manual, HCFA Pub. 10, section 404, which has been replaced by the Medicare Claims Processing Manual, Pub. 100-4, Chapter 3, section 100.4.1) that were in effect prior to the implementation of the PPS for LTCHs (that is, prior to October 1, 2002). The manual instructed hospitals as follows: ``The hospital must submit a discharge bill with the old provider number and an admission notice with the new provider number. The date of discharge and the date of admission are the same date, which is the first day of the new fiscal period. All subsequent billings are submitted under the new provider number.''

It is important to note that at the time this manual provision was written, IPPS-excluded hospitals, including LTCHs, were reimbursed under the reasonable cost-based (TEFRA) payment system, not under other PPSs that pay on a per discharge basis. Thus, under the manual instructions, if a patient was in an acute care hospital and the hospital converted to a LTCH during the patient's stay, Medicare would then make payment for what was, in reality, only one episode of care as if it were two episodes. Specifically, the days of the stay while the facility was certified as an acute care hospital generate a full DRG payment under the IPPS; and the services provided from the time the facility was certified as a LTCH were reimbursed under the reasonable cost-based payment system. We are proposing to revisit the issue of Medicare payment for crossover patients now that there has been a fundamental change in the Medicare payment system for LTCHs. LTCHs are now paid under the discharge-based LTCH PPS which was effective for LTCHs for cost reporting periods beginning on or after October 1, 2002.

Under the LTCH PPS for crossover patients, under the existing manual instructions, Medicare makes a full DRG payment under the IPPS to the acute care hospital for the ``first portion'' of the inpatient stay, and when the acute care hospital converts to an LTCH, Medicare makes a second PPS payment under the LTCH PPS for the ``second portion'' of the stay. We believe that this results in excessive Medicare payments and results in the inappropriate use of the Medicare Trust Fund. We believe the results described above are contrary to a basic premise of a PPS, which is that a single discharge-based PPS payment is adequate and appropriate reimbursement for the entire bundle of services that a hospital provides during the course of a patient's stay. We believe the care provided prior to and after the conversion to a LTCH is really one bundle of services provided during a single hospitalization. The ``discharge'' from the acute care hospital and ``admission'' to the LTCH has only been a ``paper discharge'' that was triggered solely by a change in the Medicare payment classification of the hospital treating the inpatient. In the instant case, the beneficiary, by mere coincidence, just happened to be an inpatient of the acute care hospital when it changed status--the acute care hospital does not drastically change the medical care it provides a beneficiary during his or her single hospitalization because its classification as an acute care hospital ends on one day and changes to LTCH classification on the next day, nor does the ``discharge'' signify the completion of a discrete period of care. Under the existing manual instructions, the hospital is receiving not one payment, but two PPS payments for a bundle of services that, in fact, was furnished during a single inpatient hospital stay and should have been adequately and properly reimbursed by a single PPS payment.

In addition, presently, if the DRG assigned to the ``discharge'' from the acute care hospital for a crossover patient falls within one of the DRGs covered by the postacute care transfer policy at Sec. 412.4(c), the provider will receive a payment under the postacute care transfer policy as if the patient, who in fact has not moved, was transferred to a postacute care provider. Payment under the postacute care transfer policy is triggered when a discharge bill with the old provider number and an admission notice with the new provider number is submitted and processed by the Medicare standard bill processing systems as a transfer. Because the patient is, in reality, at the ``same'' facility (an acute care hospital that had met the LTCH designation criteria) and is in one episode of care, we do not believe the application of the existing transfer policy is the appropriate methodology for dealing with this situation. Under the postacute care transfer policy, the payment to the transferring hospital is only affected if the patient is discharged prior to the day before the geometric mean length of stay for the DRG. Where the patient is discharged by the day before the geometric mean length of stay, the ``discharging'' acute care hospital will receive the equivalent of the full IPPS DRG payment and the LTCH hospital will also receive a full LTCH PPS payment.

Accordingly, we are proposing to revise our regulations to provide for only one Medicare program payment for LTCH crossover patients. After reconsidering the current payment policy for crossover patients, we do not believe it is appropriate to make two separate discharge- based payments under Medicare for what, in reality, is a single inpatient hospital stay. In fact, when a patient under existing policy is deemed discharged from an acute care

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hospital that has met the LTCH designation requirements during the patient's stay and has now changed its classification to LTCH status, we believe the patient has been receiving one consistent course of treatment throughout his or her stay. An acute care hospital that has become a LTCH prior to being paid as a LTCH has been admitting and treating patients with the multi-cormorbidities that result in longer hospital stays that are characteristic of the patient census at a LTCH, as required by Sec. 412.23(e). Invariably, at the time the acute care hospital becomes a LTCH, there will be patients who were admitted to the acute care hospital and who remain in the facility when it converts to a LTCH and are ultimately discharged from the LTCH. An acute care hospital's change in payment classification status to a LTCH at the start of its first cost reporting period should have no impact on the course of treatment that is already underway for the patient in what is now a LTCH and not an acute care hospital. Accordingly, we believe that only one Medicare payment should be made for the entire stay.

Therefore, we are proposing a more appropriate payment policy for crossover patients that would provide one Medicare payment for what has been treated, for payment purposes under Medicare, to be two stays, but is, in reality, one continuous and uninterrupted period of inpatient hospital care. Consistent with the authority granted to the Secretary in both section 123 of the BBRA (Pub. L. 106-113) and section 307 of the BIPA (Pub. L. 106-554) to develop a LTCH PPS DRG-based system, we are proposing, effective for a patient stay in which a patient is in an acute care hospital and that hospital is designated as a LTCH on or after October 1, 2004, to make only one LTCH payment based on the PPS of the facility that is actually discharging the patient. Under this approach, we would include those days of care and costs incurred by the hospital for the crossover patient before the facility met the LTCH status criteria, in determining payments to the LTCH for that patient under the LTCH PPS. Under this proposed policy, for example, if an acute care hospital admits a patient on December 28 and the hospital converts to a LTCH on January 1 when its cost reporting period begins, and the patient is physically discharged from the LTCH on February 5, a single Medicare payment would be made for this entire stay (December 28 through February 5), and payment would be made to the LTCH based on the LTCH-DRGs under the LTCH PPS. We are proposing to count the crossover patient's entire hospitalization (that is, all days and costs of the patient stay in the facility that occurred prior to and after conversion) in determining the applicable payment under the LTCH PPS. This proposed provision would also count all the days of the inpatient stay, that is, prior to and after conversion, as LTCH days for purposes of determining whether the facility continues to meet the average length of stay regulations for LTCH. We believe that this proposed policy is consistent with the discretionary authority granted to the Secretary at section 1886(d)(1)(B)(iv)(I) of the Act for determining average lengths of stay for LTCHs. Specifically, section 1886(d)(1)(B)(iv)(I) of the Act provides that a LTCH is a hospital that has an average length of stay (as determined by the Secretary) of greater than 25 days. Thus, the Secretary determines how a LTCH's average length of stay is to be determined.

We are also using the broad discretionary authority provided in section 1871 of the Act to not count the days of the patient's stay in the acute care hospital prior to conversion as acute care days. In addition, we are using the broad authority in section 1871 of the Act to not pay for the days of the patient's stay in the acute care hospital as acute days. Section 1871 of the Act authorizes the Secretary to promulgate regulations that are necessary to carry on the administration of the Medicare program.

In addition, we believe counting all days for the patient's stay is consistent with the policy at recently revised Sec. 412.23(e)(3), which provides that if a LTCH patient is admitted in one cost reporting period and discharged in a second cost reporting period, all of the days of the patient's stay, even those from prior fiscal years, are counted in the cost reporting period in which the patient is discharged. In the example of a crossover patient cited above, including the days in December may result in a full LTC-DRG payment rather than the lower payment under the short-stay outlier policy (Sec. 412.529) based on the length of the stay. (Under the short-stay policy, we would adjust (lower) the Federal prospective payment if the payment is for a length of stay that is up to and including five-sixths of the geometric average length of stay for the LTC-DRG assigned to the case.)

Accordingly, we are proposing to add a new Sec. 412.2(b)(3), applicable to acute care hospitals, and a new Sec. 412.521(e), applicable to LTCHs, that specify that Medicare would make only one LTCH PPS payment for a crossover patient to the LTCH that is discharging the patient based on the entire stay, both prior to the change to LTCH status and after the change. Medicare considers all days of the patient stay in the facility (days prior to and after conversion to the LTCH status) to be a single episode of LTCH care. Medicare will not make any payment under 42 CFR Part 412, Subpart H for any part of the hospitalization. In addition, for purposes of determining the beneficiary LTCH length of stay, the days prior to and after conversion to LTCH status are included. In order to implement the proposed policy, we would create systems adjustments that would enable the single claim generated by the discharging provider to include patient days under the initial provider number. We note that our proposal to define and pay for crossover patient stays as one episode of care based on the PPS of the discharging provider is consistent with existing regulations that establish that payment under the per discharge PPS constitutes ``payment in full'' for acute care hospitals at Sec. 412.2(b) under the IPPS and for LTCHs, at Sec. 412.521(b) under the LTCH PPS.

In this proposal, we have specifically addressed only the situation of a crossover patient that was in an acute care hospital that meets the requirements to be paid as a LTCH. However, we believe the policy may be equally applicable to other crossover situations. For example, an acute care hospital may meet the requirements to be paid as an inpatient rehabilitation facility (under the IRF PPS) and there could be rehabilitation patients who were admitted to the acute care hospital who were not discharged from the hospital until after the facility was designated as an IRF. At this time, we are not proposing to make a change to the existing payment policy in situations other than the LTCH crossover patient. We have only addressed the LTCH crossover patient because, based on the statutory and regulatory qualifying criteria, every LTCH must first be certified as a hospital before it can meet the LTCH criteria. However, the same is not true for other hospital certifications. For example, an inpatient rehabilitation hospital can be certified as an IRF without first being certified and paid as an acute care hospital for inpatient services. However, we intend to revisit the existing crossover policy as it affects other crossover situations in the future. We also welcome comments on how Medicare payment policy should address those situations.

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C. Geographic Reclassifications--Definitions of Urban and Rural Areas (Sec. 412.63(b) and Proposed New Sec. 412.64(b))

[If you choose to comment on issues in this section, please include the caption ``Urban and Rural Areas Definitions'' at the beginning of your document.]

As discussed in section III.B. and III.G. of this proposed rule, we are proposing how we would implement OMB's revised standards for defining MSAs and our plan to use the New England MSAs established by OMB. These proposals relate to our policies in established regulations under Sec. 412.63(b) governing geographic classification of hospitals for purposes of the wage index and the standardized amounts in determining the Federal rates for inpatient operating costs. In this section, we define the geographic areas for purposes of reclassification of hospitals. Therefore, consistent with our proposed changes to reflect the new definitions of CBSAs based on the Census 2000 data, effective for discharges occurring on or after October 1, 2004, we are proposing to revise Sec. 412.63(b) and add a new Sec. 412.64(b) to reflect the existing geographic classification definitions.

D. Equalization of Urban and Rural Standardized Amounts (Sec. 412.63(c) and Proposed New Sec. 412.64)

[If you choose to comment on issues in this section, please include the caption ``Standardized Amounts'' at the beginning of your document.]

Sections 1886(d)(2)(D) and (d)(3) of the Act previously required the Secretary to compute two average standardized amounts for discharges occurring in a fiscal year: one for hospitals located in large urban areas and one for hospitals located in other areas. In addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the Act, the average standardized amount per discharge was determined for hospitals located in large urban and other areas in Puerto Rico. In accordance with section 1886(b)(3)(B)(i) of the Act, prior to April 1, 2003, the large urban average standardized amount was 1.6 percent higher than the other area average standardized amount. The two standardized amounts are currently equal, as discussed in the following paragraphs.

Section 402(b) of Pub. L. 108-7 required that, effective for discharges occurring on or after April 1, 2003, and before October 1, 2003, the Federal rate for all IPPS hospitals would be based on the large urban standardized amount. Subsequently, Pub. L. 108-89 extended section 402(b) of Pub. L. 108-7 to discharges occurring on or after October 1, 2003, and before April 1, 2004. Finally, section 401(a) of Pub. L. 108-173 required that, beginning with FY 2004 and thereafter, an equal standardized amount is to be computed for all hospitals at the level computed for large urban hospitals during FY 2003, updated by the applicable percentage update. This provision in effect makes permanent the equalization of the standardized amounts at the level of the previous standardized amount for large urban hospitals. Section 401(c) also equalizes the Puerto Rico-specific urban and other area rates.

Accordingly, we are providing in this proposed rule for a single national standardized amount and a single Puerto Rico standardized amount for FY 2005 and thereafter, as discussed in detail in the Addendum to this proposed rule. We are proposing to revise existing Sec. 412.63 that includes the provisions related to computation of the standardized amount to make it applicable to fiscal years through FY 2004 and to establish a new Sec. 412.64 that will include the provisions applicable to the single national standardized amount applicable for FY 2005 and subsequent years. Similarly, we are proposing to revise existing Sec. 412.210 for Puerto Rico to make it applicable to fiscal years through FY 2004 and adding a new Sec. 412.211 for FY 2005 and subsequent years for the Puerto Rico standardized amount. We are also proposing to make conforming changes to various other sections of the regulations to reflect the single standardized amount for the States and for Puerto Rico.

E. Reporting of Hospital Quality Data for Annual Hospital Payment Update (Proposed New Sec. 412.64(d))

[If you choose to comment on issues in this section, please include the caption ``Hospital Quality Data'' at the beginning of your document.]

1. Background

Section 501(b) of Pub. L. 108-173 amended section 1886(b)(3)(B) of the Act to add a new subclause (vii) to revise the mechanism used to update the standardized amount for payment for inpatient hospital operating costs. Specifically, the amendment provides that the update percentage increase (also known as the market basket update) for each of FYs 2005 through 2007 will be reduced by 0.4 percentage point for any ``subsection (d) hospital'' that does not submit data on a set of 10 quality indicators established by the Secretary as of November 1, 2003. (The statutory reference to a ``subsection (d) hospital'' restricts the application of this provision to hospitals paid under the IPPS. Therefore, the provision does not apply to hospitals and hospital units excluded from the IPPS, nor to payments to hospitals under other systems such as the outpatient hospital PPS.) The statute also provides that any reduction will apply only to the fiscal year involved, and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. This measure establishes an incentive for IPPS hospitals to submit data on the quality measures established by the Secretary.

We are proposing to implement the provisions of section 501(b) as described at the CMS Web site: http://www.cms.hhs.gov/quality/hospital.

At a press conference on December 12, 2002, the Secretary of HHS announced a series of steps that HHS and its collaborators are taking for public reporting of hospital quality information. These collaborators include the American Hospital Association, the Federation of American Hospitals, the Association of American Medical Colleges, the Joint Commission on Accreditation of Healthcare Organizations, the National Quality Forum, the American Medical Association, the Consumer- Purchaser Disclosure Project, the American Association of Retired Persons, the American Federation of Labor-Congress of Industrial Organizations and the Agency for Healthcare Research and Quality, as well as CMS, QIOs, and others.

CMS began the public reporting initiative in July 2003 with a professional Web site that provides data intended for health care professionals. The professional Web site will be followed by a consumer Web site. The information on the consumer Web site will include the data from the professional Web site but in an easy-to-use format for consumers. It is intended to be an important tool for individuals to use in making decisions about their health care coverage. This information will assist beneficiaries by providing comparison information for consumers who need to select a hospital. It will also serve as a way of encouraging hospitals to adopt quality improvement strategies.

The 10 measures that were employed in this voluntary initiative as of November 1, 2003, are:

Heart Attack (Acute Myocardial Infarction)

Was aspirin given to the patient upon arrival to the hospital?

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Was aspirin prescribed when the patient was discharged?

Was a beta-blocker given to the patient upon arrival to the hospital?

Was a beta-blocker prescribed when the patient was discharged?

Was an ACE inhibitor given for the patient with heart failure? Heart Failure

Did the patient get an assessment of his or her heart function?

Was an ACE inhibitor given to the patient? Pneumonia

Was an antibiotic given to the patient in a timely way?

Had a patient received a pneumococcal vaccination?

Was the patient's oxygen level assessed?

These measures have been endorsed by the National Quality Forum (NQF) and are a subset of the same measures currently collected for the JCAHO by its accredited hospitals. Many hospitals are currently participating in the Department's National Voluntary Hospital Reporting Initiative (NVHRI) and are already submitting data to the QIO Clinical Warehouse. The Secretary adopted collection of data on these 10 quality measures in order to: (1) Provide useful and valid information about hospital quality to the public; (2) provide hospitals a sense of predictability about public reporting expectations; (3) begin to standardize data and data collection mechanisms; and (4) foster hospital quality improvement. 2. Requirements for Hospital Reporting of Quality Data

For the hospital reporting initiative for the Medicare annual payment update provided for under section 501(b) of Public Law 108-173, we will be collecting data on the 10 clinical measures for all patients. We refer to this program as the Reporting Hospital Quality Data for the Annual Payment Update (RHQDAPU) program to distinguish it from the continuing NVHRI.

The procedures for participating in the RHQDAPU can be found on the QualityNet Exchange at the Web site: http://qnetexchange.org in the

``Reporting Hospital Quality Data for Annual Payment Update Reference Checklist.'' This checklist also contains all of the forms to be completed by hospitals participating in the program. In order to participate in the RHQDAPU, hospitals must follow the following steps:

The hospital must identify a QualityNet Exchange administrator who follows the registration process and submits the information through the QIO. This must be done, regardless of whether the hospital uses a vendor for transmission of data.

All participants must first register with the QualityNet Exchange, regardless of the method used for data submission. If a hospital is currently participating in the voluntary reporting initiative, re-registration on the QualityNet Exchange is unnecessary. However, registration includes completion of the RHQDAPU Notice of Participation form. All hospitals must send the RHQDAPU form to their QIOs no later than August 1, 2004, for the FY 2005 update.

The hospital must collect data for all 10 measures and submit the data to the QIO Clinical Warehouse either using the CMS Abstraction & Reporting Tool (CART), the JCAHO Oryx Core Measures Performance Measurement System (PMS), or another third-party vendor who has met the measurement specification requirements for data transmission to the QualityNet Exchange. The QIO Clinical Warehouse will submit the data to CMS on behalf of the hospitals. The submission will be done through QualityNet Exchange, which is a secure site that voluntarily meets or exceeds all current Health Insurance Portability and Accountability Act (HIPAA) requirements, while maintaining QIO confidentiality as required by law. The information in the Clinical Warehouse is considered QIO data, and therefore, is subject to the stringent confidentiality regulations in 42 CFR part 480.

Hospitals must begin the submission of data under the provisions of section 1886(b)(3)(B)(vii)(II) of the Act, as added by section 501(b) of Public Law 108-173, by July 1, 2004. Because section 501(b) of Public Law 108-173 grants a 30-day grace period for submission of data with respect to FY 2005, we are proposing to allow hospitals until August 1, 2004, for completed submissions to be successfully accepted into the QIO Clinical Warehouse. Hospitals would be required to submit data for the first calendar quarter of 2004 discharges in order to meet the requirements for the FY 2005 payment update. Hospitals participating in the NVHRI that submit the required 10 measures for the fourth calendar quarter of 2003 by the CMS-established deadline of May 15, 2004, and that meet the registration requirements for the market basket update, would be given until August 15, 2004, to submit data for the first calendar quarter of 2004. There will be no chart-audit validation criteria in place for the FY 2005 payment update beyond the CART edits, currently in force, applied to data entering the QIO Clinical Warehouse. In addition, we will estimate the minimum number of discharges anticipated to be submitted by a hospital using Medicare administrative data. We will use this anticipated minimum number to establish our expectations of the number of cases for each hospital. Hospitals that do not treat a condition or have very few discharges would not be penalized and would receive the full annual payment update if they submit all the data they do possess. New hospitals should begin collecting and reporting data immediately and complete the registration requirements for the market basket update. The same standards that are applied to established hospitals will be applied to new hospitals when determining the expected number of discharges for the calendar quarters covered for each fiscal year.

The annual payment updates will be based on the successful submission of data to CMS via the QIO Clinical Warehouse by the established deadlines. Hospitals may withdraw from RHQDAPU at any time up to August 1, 2004. Hospitals withdrawing from the program will not receive the full market basket update. Instead, they will receive a 0.4 percentage point reduction in the update. By law, a hospital's actions each fiscal year will not affect its update in a subsequent fiscal year. Therefore, a hospital must meet the requirements for RHQDAPU each fiscal year the program is in effect, and failure to receive the full update in one fiscal year will not affect its update in a succeeding fiscal year. 3. Submission of Hospital Data for FYs 2006 and 2007

For FYs 2006 and 2007, we will require hospitals to submit data quarterly, starting August 15, 2004. Eligibility for the full annual payment update will be based on the most recent four quarters of data. These data would be submitted on the same schedule for data transmission currently in force for CART data. That is, data must be submitted to the QIO Clinical warehouse no later than 15 calendar days after the fourth month following the end of the calendar quarter. This schedule is available at http://www.qnetexchange.org. We will establish

validation requirements for submitted data for FYs 2006 and 2007. Submissions would, at a minimum, need to be accurate, timely, and complete. That is--

The hospital-submitted data must meet minimum levels of reliability through chart audit re-abstractions over all topics. At the data element level, there must be an 80 percent agreement

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between the original abstraction and the re-abstraction using the CART tool.

The submitted data must be on schedule, pass all warehouse edits, and be successfully accepted into the warehouse.

Completeness of submitted data will be assessed to ensure the number of submitted cases corresponds to the number of bills submitted by the hospital to CMS.

We are planning to publish the most recent 12 months of discharge data (4 quarters) for all data accepted into the warehouse and passing all validation requirements. For FY 2005, we will publish as much data as we have available. Hospitals will have the opportunity to review the information prior to posting on the CMS Web site. However, there will be no opportunity to withhold the publication of the information. The preview will only be to correct obvious errors. 4. Proposed Regulation Change

We are proposing to establish a new Sec. 412.64(d)(2) to provide that, for FYs 2005, 2006, and 2007, the applicable percentage change is reduced by 0.4 percentage point in the case of any subsection (d) hospital that does not submit data to CMS on the 10 quality indicators established by the Secretary as of November 1, 2003. Any reduction will apply only to the fiscal year involved, and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. We will be modifying our payment software to apply the correct updates to hospitals, depending on whether they submit the requisite data on the 10 quality indicators. We show the different standardized amounts that apply to hospitals that submit the requisite quality data, and to hospitals that do not, in the Addendum to this proposed rule.

F. Proposed Revision of the Labor-Related Share for the Hospital Wage Index (Sec. 412.64(h))

[If you choose to comment on issues in this section, please include the caption ``Labor-Related Share'' at the beginning of your document.]

As discussed in section III. of the preamble of this proposed rule, section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of the national prospective payment system base payment rates that are attributable to wages and wage-related costs by a factor that reflects the relative differences in labor costs among geographic areas. It also directs the Secretary to estimate from time to time the proportion of hospital costs that are labor-related. The portion of hospital costs attributable to wages and wage-related costs is referred to as the labor-related share. The labor-related share of the prospective payment rate is adjusted by an index of relative labor costs, which is referred to as the wage index. In the past, we have defined the labor-related share for prospective payment acute care hospitals as the national average proportion of operating costs that are related to, influenced by, or vary with the local labor market. The labor-related share for the acute care hospital inpatient prospective payment system has been calculated as the sum of the weights for wages and salaries, fringe benefits, nonmedical professional fees, contract labor, postage, and labor-intensive services. For FY 2004, the labor share of the hospital wage index was established at 71.066 percent.

Section 403 of Pub. L. 108-173 amended section 1886(d)(3)(E) of the Act to provide that the Secretary must use 62 percent as the labor- related share unless application of this percentage ``would result in lower payments than would otherwise be made.'' However, this provision of Pub. L. 108-173 did not change the legal requirement that the Secretary estimate ``from time to time'' the proportion of hospitals' costs that are ``attributable to wages and wage-related costs.'' In fact, section 404 of Pub. L. 108-173 requires the Secretary to develop a frequency for revising the weights used in the hospital market basket, including the labor share, to reflect the most current data more frequently than once every 5 years. Section 404 further requires us to include in the final IPPS rule for FY 2006 an explanation of the reasons for, and options considered, in determining such frequency.

Under section III. of this preamble, we discuss our proposed implementation of section 1886(d)(3)(E) of the Act, as amended by section 403, as it applies to the development of the proposed FY 2005 wage index. In this section IV.F. of the preamble, we are proposing to incorporate the provisions of section 403 of Pub. L. 108-173 under a new Sec. 412.64(h). Specifically, we are proposing to specify that CMS will adjust the proportion of the Federal rate for inpatient operating costs that are attributable to wages and labor-related costs for area differences in hospital wage levels by a factor (established by CMS based on survey data) reflecting the relative level of hospital wages and wage-related costs in the geographic area (that is, urban or rural area as determined the regulations) of the hospital compared to the national average level of hospital wages and wage-related costs. The wage index would continue to be updated annually. In addition, we are proposing to specify that CMS will determine the proportion of the Federal rate that is attributable to wages and labor-related costs from time to time, employing a methodology that is described in the annual regulation updating the system of payment for inpatient hospital operating costs. However, CMS would employ 62 percent as the proportion of the rate that is adjusted for the relative level of hospital wages and wage-related costs, unless employing that percentage would result in lower payments for the hospital than employing the proportion determined under the methodology described in the preceding sentence.

G. Wage Index Adjustment for Commuting Patterns of Hospital Employees (Proposed New Sec. 412.64(i))

[If you choose to comment on issues in this section, please include the caption ``Out-Migration of Hospital Employees'' at the beginning of your document.]

As discussed in section III.G.2.e. of this preamble, section 505 of Pub. L. 108-173 established new section 1886(d)(13) of the Act. The new section 1886(d)(13) requires that the Secretary establish a new process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. The process provides for an increase in the wage index for hospitals located in certain counties that have a high percentage of hospital employees who reside in the county but work in a different area with a higher wage index. These adjustments to the wage index are effective for 3 years beginning with discharges occurring on or after October 1, 2004. Adjustments under this provision are not subject to the budget neutrality requirements at section 1886(d)(3)(E) or section 1886(d)(8)(D) of the Act.

Under section III.G.3.e of this preamble, we discuss the proposed implementation of the provisions of section 505 in developing the proposed FY 2005 wage index and the proposed applicable adjustments to that index. We are proposing in this section IV.G. of the preamble to incorporate the provisions of section 505 in the regulations by adding a new Sec. 412.64(i).

The Secretary is required to establish criteria to identify ``qualifying counties,'' and hospitals located in the qualifying counties are to receive an adjustment to their wage index. To implement this provision, we are proposing to use commuting data compiled by the U.S. Census Bureau based on a special tabulation of Census 2000 journey-to-work data. This

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information is gathered from responses to the Census long-form (sample) questions on where people worked. The resulting county-of-residence by county-of-work commuter flow file uses 108 Industrial Structure codes, developed by the Bureau of Economic Analysis. Using these data, we are able to identify the total number of hospital workers who live in each county and the number of workers within that county who commute to hospitals in other counties.

Section 1886(d)(13)(B)(i) of the Act directs the Secretary to establish a threshold percentage difference between the county's wage index and a weighted wage index of the surrounding higher wage index areas that must be met in order for the county to qualify. We are proposing to establish this threshold at any percentage greater than zero, such that any increase in the wage index resulting from this provision that is greater than zero percent would be recognized. Section 1886(d)(13)(B)(ii) of the Act specifies that the Secretary is to establish the minimum out-migration threshold in order to qualify, which may not be less than 10 percent. We are proposing to establish the out-migration threshold at the minimum 10 percent.

Section 1886(d)(13)(B)(iii) of the Act requires that the average hourly wage for all hospitals in the county must be equal to or exceed the average hourly wage for all hospitals in the labor market area. Section 1886(d)(13)(E) of the Act indicates this process may be based on the process used by the MGCRB. This section also gives the Secretary the authority to require hospitals to submit data necessary to implement this provision, or to use other data sources as available. To compute this requirement, we are proposing to determine the average of hospitals' 3-year average hourly wage for all hospitals in a given county. We would compare this county average hourly wage to the 3-year average hourly wage for the labor market area where the county is located. We are proposing to use the 3-year average hourly wage because we believe it gives a better estimate for the wages paid by a given hospital over a period of time. This statutory requirement limits the number of eligible counties.

Section 1886(d)(13)(A) of the Act allows the Secretary to establish the process through application or otherwise for this adjustment to the wage index. We are proposing not to use an application process. Rather, all hospitals located in qualifying counties would automatically receive the increase in wage index, unless the hospital has already been reclassified to another geographic area for purposes of wage index or standardized amount. This wage index increase would be effective for a period of 3 fiscal years, FY 2005 through FY 2007.

Hospitals receiving this wage index increase under section 1886(d)(13)(F) of the Act are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Therefore, consistent with Sec. 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of this proposed rule in the Federal Register. Similarly, hospitals may terminate an existing 3-year reclassification within 45 days of the publication of this proposed rule. Hospitals that withdraw their application for reclassification would then automatically receive the commuting wage index adjustment. The request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2005 must be received by the MGCRB within 45 days of the publication of this proposed rule.

H. Additional Payments for New Medical Services and Technology: Proposed Policy Changes (Sec. Sec. 412.87 and 412.88)

[If you choose to comment on issues in this section, please include the caption ``New Technology Threshold'' at the beginning of your document.]

As discussed in section II.D. of this proposed rule, sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies under the IPPS, effective for discharges beginning on or after October 1, 2001. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that the process must apply to a new medical service or technology if, ``based on the estimated costs incurred with respect to discharges involving such service or technology, the DRG prospective payment rate otherwise applicable to such discharges under this subsection is inadequate.'' Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be considered ``new'' if it meets criteria established by the Secretary after notice and opportunity for public comment.

Sections 1886(d)(5)(K)(ii) through (d)(5)(K)(vi) of the Act further provide--

For an additional payment for new medical services and technology in an amount beyond the DRG prospective payment system payment rate that adequately reflects the estimated average costs of the service or technology.

That the requirement for an additional payment for a new service or technology may be satisfied by means of a new technology group (described in section 1886(d)(5)(L) of the Act), an add-on payment, a payment adjustment, or any other similar mechanism for increasing the amount otherwise payable with respect to a discharge.

For the collection of data relating to the cost of a new medical service or technology for not less than 2 years and no more than 3 years after an appropriate inpatient hospital services code is issued. The statute further provides that discharges involving new services or technology that occur after the collection of these data will be classified within a new or existing DRG group with a weighting factor derived from cost data collected for discharges occurring during such period.

Section 412.87(b)(1) of our existing regulations provides that a new technology will be an appropriate candidate for an additional payment when it represents an advance in medical technology that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries (see the September 7, 2001 final rule (66 FR 46902)). Section 412.87(b)(3) provides that, to receive special payment treatment, new technologies meeting this clinical definition must be demonstrated to be inadequately paid otherwise under the DRG system.

In the August 1, 2003 final IPPS rule, we revised the threshold amount for determining if payment for a new technology or medical service is inadequate, effective for FY 2005 and subsequent fiscal years (68 FR 45392). We lowered the previously established threshold of 1 standard deviation to 75 percent of 1 standard deviation (based on the logarithmic values of the charges) beyond the geometric mean standardized charges for all cases in the DRG to which the new technology is assigned (or the case-weighted average of all relevant DRGs, if the new technology occurs in many different DRGs), transformed back to charges.

Section 503(b) of Pub. L. 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to specify that in determining whether payments for a new technology or medical service are inadequate, the Secretary is to determine and apply a threshold amount that is the ``lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of 1 standard deviation for the DRG involved.'' As a result of enactment of section 503(b), we are proposing to revise our regulations at Sec. 412.87(b)(3)

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to incorporate the revised threshold amount.

The report language accompanying section 533 of Pub. L. 106-554 indicated Congressional intent that the Secretary implement the new mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 106th Cong., 2nd Sess., at 897 (2000)). Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual DRG classifications and relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year at the same time we estimated the payment effect of changes to the DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts.

To balance appropriately the Congressional intent to increase Medicare payments for eligible new technologies with concern that the total size of those payments not result in significantly reduced payments for other cases, we set a target limit for estimated add-on payments for new technology under the provisions of sections 1886(d)(5)(K) and (L) of the Act at 1.0 percent of estimated total operating prospective payments. In accordance with Sec. 412.88(c) of the regulations, if the target limit was exceeded, we would reduce the level of payments for approved technologies across the board, to ensure estimated payments did not exceed the limit.

Section 503(d)(1) of Pub. L. 108-173 amended section 1886(d)(5)(K)(ii)(III) of the Act to remove the budget neutrality provision for add-on payments for a new medical service or technology. Section 503(d)(2) specifies that ``There shall be no reduction or other adjustment to payments under section 1886 of the Social Security Act because an additional payment is provided'' for new technology. Accordingly, as a result of the enactment of section 503(d) of Pub. L. 108-173, we will no longer include the impact of additional payments for new medical services and technologies in the budget neutrality factor. In addition, we are proposing to delete Sec. 412.88(c) of the regulations.

I. Rural Referral Centers (Sec. 412.96)

[If you choose to comment on issues in this section, please include the caption ``Rural Referral Centers'' at the beginning of your document.]

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at Sec. 412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS as a rural referral center. For discharges occurring before October 1, 1994, rural referral centers received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount. Although the other urban and rural standardized amounts are the same for discharges occurring on or after October 1, 1994, rural referral centers continue to receive special treatment under both the DSH payment adjustment and the criteria for geographic reclassification.

Section 402 of Pub. L. 108-173 raised the DSH adjustment for other rural hospitals with less than 500 beds and rural referral centers. Other rural hospitals with less than 500 beds are subject to a 12- percent cap on DSH payments. Rural referral centers are not subject to the 12.0 percent cap on DSH payments that is applicable to other rural hospitals (with the exception of rural hospitals with 500 or more beds). Rural referral centers are not subject to the proximity criteria when applying for geographic reclassification, and they do not have to meet the requirement that a hospital's average hourly wage must exceed 106 percent of the average hourly wage of the labor market area where the hospital is located.

As discussed in Federal Register documents at 62 FR 45999 and 63 FR 26325, under section 4202 of Pub. L. 105-33, a hospital that was classified as a rural referral center for FY 1991 is to be considered as a rural referral center for FY 1998 and later years so long as that hospital continues to be located in a rural area and does not voluntarily terminate its rural referral center status. Effective October 1, 2000, if a hospital located in what is now an urban area was ever a rural referral center, it is reinstated to rural referral center status (65 FR 47089). Otherwise, a hospital seeking rural referral center status must satisfy the applicable criteria.

One of the criteria under which a hospital may qualify as a rural referral center is to have 275 or more beds available for use (Sec. 412.96(b)(1)(ii)). A rural hospital that does not meet the bed size requirement can qualify as a rural referral center if the hospital meets two mandatory prerequisites (a minimum case-mix index and a minimum number of discharges) and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume) (Sec. 412.96(c)(1) through (c)(5)). (See also the September 30, 1988 Federal Register (53 FR 38513)). With respect to the two mandatory prerequisites, a hospital may be classified as a rural referral center if--

The hospital's case-mix index is at least equal to the lower of the median case-mix index for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median case-mix index for all urban hospitals nationally; and

The hospital's number of discharges is at least 5,000 per year, or, if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the Act.) 1. Case-Mix Index

Section 412.96(c)(1) provides that CMS will establish updated national and regional case-mix index values in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. The methodology we use to determine the proposed national and regional case-mix index values is set forth in regulations at Sec. 412.96(c)(1)(ii). The proposed national median case-mix index value for FY 2005 includes all urban hospitals nationwide, and the proposed regional values for FY 2005 are the median values of urban hospitals within each census region, excluding those hospitals with approved teaching programs (that is, those hospitals receiving indirect medical education payments as provided in Sec. 412.105). These proposed values are based on discharges occurring during FY 2003 (October 1, 2002 through September 30, 2003) and include bills posted to CMS' records through December 2003.

We are proposing that, in addition to meeting other criteria, if they are to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2004, rural hospitals with fewer than 275 beds must have a case-mix index value for FY 2003 that is at least--

1.3550; or

The median case-mix index value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in Sec. 412.105) calculated by CMS for the census region in which the hospital is located.

The proposed median case-mix index values by region are set forth in the following table:

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Case-mix Region

index value.

1. New England (CT, ME, MA, NH, RI, VT).................

1.2400 2. Middle Atlantic (PA, NJ, NY).........................

1.2387 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..

1.3249 4. East North Central (IL, IN, MI, OH, WI)..............

1.2661 5. East South Central (AL, KY, MS, TN)..................

1.2777 6. West North Central (IA, KS, MN, MO, NE, ND, SD)......

1.1787 7. West South Central (AR, LA, OK, TX)..................

1.3043 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............

1.3527 9. Pacific (AK, CA, HI, OR, WA).........................

1.3095

The preceding numbers will be revised in the final rule to the extent required to reflect the updated FY 2001 MedPAR file, which will contain data from additional bills received through March 31, 2002.

Hospitals seeking to qualify as rural referral centers or those wishing to know how their case-mix index value compares to the criteria should obtain hospital-specific case-mix index values (not transfer- adjusted) from their fiscal intermediaries. Data are available on the Provider Statistical and Reimbursement (PS&R) System. In keeping with our policy on discharges, these case-mix index values are computed based on all Medicare patient discharges subject to DRG-based payment. 2. Discharges

Section 412.96(c)(2)(i) provides that CMS will set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. We are proposing to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2001 (that is, October 1, 2000 through September 30, 2001), which is the latest available cost report data we have at this time. In last year's final rule we inadvertently indicated that we relied upon data regarding discharges occurring during FY 2002. However, we have now determined that our values were based upon data regarding discharges occurring during FY 2000.

Therefore, we are proposing that, in addition to meeting other criteria, a hospital, if it is to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2004, must have as the number of discharges for its cost reporting period that began during FY 2001 a figure that is at least--

5,000 (3,000 for an osteopathic hospital); or

The median number of discharges for urban hospitals in the census region in which the hospital is located, as indicated in the following table:

Number of Region

discharges.

1. New England (CT, ME, MA, NH, RI, VT).................

8,212 2. Middle Atlantic (PA, NJ, NY).........................

9,574 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..

10,303 4. East North Central (IL, IN, MI, OH, WI)..............

8,684 5. East South Central (AL, KY, MS, TN)..................

7,624 6. West North Central (IA, KS, MN, MO, NE, ND, SD)......

6,789 7. West South Central (AR, LA, OK, TX)..................

6,485 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............

8,489 9. Pacific (AK, CA, HI, OR, WA).........................

6,274

These numbers will be revised in the final rule based on the latest available cost report data.

We reiterate that if an osteopathic hospital is to qualify for rural referral center status for cost reporting periods beginning on or after October 1, 2004, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2001.

J. Additional Payments to Hospitals With High Percentage of End-Stage Renal Disease (ESRD) Discharges (Sec. 412.104)

[If you choose to comment on issues in this section, please include the caption ``ESRD Discharges'' at the beginning of your document.]

Under existing regulations at Sec. 412.104(a), CMS provides for additional Medicare payments to a hospital for inpatient dialysis provided to Medicare beneficiaries with end-stage renal disease (ESRD) if the hospital's ESRD Medicare beneficiary discharges are 10 percent or more of its total Medicare discharges. This provision states that discharges classified into DRG 302 (Kidney Transplant), DRG 316 (Renal Failure), or DRG 317 (Admit for Renal Dialysis) are excluded for purposes of determining a hospital's eligibility for this special payment. We have been informed that, under this provision, hospitals may be counting all discharges of ESRD Medicare beneficiaries towards determining the 10 percent factor rather than counting only those discharges where the ESRD beneficiary received inpatient dialysis.

When we established this regulation in the August 31, 1984 final rule (49 FR 34747), we stated that this special payment was intended to ameliorate those circumstances in which the concentration of ESRD beneficiaries receiving inpatient dialysis may be such that the hospital would not be able to absorb the entire expense with revenue from other less costly cases. We further stated that we believed those few hospitals most extremely impacted by the ESRD beneficiary population should be afforded some protection against the chance of encountering inpatient dialysis expenses that could not be offset by revenue from cases in which the DRG payment was greater than the hospital's cost. Because this special payment is intended to limit the adverse impact on hospitals delivering inpatient dialysis services to ESRD beneficiaries, we firmly believe that only those

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discharges of beneficiaries who receive dialysis services during an inpatient stay should be counted in determining a hospital's eligibility for the additional payment. After a careful review of Sec. 412.104(a), we acknowledge that hospitals may require additional guidance in appropriately determining their eligibility for this special payment. Therefore, we are proposing to revise Sec. 412.104(a) to make it clear that, in determining a hospital's eligibility for the additional Medicare payment, only discharges involving ESRD Medicare beneficiaries who have received a dialysis treatment during an inpatient hospital stay are to be counted. This proposed change would be applied prospectively, effective for cost reporting periods beginning on or after October 1, 2004.

K. Indirect Medical Education (IME) Adjustment (Sec. 412.105)

[If you choose to comment on issues in this section, please include the caption ``IME Adjustment'' at the beginning of your document.]

1. IME Adjustment Factor Formula Multipliers (Section 502(a) of Public Law 108-173 and Existing Sec. 412.105(d)(3)(vii) and Proposed Sec. 412.105(d)(3)(viii) Through (d)(3)(xii) of the Regulations)

Section 1886(d)(5)(B) of the Act provides that prospective payment hospitals that have residents in an approved graduate medical education (GME) program receive an additional payment to reflect the higher indirect costs of teaching hospitals relative to nonteaching hospitals. The regulations regarding the calculation of this additional payment, known as the indirect medical education (IME) adjustment, are located at Sec. 412.105. The IME adjustment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated using a hospital's ratio of residents to beds, which is represented as r, and a formula multiplier, which is represented as c, in the following equation: c x [{1 + r{time} \.405\ -1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

Section 502(a) of Pub. L. 108-173 modified the formula multiplier c to be used in the calculation of the IME adjustment. Prior to enactment of Pub. L. 108-173, the formula multiplier was fixed at 1.35 for discharges occurring during FY 2003 and thereafter. Section 502(a) modifies the formula multiplier beginning midway through FY 2004 and provides for a new schedule of formula multipliers for FYs 2005 and thereafter as follows:

For discharges occurring on or after April 1, 2004, and before October 1, 2004, the formula multiplier is 1.47.

For discharges occurring during FY 2005, the formula multiplier is 1.42.

For discharges occurring during FY 2006, the formula multiplier is 1.37.

For discharges occurring during FY 2007, the formula multiplier is 1.32.

For discharges occurring during FY 2008 and fiscal years thereafter, the formula multiplier is 1.35.

We are proposing to revise Sec. 412.105(d)(3)(vii) and add Sec. 412.105(d)(3)(viii) through (d)(3)(xii) to incorporate these changes in the formula multipliers. 2. IME Adjustment Formula Multiplier for Redistributed FTE Resident Slots (Section 422(b)(1)(C) of Pub. L. 108-173)

Under new section 1886(h)(7)(B) of the Act, added by section 422(a) of Pub. L. 108-173, a hospital may receive an increase in its FTE resident cap as a result of the agency's redistribution of unused resident positions. (This provision is discussed in detail in section IV.J.2. of the preamble of this proposed rule.) Section 422(b)(1)(C) of Pub. L. 108-173 amended section 1886(d)(5)(B) of the Act to add a new subclause (ix) to provide that, for discharges occurring on or after July 1, 2005, for a hospital whose FTE resident cap is increased as a result of a redistribution of unused resident positions, the IME adjustment factor is to be calculated using a formula multiplier of 0.66 with respect to any additional residents counted by the hospital as a result of that increase in the hospital's FTE resident cap. Thus, we are proposing that a hospital that counts additional residents as a result of an increase in its FTE resident cap under section 1886(h)(7)(B) of the Act would receive IME payments based on the sum of two different IME adjustment factors: (1) An IME adjustment factor that is calculated using the schedule of formula multipliers described in section IV.G.1. of this preamble established by section 502(a) of Pub. L. 108-173, and which also uses the hospital's number of FTE residents, not including residents attributable to an FTE cap increase under section 1886(h)(7)(B) of the Act, in the numerator of the resident-to- bed ratio; and (2) an IME adjustment factor that is calculated using the formula multiplier of 0.66, and the additional number of FTE residents that are attributable to the increase in the hospital's FTE resident cap under section 1886(h)(7)(B) of the Act in the numerator of the resident-to-bed ratio. (The number of available beds used in the denominator would be the same for both IME adjustments.)

We note that section 422(b) of Pub. L. 108-173, which addresses the application of the IME adjustment to the residents counted as a result of an increase in a hospital's FTE resident cap under section 422(a), makes no reference to section 1886(d)(5)(B)(vi) of the Act. That is, the statute does not provide for an exclusion from application of the cap on the resident-to-bed ratio at section 1886(d)(5)(B)(vi)(I) of the Act or from application of the rolling average count at section 1886(d)(5)(B)(vi)(II) of the Act for residents added as a result of FTE cap increases under section 1886(h)(7)(B). There is no specific pronouncement in section 422 exempting residents counted as a result of the FTE resident cap increases under section 422(a) from the cap on the resident-to-bed ratio and the rolling average, and we see no apparent reason to treat those residents differently for purposes of these two provisions. Therefore, we are proposing to require that if a hospital increases its IME FTE count of residents as a result of section 1886(h)(7)(B) of the Act, those FTE residents are immediately subject to the cap on the resident-to-bed ratio and the rolling average calculation. Furthermore, we believe that, given potentially significant shifts of FTE positions among hospitals as a result of the new section 1886(h)(7) of the Act, the inclusion of FTE residents added as a result of section 1886(h)(7)(B) of the Act in the cap on the resident-to-bed ratio and in the rolling average introduces a measure of stability and predictability, and mitigates radical shifts in IME payments from period to period. Thus, a hospital's increase in IME payment may be delayed for one year to the extent that the resident-to- bed ratio for the current cost reporting period is capped by the resident-to-bed ratio for the previous cost reporting period. Further, the additional FTE residents would be phased in over a 3-year period in the hospital's FTE count because they are immediately included in the rolling average calculation.

The following illustrates how the IME payment would be calculated for a hospital that receives an increase to its FTE resident cap as a result of section 1886(h)(7)(B) of the Act. For example, Hospital A has a fiscal year end (FYE) of September 30, and a 1996 IME FTE cap of 20 FTEs. During its FYEs September 30, 2003, September 30, 2004, and September 30, 2005, Hospital A trains 25 FTE residents. Effective July 1, 2005, under section 1886(h)(7)(B) of

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the Act, Hospital A receives an increase to its IME 1996 cap of 5 FTEs, for a total adjusted IME cap of 25 FTEs. Hospital A has maintained an available bed count of 200 beds in FYE September 30, 2004 and throughout FYE September 30, 2005. For the FYE September 30, 2005 cost report, the IME adjustment factor is calculated as follows:

Step 1. For discharges occurring on October 1, 2004, through September 30, 2005 for residents NOT counted pursuant to section 1886(d)(5)(B)(ix) of the Act:

Rolling average count of FTE residents: 20+20+20/3 = 20.

Current year resident-to-bed ratio: 20/200 = .10.

Cap on resident-to-bed ratio (from prior year): 20/200 = .10.

Compare, and use the lower of, prior year resident-to-bed ratio and current year resident-to-bed ratio: .10 = .10.

Compute IME adjustment factor: 1.42 x [{1 + .10{time} \.405\ -1] = 0.0559.

Step 2. For discharges occurring on July 1, 2005 through September 30, 2005 for residents counted pursuant to section 1886(d)(5)(B)(ix) of the Act:

Rolling average count of FTE residents: 25+20+20/3 = 21.7.

Resident-to-bed ratio for 7/1/05-9/30/05: 21.7/200 = .11.

Cap on resident-to-bed ratio (from prior year): 20/200 = .10.

Compare, and use the lower of, prior year resident-to-bed ratio and resident-to-bed ratio for 7/1/05-9/30/05: .10 Compute IME adjustment factor: 0.66 x [{1 + 0{time} \.405\ -1] = 0.0.

In this example, the addition of 5 FTE residents under section 1886(h)(7)(B) caused Hospital A's resident-to-bed ratio for discharges occurring on July 1, 2005, through September 30, 2005, to exceed the resident-to-bed ratio of .10 from the prior year. Since the multiplier of 0.66 is to be used for determining IME payment ``insofar as an additional payment amount * * * is attributable to resident positions redistributed to a hospital * * *'' under section 1886(d)(5)(B)(v) of the Act, as amended by section 422(b)(1)(C) of Pub. L. 108-173, Hospital A does not receive any IME payment attributable to the 5 FTE residents added as a result of section 1886(h)(7)(B) of the Act for discharges occurring on July 1, 2005, through September 30, 2005. As shown under the fifth bullet point in Step 2 of the example above, a resident-to-bed ratio of zero is used to compute the IME adjustment for FTE residents attributable to increases in the FTE resident cap under section 1886(h)(7)(B) of the Act for discharges occurring on or after July 1, 2005 and on or before September 30, 2005. The ratio of .10 would not be used to compute the IME adjustment for FTE residents attributable to an increase in the FTE resident cap under section 1886(h)(7)(B) because the ratio of .10 is attributable to the 20 FTE residents from the prior year, and is not related to residents added under section 1886(h)(7)(B) of the Act. (We note that a hospital's resident-to-bed ratio in the current year might decrease despite residents added as a result of section 1886(h)(7)(B) of the Act, due to an increase in the number of available beds in the denominator of the current year resident-to-bed ratio. In such a case, because the current year ratio would be less than the prior year ratio, the hospital's resident-to-bed ratio would not be capped by the prior year resident- to-bed ratio, and, therefore, the hospital could receive an IME payment in the current year (that is, there would not be a 1-year delay) relating to residents added under section 1886(h)(7)(B) of the Act).

However, an increase in the resident-to-bed ratio in the current period may establish a higher cap for the following period, and, all other things being equal, a hospital could then receive IME payment for FTE residents added as a result of section 1886(h)(7)(B) of the Act after a 1-year lag. In the example above, Hospital A would receive an IME payment for residents added as a result of section 1886(h)(7)(B) of the Act in its cost reporting period ending September 30, 2006, as follows:

Step 1. For residents NOT counted pursuant to section 1886(d)(5)(B)(ix) of the Act:

Rolling average count of FTE residents: 20+20+20/3 = 20.

Current year resident-to-bed ratio: 20/200 = .10.

Cap on resident-to-bed ratio (from prior year): 20/200 = .10.

Compare, and use the lower of, prior year resident-to-bed ratio and current year resident-to-bed ratio: .10 = .10.

Compute IME adjustment factor: 1.37 x [{1 + .10{time} \.405\ -1] = 0.0559.

Step 2. For 5 FTE residents counted pursuant to with section 1886(d)(5)(B)(ix) of the Act:

Rolling average count of FTE residents: 25+25+20/3 = 23.3.

Resident-to-bed ratio for FYE 9/30/06: 23.3/200 = .12.

Cap on resident-to-bed ratio (from prior year): 25/200 = .13.

Compare, and use the lower of, prior year resident-to-bed ratio and current year resident-to-bed ratio: .13 >.12. Current year ratio of .12 is the lower of the two.

Take the difference between the rolling average count of FTE residents counted as a result of section 1886(h)(7)(B) of the Act, and the rolling average count of FTE residents not counted as a result of section 1886(h)(7)(B) of the Act, (rolling average count under step 2 minus rolling average count under step 1): 23.3-20 = 3.3.

Compute current year resident-to-bed ratio attributable to residents added under section 1886(h)(7)(B): 3.3/200 = 0.02.

Compute IME adjustment factor: 0.66 x [{1 + .02{time} \.405\ -1] = 0.0053.

Step 3. Compute IME payment for FYE September 30, 2006: [Total DRG payments for discharges occurring on October 1, 2005 through September 30, 2006] x [0.0592] (that is, 0.0539 + 0.0053).

We are proposing to revise Sec. 412.105 to incorporate these changes under proposed new paragraph (d)(4), proposed new paragraph (e)(2), proposed new paragraph (f)(1)(iv)(B), and proposed added new last sentence of paragraph (f)(1)(v). 3. Technical Changes

In Sec. 412.105(a)(1), introductory text, we include a cross-reference to ``paragraph (f) and (h)'' of Sec. 412.105. Paragraph (h) no longer exists in this section. Therefore, we are proposing to remove the cross-reference to paragraph (h).

In Sec. 412.105(f)(1)(i)(A), we reference national organizations listed in Sec. 415.200(a). The cross-reference to Sec. 415.200(a) is incorrect. We are proposing to correct the cross- reference to read ``Sec. 415.152.''

In section IV.O. of this preamble, we discuss our proposal to redesignate existing Sec. 413.86 governing payments for direct costs of GME to nine separate sections. Many of the paragraphs in the existing Sec. 413.86 are cited in Sec. 412.105 governing the IME adjustment. We are proposing to make changes to the cross-reference in Sec. 412.105 to conform them to these proposed redesignated separate sections.

L. Payment to Disproportionate Share Hospitals (DSHs) (Section 402 of Pub. L. 108-173 and Sec. 412.106 of Existing Regulations)

[If you choose to comment on issues in this section, please include the caption ``DSH Adjustment'' at the beginning of your document.]

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1. Enhanced DSH Adjustment for Rural Hospitals and Urban Hospitals With Fewer Than 100 Beds

Section 1886(d)(5)(F) of the Act provides for additional payments to subsection (d) hospitals that serve a disproportionate share of low- income patients. The Act specifies two methods for a hospital to qualify for the Medicare disproportionate share hospital (DSH) adjustment. Under the first method, hospitals that are located in an urban area and have 100 or more beds may receive a DSH payment adjustment if the hospital can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients. These hospitals are commonly known as ``Pickle hospitals.'' The second method, which is also the most commonly used method for a hospital to qualify, is based on a complex statutory formula under which payment adjustments are based on the level of the hospital's DSH patient percentage, which is the sum of two computations. The first computation includes the number of patient days that are furnished to patients who were entitled to both Medicare Part A and Supplemental Security Income (SSI) benefits. This number is divided by the total number of patient days that are associated with patients entitled to benefits under Medicare Part A. The second computation includes hospital patient days that are furnished to patients who, for those days, were eligible for Medicaid but were not entitled to benefits under Medicare Part A. This number is divided by the number of total hospital inpatient days in the same period.

Hospitals whose DSH patient percentage exceeds 15 percent are eligible for a DSH payment adjustment (prior to April 1, 2001, the qualifying DSH patient percentage varied, in part, by the number of beds (66 FR 39882)). The DSH payment adjustment may vary based on the DSH patient percentage and the type of hospital. The statute provides for different payment adjustments for urban hospitals with 100 or more beds and rural hospitals with 500 or more beds, hospitals that qualify as RRCs or SCHs, and other hospitals.

Effective April 1, 2004, section 402 of Public Law 108-173 amended section 1886(d)(5)(F) of the Act to revise the formulae used to calculate DSH payment adjustments for certain hospitals that qualify for the adjustments under the second method. Specifically, under the new section 1886(d)(5)(F)(xiv), added by section 402, for hospitals that are not large urban or large rural hospitals, DSH payments are calculated using the same DSH adjustment formula used for large urban hospitals. However, the DSH payment adjustment for most of these categories of hospitals, except for hospitals classified as RRCs, including RRCs that are also SCHs, is capped at 12 percent. In addition, the formula for large urban hospitals with 100 beds or more, and large rural hospitals with 500 beds or more, has not been revised by section 402. Finally, Pickle hospitals are not affected by this change; they will continue to receive a DSH adjustment under the alternative formula.

Effective for discharges occurring on or after April 1, 2004, the following DSH payment adjustment formulae apply for the following specified categories of hospitals:

For urban hospitals with fewer than 100 beds and whose disproportionate patient percentage is equal to or greater than 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For urban hospitals with fewer than 100 beds and whose disproportionate patient percentage is greater than 20.2: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For urban hospitals with fewer than 100 beds, the maximum DSH payment adjustment is 12 percent.

For rural hospitals that are SCHs and are not RRCs and whose disproportionate patient percentage is equal to or greater than 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For rural hospitals that are SCHs and are not RRCs and whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For rural hospitals that are SCHs and are not RRCs, the maximum DSH payment adjustment is 12 percent.

For RRCs whose disproportionate patient percentage is greater than or equal to 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For RRCs whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For rural hospitals that are both RRCs and SCHs and whose disproportionate patient percentage is greater than or equal to 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For rural hospitals that are both RRCs and SCHs whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For rural hospitals with fewer than 500 beds and whose disproportionate patient percentage is equal to or greater than 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For rural hospitals with fewer than 500 beds and whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For rural hospitals with fewer than 500 beds, the maximum DSH payment adjustment is 12 percent.

These revised formulae, which became effective for discharges occurring on or after April 1, 2004, were implemented through a CMS One-Time Notification (CR 3158), issued on March 26, 2004. The notice describes the changes required by section 402 of Public Law 108-173. In this proposed rule, we are proposing to revise Sec. Sec. 412.106 (d)(2)(ii), (d)(2)(iii), and (d)(2)(iv) of the regulations to reflect these statutory revisions.

The following DSH formulae were not affected by the changes made by section 402 of Pub. L. 108-173 and remain in effect:

For urban hospitals with 100 beds or more and whose disproportionate patient percentage is equal to or greater than 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For urban hospitals with 100 beds or more and whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient percentage -20.2 percent) (82.5 percent) + 5.88 percent.

For rural hospitals with 500 beds or more and whose disproportionate patient percentage is equal to or greater than 15 percent and less than or equal to 20.2 percent: (Disproportionate patient percentage -15 percent) (65 percent) + 2.5 percent.

For rural hospitals with 500 beds or more and whose disproportionate patient percentage is greater than 20.2 percent: (Disproportionate patient

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percentage -20.2 percent) (82.5 percent) + 5.88 percent. 2. Proposals for Available Beds and Patient Days for the DSH Adjustment

In our May 19, 2003 IPPS proposed rule for FY 2004 (68 FR 27201), we proposed changes to our policy on counting available beds and patient days for the purposes of the DSH adjustment. For the available beds policy we proposed changes to counting unoccupied beds and observation beds. In regard to patient days, we proposed changes to counting dual-eligible and Medicare+Choice (M+C) days. Due to the number and nature of the public comments received, we did not respond to the public comments on these proposals in the final rule for FY 2004 (68 FR 45415). We indicated that we would address those public comments in a separate document. We plan to address the comments regarding unoccupied beds, observation beds, dual eligible days, and M+C days in the IPPS final rule for FY 2005.

M. Payment Adjustments for Low-Volume Hospitals (Proposed New Sec. 412.101)

[If you choose to comment on issues in this section, please include the caption ``Low-Volume Hospital Adjustment'' at the beginning of your document.]

Section 406 of Pub. L. 108-173 amended section 1886(d) of the Act to add a new subclause (12) to provide for a new payment adjustment to account for the higher costs per discharge of low-volume hospitals under the IPPS. Section 1886(d)(12)(C)(i) of the Act, as added by section 406, defines a low-volume hospital as a ``subsection (d) hospital . . . that the Secretary determines is located more than 25 road miles from another subsection (d) hospital and that has less than 800 discharges during the fiscal year.'' Section 1886(d)(12)(C)(ii) of the Act further stipulates that the term ``discharge'' refers to total discharges, and not merely to Medicare discharges. Specifically, the term refers to the ``inpatient acute care discharge of an individual regardless of whether the individual is entitled to benefits under part A.'' Finally, the provision requires the Secretary to determine an applicable percentage increase for these low-volume hospitals based on the ``empirical relationship'' between ``the standardized cost-per-case for such hospitals and the total number of discharges of these hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.'' The statute thus mandates the Secretary to develop an empirically justifiable adjustment formula based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent.

MedPAC has published an analysis of the financial performance and cost profiles of low-volume hospitals (MedPAC June 2001 Report to Congress, page 66). Its analysis indicated that hospitals with 500 discharges or less generally have negative Medicare margins. Specifically, hospitals with 200 discharges or less have margins of - 16.4 percent, and hospitals with 201 to 500 discharges have margins of -2.1 percent. MedPAC's analysis further revealed that hospitals with a small volume of discharges have higher costs per discharge than larger facilities, after controlling for the other cost factors recognized in the payment system. MedPAC's analysis thus indicates that low-volume providers are disadvantaged by payment rates based on average volume. In analyzing the relationship between costs per case and discharges, MedPAC also found that this relationship begins to level off and reaches zero variation at around 500 discharges. Therefore, MedPAC recommended an adjustment formula in the form of:

1.25 = (.0005*D), if D0'' in order to avoid the anomalous result that a hospital without any discharges would qualify for the maximum 25-percent adjustment.

We note that, under this formula, some hospitals that meet the statutory definition of low-volume hospital would receive no adjustment. Specifically, hospitals with more than 500 but fewer than 800 total discharges for the year would receive no adjustment under this formula. Despite the statutory definition of a low-volume hospital as a subsection (d) hospital that has less than 800 discharges during the fiscal year, the statutory provision mandating this adjustment also requires the Secretary to determine the empirical relationship between the standardized cost-per-case, the total number of discharges, and the amount of incremental costs associated with the number of discharges. In addition, the provision requires that the applicable percentage increase shall be ``based upon such relationship in a manner that

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reflects * * * such incremental costs.'' We believe that the statutory language thus gives the Secretary the flexibility to set the percentage increase at zero for a given number of discharges if the empirical evidence shows that hospitals experience no higher incremental costs when they reach that number of discharges. In other words, the statute does not require the Secretary to provide an adjustment in the absence of empirical evidence that an adjustment is warranted by higher incremental costs.

While the statute defines low-volume hospitals in terms of total inpatient acute care discharges and mandates that the adjustment be based upon the amount of incremental costs associated with the number of discharges, it does not specify whether the count of discharges, either for purposes of the definition or the payment adjustment formula, should be based on the payment year or some previous year. Specifically, the statute defines low-volume hospital as ``for a fiscal year, a subsection (d) hospital * * * [that] has less than 800 discharges during the fiscal year'' (emphasis added).

We believe that this statutory language gives us the flexibility to define which fiscal year to use in determining the number of discharges, both for purposes of the definition of ``low-volume hospital'' and the payment adjustment formula. Prospective payment systems place substantial value on providing hospitals with predictability regarding payments. If the determination of whether hospitals qualify for low-volume payment adjustments and the computation of the payment adjustment amount are based on the number of discharges in the current fiscal year, neither CMS nor the hospital will know with certainty whether a hospital qualifies for the adjustment, or what the amount of the adjustment would be, until after the end of the payment year (probably not until the time of final cost report settlement for the year). In such circumstances, CMS could be faced with the prospect of recouping large overpayments in some cases or reimbursing for large underpayments in others. Hospitals would face similar uncertainties. On the other hand, if these determinations are based on discharge counts from a prior fiscal year, hospitals will know in advance whether they will be receiving a payment adjustment and what the size of the adjustment will be. Both hospitals and CMS will be able to plan accordingly.

Therefore, we are proposing to base the count of discharges, for purposes both of meeting the qualifying definition and determining the amount of the payment adjustment, on the number of inpatient acute care discharges occurring during the cost reporting period for the most recent submitted cost report. We recognize that this policy may temporarily disadvantage certain hospitals. For example, a hospital that had more than 500 discharges in its most recent submitted cost report may have fewer than 500 discharges during the first fiscal year in which this low-volume payment adjustment is available. Such a hospital would not qualify for the low-volume adjustment during the first fiscal year of the adjustment under the policy that we are proposing, but it would qualify under alternative policy of basing the discharge count on the fiscal year for which payment is made. However, even in such cases, the hospital would not be certain about whether it would receive an adjustment until its cost report for the payment year is settled. In addition, under the policy we are now proposing, the hospital would still be certain of receiving a low-volume adjustment for any fiscal year in which it had 500 or fewer discharges. The hospital would receive the adjustment during the fiscal year after the cost report is submitted for any fiscal year in which the hospital had 500 discharges or less.

A further implication of this proposed policy is that a new hospital would not receive an adjustment during its first year of operation, even if it has fewer than 500 total discharges during that year. While this approach is somewhat disadvantageous for hospitals in their first year of existence, we believe that it is justified in order to avoid setting up a settlement process to finalize payments under this new proposed adjustment. Therefore, we are proposing that new hospitals that meet the distance requirement would not be eligible for the adjustment until data become available to determine that the annual number of discharges is 500 or less. Under this approach, new hospitals would not receive a low-volume adjustment during at least the first 2 years of their existence. (This is generally the amount of time that elapses before submission of a cost report.) This treatment is consistent with the treatment of some existing hospitals, for example, hospitals that have declining numbers of discharges, and would not be eligible for the adjustment until their data show 500 or fewer discharges.

As we noted above, the statute defines a low-volume hospital as a subsection (d) hospital that the Secretary determines is located more than 25 road miles from another subsection (d) hospital and that has less than 800 discharges during the fiscal year. In order to enforce the requirement that a qualifying hospital must be located more than 25 miles from another PPS hospital, we are proposing that a hospital that wishes to qualify for the adjustment must provide its fiscal intermediary with evidence that it meets this distance requirement. The intermediary will then certify, on the basis of the evidence presented by the hospital and any other relevant evidence that it may be able to develop, that the hospital meets this requirement. Other relevant evidence may include maps, mapping software, and inquiries to State and local police, transportation officials, or other government officials.

We are proposing to add a new Sec. 412.101 to incorporate the provisions of section 406 of Public Law 108-173.

N. Medicare Geographic Classification Review Board (MGCRB) Reclassifications (Sec. Sec. 412.230, 412.234, and 412.236)

[If you choose to comment on issues in this section, please include the caption ``Hospital Reclassifications'' at the beginning of your document.]

1. Background

With the creation of the MGCRB, beginning in FY 1991, under section 1886(d)(10) of the Act, hospitals could request reclassification from one geographic location to another for the purpose of using the other area's standardized amount for inpatient operating costs or the wage index value, or both (September 6, 1990 interim final rule with comment period (55 FR 36754), June 4, 1991 final rule with comment period (56 FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing regulations in Subpart L of Part 412 (Sec. Sec. 412.230 et seq.) set forth criteria and conditions for redesignations for purposes of the wage index or the average standardized amount, or both, from rural to urban, rural to rural, or from an urban area to another urban area, with special rules for SCHs and rural referral centers.

Effective with reclassifications for FY 2003, section 1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the average of the 3 years of hourly wage data from the most recently published data for the hospital when evaluating a hospital's request for reclassification. The regulations at Sec. 412.230(e)(2)(ii) stipulate that the wage data are taken from the CMS hospital wage survey used to construct the wage index in effect for prospective payment purposes. To evaluate applications for wage index reclassifications for FY 2005, the

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MGCRB used the 3-year average hourly wages published in Table 2 of the August 1, 2003 IPPS final rule (68 FR 50135). These average hourly wages are taken from data used to calculate the wage indexes for FY 2002, FY 2003, and FY 2004, based on cost reporting periods beginning during FY 1998, FY 1999, and FY 2000, respectively. 2. Standardized Amount Reclassification Provisions

As specified in Sec. 412.230(d)(1), to be reclassified to an adjacent area for the purpose of using that area's standardized amount, an individual hospital seeking redesignation must demonstrate that its incurred costs are comparable to hospital costs in the adjacent area (that is, hospitals must demonstrate that their costs exceed their current payments by 75 percent of the additional payments they would receive through reclassification) and that it has the necessary close proximity to that area (that is, an urban hospital must be no more than 15 miles and a rural hospital no more than 35 miles from the adjacent area; or at least 50 percent of the hospital's employees must reside in the adjacent area).

Under section 402(b) of Public Law 108-7, Congress provided that all inpatient PPS hospitals be paid at the large urban average standardized amount for discharges occurring on or after April 1, 2003 and before October 1, 2003. Under Public Law 108-89, Congress extended section 402(b) of Public Law 108-7 to discharges occurring through March 31, 2004. Section 401 of Public Law 108-173 further extended the equalization of urban and rural operating standardized payment amounts. (See section IV.B. of this preamble for a more detailed discussion.) Section 401 also equalized the Puerto Rico-specific urban and other area rates by requiring that the Puerto Rico-specific urban and other area rates be made retroactive to October 1, 2003. The Puerto Rico- specific equalization of the urban and rural operating standardized amounts became effective for discharges beginning on or after April 1, 2004.

As a result of these legislative changes, the standardized amount reclassification criterion is no longer necessary or appropriate. Therefore, we are proposing to revise Sec. 412.230 and Sec. 412.234 to remove all standardized amount criteria provisions. We are proposing to remove the provisions of ``Sec. 412.230(d)'' (existing paragraph (e) would be redesignated as paragraph (d)), and to remove Sec. 412.234(c) and (d)(2) (existing paragraph (d)(1) would be redesignated as paragraph (c) and revised), which contain the criterion requiring individual hospitals and urban hospital groups to demonstrate that their costs are more comparable to the average amount they would be paid if they were reclassified than the amount they would be paid under their current classification.

With the implementation of the equalization of the national adjusted operating standardized amount for large urban and other areas provision of Public Law 108-173, we also are proposing the following technical revisions to several sections under Subpart L of Part 412, which set forth the criteria and conditions for redesignations.

We are proposing to delete the cross-reference to ``Sec. 412.230(d)(2)'' cited in Sec. 412.230(a)(4) and to make redesignation changes for the existing cross-reference changes to paragraph (e), which is proposed to be redesignated as paragraph (d).

We are proposing to delete Sec. 412.230(a)(5)(ii) (the existing paragraphs (a)(5)(iii), (a)(5)(iv), and (a)(5)(v) would be redesignated as paragraphs (a)(5)(ii), (a)(5)(iii), and (a)(5)(iv), respectively. Under existing Sec. 412.230(a)(5)(ii), we defined, for fiscal years 1997, 1998, and 2002, the limitation for redesignation for purposes of the standardized amount. Our policy has been that a hospital may not be redesignated for purposes of the standardized amount to an area that does not have a higher standardized amount than the standardized amount the hospital currently receives.

We are proposing to delete existing Sec. 412.236. Section 412.236 sets forth the redesignation criteria for hospitals in a NECMA. Under the new CBSAs, OMB has defined the MSAs and Micropolitan areas in New England on the basis of counties. As discussed in section III.B. of this proposed rule, to maintain consistency in the definition of labor market areas between New England and the rest of the country, we are proposing to use the New England MSAs under the new CBSA definition. Proposing to adopt the New England MSAs requires not only that we delete the reference to NECMAs in existing definitions, but that we also delete reference to criteria applicable to hospitals located in a NECMA that apply for reclassification. In keeping with the proposal to define labor market areas as MSAs, including those in New England, the criteria and conditions for redesignation set forth in Sec. 412.230 will be applicable to New England hospitals seeking to reclassify.

In an effort to refine the reclassification guidelines, we established Sec. Sec. 412.234 and 412.236 in the existing guidelines to allow for reclassification of urban groups and New England groups, respectively (56 FR 25458). Under Sec. 412.232(a) and Sec. 412.234(a), we set forth similar criteria for rural and urban hospitals to be reclassified as a group, respectively. Prior to the implementation of legislation to eliminate the differential in the standardized amount, urban county groups that were interested in applying for purposes of the wage index submitted applications to the MGCRB for consideration. Many urban county group applications were unable to reclassify solely because they failed to meet the standardized amount criteria. In light of the fact that the standardized amount criteria are no longer appropriate, we believe it would be appropriate to make an adjustment to the hospital's wage index by assigning, to hospitals that were unable to reclassify in applications for both FY 2004 and FY 2005, the wage index for the MSA requested in the FY 2004 and FY 2005 group application. Section 1886(d)(5)(I)(i) of the Act provides the Secretary with broad authority to make adjustments and exceptions under the IPPS. Specifically, the section provides that the ``Secretary shall provide by regulation for such other exceptions and adjustments to such payment amounts under this subsection as the Secretary deems appropriate.'' Under this unique circumstance, we are proposing to exercise the broad authority under section 1886(d)(5)(I)(i) of the Act, to make an exception to the assignment of wage index value for certain hospitals that failed to reclassify as a group under Sec. 412.234 for FY 2004 and FY 2005. Specifically, effective with discharges occurring during the 3-year period beginning October 1, 2004 through September 30, 2007, any hospital whose urban county group application under Sec. 412.234 would have been approved by the MGCRB but for the failure to meet the requirements in Sec. 412.234(c), would be assigned the wage index for the MSA identified in the FY 2004 and FY 2005 group application (in cases where the group identified more than one preference, the hospital would be assigned the wage index that is most advantageous). Hospitals that wish to receive the wage index of the area identified in their FY 2004 and FY 2005 group applications under this provision need only notify CMS in writing, at the address provided under the Addresses section of this proposed rule, before the close of the comment period. The notification should only contain:

The hospital's name and street address.

The hospital's provider number.

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The name, title, and telephone number of a contact person for communications.

The area (name and MSA number) identified in their FY 2005 group application.

Copies of any and all MGCRB decision notification letters for FY 2004 and FY 2005. 3. Reclassification of Urban Rural Referral Centers

Under existing regulations at Sec. 412.230(e)(3), rural referral centers (RRCs) (including hospitals that were ever RRCs) are exempt from one of the average hourly wage criteria that apply to other hospitals seeking reclassification. Specifically, an RRC is exempt from the requirement under Sec. 412.230(e)(1)(iii) that the hospital's 3- year average hourly wage meet a threshold percentage in relation to the average hourly wage of all the hospitals in the area in which the hospital is located. These threshold percentages are 108 percent for hospitals located in urban areas, and 106 percent for hospitals located in rural areas. However, an RRC is not exempt from another threshold requirement, namely the requirement under Sec. 412.230(e)(1)(iv) that the hospital's 3-year average hourly wage must meet a threshold percentage of the 3-year average hourly wage of the hospitals located in the area to which the hospital seeks reclassification. As in the case of the first threshold, this threshold percentage is different for urban and rural hospitals. An urban hospital's 3-year average hourly wage must be at least 84 percent of the average hourly wage of the hospitals located in the area to which the hospital seeks reclassification, while a rural hospital's 3-year average hourly wage must be at least 82 percent of the average hourly wage of the hospitals located in the area to which the hospital seeks reclassification.

It has come to our attention that the requirement of Sec. 412.230(e)(1)(iv) places RRCs located in urban areas on a different footing than RRCs located in rural areas. In some cases, urban RRCs that have been denied reclassification because they failed to meet the 84-percent threshold would have been able to meet the 82-percent threshold that would have applied if they were located in a rural area. RRCs play a significant role in treating Medicare beneficiaries from rural areas, whether or not a particular RRC is physically located in a rural area or an urban area. Thus, we believe that it would be more appropriate for all RRCs, whether they are actually located in urban or rural areas, to be treated on an equal basis with respect to the qualifications for geographic reclassification. Therefore, we are proposing to revise Sec. 412.230(e)(1)(iii) of the regulations to provide that RRCs, including RRCs located in urban areas, must meet the 82-percent threshold that applies to rural hospitals rather than the 84-percent threshold that applies to urban hospitals.

Furthermore, we are aware of at least one case in which an RRC was reclassified by the MGCRB for FY 2004, but upon applying to the MGCRB for FY 2005, was found to be ineligible for reclassification because its 3-year average hourly wage was now less than 84 percent of the hospitals located in the MSA to which it applied for reclassification. In this case, the hospital's 3-year average hourly wage was still greater than 82 percent of the MSA to which it had applied for reclassification. In such a case, we believe that it would be appropriate to make an accommodation for one year, so that the hospital is not subjected to the financial strain that may be caused by receiving a lower wage index for one year until it qualifies to apply for reclassification under the revised threshold criterion that we are proposing here. Therefore, we are proposing that, in such a case, we would exercise our authority under section 1886(d)(5)(I)(i) of the Act to make an exception by assigning to the hospitals for one additional year the wage index that applied to the hospital in FY 2004 through FY 2005. We are proposing to use this authority to provide, under this unique circumstance, special protection to a small number of hospitals that would otherwise be subject to a temporary, but serious, disadvantage. Specifically, we would assign an RRC that meets the conditions described above, the wage index value of the MSA to which it was reclassified by the MGCRB in FY 2004. In order to be eligible for this exception, the hospital may not qualify for any geographic reclassification for discharges effective October 1, 2004 (under the regular rules or the special one-time appeal provision). This assignment would be valid only for FY 2005, after which the hospital would have the opportunity to apply for reclassification under the new threshold for all RRCs that we are proposing in this rule.

We are proposing to revise proposed redesignated Sec. 412.230(d)(3) and add a new Sec. 412.64(j) to incorporate this proposal. 4. Special Circumstances of Sole Community Hospitals (SCHs) in Low Population Density States

Medicare program policy has long provided special treatment for hospitals in rural areas. For many years, rural hospitals have experienced lower margins than other hospitals, and Congress has created several special measures to address the unique issues of hospitals in rural areas. For example, Congress created the CAH program in 1997 to ensure that beneficiaries in isolated areas had access to emergency services and certain essential inpatient services. To qualify for CAH designation, a hospital must be located more than 35 miles from the nearest similar hospital and have an average length of stay not exceeding 4 days. A CAH must provide 24-hour emergency care services and have no more than 25 acute care beds. CAHs are currently paid 101 percent of their current Medicare allowable costs for inpatient and outpatient services. Similarly, the SCH program has long served to maintain access to needed health services for beneficiaries in isolated communities. SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal national rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge.

Many rural hospitals have taken advantage of the opportunity to participate in the CAH program in recent years. We expect the number of hospitals to increase because of the changes made to the CAH program under recently enacted Public Law 108-173 (for example, increasing the reasonable cost payment rate from 100 percent to 101 percent and increasing the qualifying bed size limitation from 15 to 25). Because CAHs are paid on the basis of their reasonable costs, the wage index is not a factor in their payments, and geographic reclassification is thus not an issue for these hospitals. However, for many rural hospitals that cannot qualify for CAH status, the wage index remains an important factor in their payment, even in the case of SCHs paid on their hospital-specific rate, for which the only impact of the wage index may be on their inpatient capital and outpatient payments. The regulations governing reclassifications by the MGCRB provide special treatment for SCHs by exempting them from the normal rules that require hospitals to demonstrate a close

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proximity (15 miles in the case of urban hospitals; 35 miles for rural hospitals), and allowing these hospitals to reclassify to the urban area or the rural area that is the closest to the hospital.

Wage index assignment is an especially pressing issue for hospitals in States with low population densities. In such States, employees are likely to commute greater distances to work. More distant areas are thus likely to compete for labor than is the case in more densely populated States. Because of this concern, and the program's longstanding recognition of these hospitals, we exercised our discretion in implementing the special one-time wage index reclassification appeal provision of section 508 of Pub. L. 108-173 to provide special consideration for SCHs in States with fewer than 10 people per square mile, based on 2000 census data (Alaska, Montana, North Dakota, South Dakota, and Wyoming). Specifically, we provided that SCHs in such a State could reclassify to an MSA within its State. More than 20 SCHs in those States were able to reclassify under this provision.

However, a number of SCHs from those States were precluded from reclassifying under the terms of section 508. We are concerned that these hospitals could now be placed at a serious disadvantage in comparison to other SCHs in their States and regions. Under the authority of section 1886(d)(5)(I)(i) of the Act, we are proposing to provide, under these unique and temporary circumstances, special protection to a small number of hospitals that would otherwise be subject to a temporary, but serious, disadvantage. Specifically, we are proposing to allow an SCH in one of the States with fewer than 10 people per square mile (Alaska, Montana, North Dakota, South Dakota, and Wyoming) to adopt the wage index of another geographic area within its State for 3 years.

Such wage index assignments would become effective for FY 2005 through FY 2007. Because the wage index assignments would be made in order to remedy a temporary disadvantage, the assignments would be for the 3-year period only and would not be available thereafter. In order to receive the wage index of another area under this proposal, a SCH may not qualify for reclassification (under the regular rules or the special one-time appeal provision) effective for discharges on or after October 1, 2004. SCHs in the identified States will not be required to meet proximity or access requirements similar to those required for reclassification in order to qualify for change in wage index under this provision. SCHs that wish to receive the wage index of another area within their State under this provision need only notify CMS in writing, at the address in the ``Addresses'' section provided for comments on this proposed rule, before the close of the comment period. The notification should contain:

The hospital's name and street address.

The hospital's provider number.

The name, title, and telephone number of a contact person for communications.

A statement certifying the SCH status.

The name of the area within the State whose wage index the hospital wishes to adopt. 5. Possible Reclassifications for Dominant Hospitals and Hospitals in Single-Hospital MSAs

Representatives of individual hospitals have expressed concern about the special circumstances of dominant hospitals and hospitals in single-hospital MSAs in relation to the wage index and the rules governing geographic reclassification. The term ``dominant hospital'' generally refers to a hospital that pays a substantial proportion of all the wages paid by hospitals geographically located in the hospital's area. A dominant hospital necessarily has a preponderate influence on the wage index calculation for the area in which it is located. As a result, dominant hospitals find it difficult to meet the threshold requirements for wage index reclassification; for example, the requirement that an urban hospital's average hourly wage is at least 108 percent of the average hourly wage of hospitals in the area in which the hospital is located (Sec. 412.230(e)(1)(iii)(B)). Indeed, a dominant hospital would find it difficult to meet any threshold based on the ratio of the hospital's average hourly wage to the average hourly wage of hospitals in the area, unless the dominant hospital's wage data were removed from the denominator for purposes of the comparison. Dominant hospitals have argued that this places them in an unfair situation. While the lower wages of other, smaller hospitals in the area can still have the effect of holding down their wage index, their dominant position makes it difficult, or even impossible, to reclassify to another area where the wage index may more closely reflect their costs.

Hospitals in single-hospital MSAs face a situation that is similar in certain respects, but quite different in others. By definition, the wage index for the sole hospital in an MSA is based completely on that hospital's wage data. Such a hospital receives, in effect, its own unique wage index, reflecting the hospital's exact position in relation to the national average hourly wage. As a result, these hospitals cannot qualify for reclassification, unless they are exempt from the wage threshold requirements due to rural referral center status. By definition, the ratio of such a hospital's average hourly wages to the area average hourly wage is always 100 percent, and these hospitals thus cannot meet either the 108 percent threshold for urban hospitals or the 106 percent threshold for rural hospitals (Sec. 412.230(e)(1)(iii)(B)). Unlike dominant hospitals, hospitals in single- hospital MSAs cannot argue that they are disadvantaged by the effect that lower wage hospitals can have on the area wage index. However, these hospitals have contended that they are sometimes in the position of competing for labor with hospitals in nearby MSAs with higher wage indexes. Under these circumstances, these hospitals cannot reclasssify to the higher wage index area even if they meet the relevant distance requirements. These hospitals also contend that they cannot afford to compete with hospitals that are paid under a higher wage index, and the 3-year lag in the data used to compute the wage index can place them in a permanent position of playing catchup. On the other hand, it is also true that such a disadvantage may be only temporary because increasing wages may eventually equalize wage index values despite the temporary financial disadvantage that would accrue to these hospitals during the 3-year lag period.

We are inviting comment on the concerns raised by hospitals in these two situations and on possible methods of addressing these concerns. A number of measures might be considered to address the concerns of these hospitals. In the case of dominant hospitals, the threshold requirements for reclassification could be revised to provide that a hospital's average hourly wage is at least 108 percent (in the case of urban hospitals) or 106 percent (in the case of rural hospitals) of the average hourly wages of all other hospitals in the area. Removing a dominant hospital's wages from the denominator of the ratio would remove the current disadvantage imposed by their dominant status, and make it more realistic for a dominant hospital to meet the threshold requirement. An existing provision under Sec. 412.230(e)(4) provides this treatment for certain dominant

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hospitals, specifically those that were approved for reclassification each year from 1992 through 1997. We could develop a parallel provision that applies to dominant hospitals generally. The use of this revised ratio could be restricted to the special circumstances of dominant hospitals, or extended to all hospitals. We could also adopt a revised threshold for dominant hospitals, as we did in the notice setting forth the criteria for reclassification under the one-time wage index appeal provision of section 508 of Public Law 108-173 (69 FR 7342). Consistent with the criteria from that notice, a dominant hospital might be defined for this purpose as a hospital that pays at least 40 percent of all the wages paid by hospitals geographically located in the hospital's area. We are considering adopting one of these measures in the final rule, and welcome comments on the advisability of doing so.

In the case of hospitals in single-hospital MSAs, one new provision that we are proposing to implement in this proposed rule may address some of their concerns (see section III.G.3.2. of this preamble). Section 505 of Public Law 108-173 provides for a new wage index adjustment for hospitals in lower wage areas in cases where significant numbers of hospital workers commute from the lower wage area to higher wage areas nearby. The statute requires that at least 10 percent of the hospital workers in a county must be commuting to a higher wage area, or areas, in order for the hospitals in the county to receive the adjustment. The adjustment formula provides for an increase to the wage index for hospitals in the county, based on the differences between the wage index that applies to the county and the higher wage indexes of nearby areas, in proportion to the percentages of hospital workers commuting to the higher wage index areas. To the degree that hospitals in single-hospital MSAs experience disadvantages in competing for hospital workers with hospitals in higher wage index areas, we expect that the counties in which these hospitals are located would qualify for this adjustment. We are actively considering whether to address the concerns of these hospitals more directly. At the same time, we intend to analyze the extent to which this provision would alleviate the concerns of these hospitals. We welcome comments on the special circumstances of hospitals in single-hospital MSAs and whether their special circumstances should be addressed by revisions to the regulations governing reclassification, or other measures. 6. Special Circumstances of Hospitals in All-Urban States

Section 4410 of Public Law 105-33 (BBA) provides that, for the purposes of section 1886(d)(3)(E) of the Act, for discharges occurring on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in the State. This provision, commonly referred to as the ``rural floor,'' currently affects the payments received by 150 hospitals in 49 MSAs. For these 150 hospitals, the applicable wage index and overall payment amounts under the IPPS are higher than they would be if their wage indexes were computed solely on the basis of the wage data from their MSAs. The wage index floor is applied in a budget neutral manner, so that aggregate IPPS payments each year are not greater or less than those that would have been made in the absence of this provision.

The ``rural floor'' under section 4410 of Public Law 105-33 does not apply in the two States that have no rural areas under the labor market definitions that apply within the IPPS. Hospitals in these two States have commented that the absence of a rural floor disadvantages them for wage index purposes compared to hospitals in States where the ``rural floor'' provision can apply. Specifically, some hospitals contend that they would have higher wage indexes, and higher payments overall, if there were a rural area in their State to set a floor under the wage indexes within the State.

We are considering whether it would be appropriate to adopt some measure to address the concerns of these hospitals. For example, we are examining the ratios between the lowest and highest wage index values in States where the ``rural floor'' affects the wage indexes of some hospitals. We might consider employing the average ratio of highest-to- lowest wage indexes in those States to set an imputed ``rural floor'' for all-urban States. For example, assume the average ``lowest-to- highest'' ratio of States with rural floors is 0.9500. Assume further that the lowest wage index in an all-urban State is 1.0000, and the highest is 1.1000. The ``lowest-to-highest'' ratio for that State is 0.9091. If we apply the average ``lowest-to-highest'' ratio to the highest wage index in the all-urban State, we would multiply 0.9500 by 1.1000, which yields 1.0450. The imputed analogue to the ``rural floor'' for the all-urban State would then be 1.0450. Any hospital with a regular wage index value less than 1.0450 would then receive the new imputed floor.

We welcome comments on the position of hospitals in all-urban States relative to hospitals that receive the ``rural floor'' in other States. We also welcome comments on whether it would be advisable to adopt an imputed floor measure or some alternative measure to address the concerns of hospitals in these States. We note that, in order to be consistent with the statutory provision establishing the rural floor, we would apply any such measure in budget neutral manner, that is, we would adjust the standardized amount so that aggregate IPPS payments each year are not greater or less than those that would have been made in the absence of this provision.

O. Payment for Direct Graduate Medical Education (Existing Sec. 413.86)

[If you choose to comment on issues in this section, please include the caption ``Graduate Medical Education'' at the beginning of your comment.]

1. Background

Section 1886(h) of the Act, as added by section 9202 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 99-272) and implemented in regulations at existing Sec. 413.86, establishes a methodology for determining payments to hospitals for the costs of approved GME programs. Section 1886(h)(2) of the Act, as added by COBRA, sets forth a payment methodology for the determination of a hospital-specific, base-period per resident amount (PRA) that is calculated by dividing a hospital's allowable costs of GME for a base period by its number of residents in the base period. The base period is, for most hospitals, the hospital's cost reporting period beginning in FY 1984 (that is, the period of October 1, 1983 through September 30, 1984). The PRA is multiplied by the weighted number of full-time equivalent (FTE) residents working in all areas of the hospital (and nonhospital sites, when applicable), and the hospital's Medicare share of total inpatient days to determine Medicare's direct GME payments. In addition, as specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting periods beginning on or after October 1, 1993, through September 30, 1995, each hospital-specific PRA for the previous cost reporting period is not updated for inflation for any FTE residents who are not either a primary care or an obstetrics and gynecology resident. As a result, hospitals that train primary care and obstetrics and gynecology residents, as well as nonprimary care residents in FY

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1994 or FY 1995, have two separate PRAs: one for primary care and obstetrics and gynecology and one for nonprimary care.

The BBRA (Pub. L. 106-113) amended section 1886(h)(2) of the Act to establish a methodology for the use of a national average PRA in computing direct GME payments for cost reporting periods beginning on or after October 1, 2000, and on or before September 30, 2005. The BBRA established a ``floor'' for hospital-specific PRAs equal to 70 percent of the locality-adjusted national average PRA. In addition, the BBRA established a ``ceiling'' that limited the annual adjustment to a hospital-specific PRA if the PRA exceeded 140 percent of the locality- adjusted national average PRA. Section 511 of the BIPA (Pub. L. 106- 554) increased the floor established by the BBRA to equal 85 percent of the locality-adjusted national average PRA. Existing regulations at Sec. 413.86(e)(4) specify that, for purposes of calculating direct GME payments, each hospital-specific PRA is compared to the floor and the ceiling to determine whether a hospital-specific PRA should be revised.

Section 1886(h)(4)(F) of the Act established caps on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating direct GME payments. For most hospitals, the caps were the number of allopathic and osteopathic FTE residents training in the most recent cost reporting period ending on or before December 31, 1996.

Note to Readers: This proposed rule includes a major redesignation of the contents of Sec. 413.86. As a result of the numerous amendments we have made over the years, the size of Sec. 413.86 has become voluminous and difficult to follow because of the multiple levels of coding. We are taking a first step to split the one section (Sec. 413.86) into nine individual sections (Sec. Sec. 413.75 through 413.83). We are proposing to designate each first level paragraph under existing Sec. 413.86 as a separate new section and vacate Sec. 413.86. At this time, we are not proposing to make any changes in the language of these new redesignated sections, except for the changes that are discussed in section IV.O. of this preamble (which would conform to the existing language of Sec. 413.86) and any appropriate cross-reference and conforming changes. We are providing a detailed crosswalk of the existing paragraphs of Sec. 413.86 to the proposed new Sec. Sec. 413.75 through 413.83. In addition, in any discussion of changes we are proposing to make, we are providing both the existing citation under Sec. 413.86 and the proposed redesignated section and paragraph. At a later date, we may further refine the contents of the redesignated sections to improve readability.

2. Reductions of and Increases in Hospitals' FTE Resident Caps for GME Payment Purposes Under Section 422 of Public Law 108-173 (Proposed Redesignated Sec. 413.79 (a Proposed Redesignation of Sec. 413.86(g)) a. General Background on Methodology for Determining the FTE Resident Count

As we explain earlier in this preamble, Medicare makes both direct and indirect GME payments to hospitals that train residents in approved medical residency training programs. Direct GME payments are made in accordance with section 1886(h) of the Act, based generally on hospital-specific PRAs, the number of FTE residents a hospital trains, and the hospital's Medicare patient share. IME payments are made in accordance with section 1886(d)(5)(B) of the Act, based generally on the ratio of the hospital's FTE residents to the number of hospital beds. Accordingly, the calculation of both direct GME and IME payments is affected by the number of FTE residents that a hospital is allowed to count; generally, the greater the number of FTE residents a hospital counts, the greater the amount of Medicare direct GME and IME payments the hospital will receive. In an attempt to end the implicit incentive for hospitals to increase the number of FTE residents, Congress instituted a cap on the number of allopathic and osteopathic residents a hospital is allowed to count for direct GME and IME purposes under the provisions of section 1886(h)(4)(F) of the Act for direct GME and section 1886(d)(5)(B)(v) of the Act for IME. Dental and podiatric residents were not included in this statutorily mandated cap. b. Reduction of Hospitals' FTE Resident Caps Under the Provisions of Section 422 of Public Law 108-173

Medicare makes direct GME and IME payments based only on the number of FTE residents that is within a hospital's FTE resident cap. Some hospitals have trained a number of allopathic and osteopathic residents in excess of their FTE resident caps. Other hospitals have reduced their resident counts to some level below their FTE resident caps. Section 422 of Public Law 108-173 added a new section 1886(h)(7) to the Act to provide for reductions in the statutory resident caps under Medicare for certain hospitals and authorize a ``redistribution'' of the FTE resident slots resulting from the reduction in the FTE resident caps to other hospitals.

The new section 1886(h)(7)(A) of the Act provides that a hospital's FTE resident cap will be reduced if its reference resident level, as described below, is less than its otherwise applicable FTE resident cap. Rural hospitals with less than 250 acute care inpatient beds are exempt from these reductions. For other hospitals, the reduction will be equal to 75 percent of the difference between the hospital's otherwise applicable FTE resident cap and its reference resident level.

(We note that the remainder of this section IV.O. of this preamble addresses the provisions of section 1886(h)(7) of the Act, as added by section 422 of Public Law 108-173, as it relates to hospitals' FTE resident caps for direct GME and IME payment purposes. We address the provisions of section 1886(h)(7) of the Act as it relates specifically to the IME adjustment under section IV.K.2. of this preamble.)

Under the new section 1886(h)(7)(B) of the Act, the Secretary is authorized to increase the otherwise applicable FTE resident caps for certain categories of hospitals for portions of cost reporting periods occurring on or after July 1, 2005, by an aggregate number that does not exceed the estimated overall reduction in FTE resident caps for all hospitals under section 1886(h)(7)(A). A single hospital may receive an increase in its FTE resident cap of no more than 25 additional FTEs. In determining which hospitals would receive an increase in their FTE resident caps, section 1886(h)(7)(B) of the Act directs us to--

Take into account the demonstrated likelihood of the hospital filling the additional positions within the first three cost reporting periods beginning on or after July 1, 2005.

Establish a priority order to distribute resident slots first to programs in hospitals located in rural areas; second, to urban hospitals that are not in large urban areas; and third, to other hospitals operating a training program in a State where there is no other training program for a particular specialty in the State.

In summary, section 422 of Public Law 108-173 added a new section 1886(h)(7) of the Act that prescribes a methodology for determining reductions to certain hospitals' FTE resident caps based on unused FTE resident slots, provides for certain exceptions to the FTE resident cap reductions, and includes general criteria that CMS must consider in the redistribution, to other hospitals, of the estimated number of FTE resident slots resulting from the reductions in the FTE resident caps. In this proposed rule, we are proposing procedures for determining whether, and by what amount, a hospital's FTE resident cap is subject to a reduction under section 1886(h)(7) of the Act. We

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also are proposing an application process for hospitals that seek to receive increases in their FTE resident caps and the specific criteria that we would use to determine which hospitals will receive the increases in their FTE resident caps under section 1886(h)(7)(B) of the Act. c. Hospitals Subject to the FTE Resident Cap Reduction

As indicated earlier, section 1886(h)(7)(A) of the Act, as added by section 422 of Public Law 108-173, provides that if a hospital's ``reference resident level'' is less than its ``otherwise applicable resident limit,'' its ``otherwise applicable resident limit'' will be reduced by 75 percent of the difference between its ``otherwise applicable resident limit'' and its ``reference resident level.'' Under the amendments made by section 422, the ``reference resident level'' generally refers to the number of unweighted allopathic and osteopathic FTE residents who are training at a hospital in a given cost reporting period. The ``otherwise applicable resident limit'' refers to a hospital's FTE resident cap established under sections 1886(h)(4)(F)(i) and (h)(4)(H) of the Act. A hospital's permanent FTE cap under section 1886(h)(4)(F)(i) of the Act is based on (1) for an urban hospital, the number of unweighted allopathic or osteopathic FTE residents in the hospital's most recent cost reporting period ending on or before December 31, 1996 (the ``1996 cap''), as specified under existing regulations at Sec. 413.86(g)(4) (proposed redesignated Sec. 413.79(c)(2)), and, if applicable, the 1996 cap adjusted for new programs as specified under existing Sec. 413.86(g)(6) (proposed redesignated Sec. 413.79(e)); or (2) for a rural hospital, 130 percent of the 1996 cap increased, as specified under existing Sec. 413.86(g)(4) and, if applicable, the 1996 cap adjusted for new programs as specified under Sec. 413.86(g)(6), or the 1996 cap with both adjustments. We also note that a hospital's 1996 cap may be adjusted in other instances (such as temporary adjustments for program or hospital closure) if the hospital is a member of a Medicare GME affiliated group under existing Sec. 413.86(b) (proposed redesignated Sec. 413.75(b)), but we will discuss the applicability of affiliations under section 1886(h)(7)(A) of the Act in more detail at section IV.O.2.f.(5) of this preamble.

In our discussion of the provisions of section 422 of Public Law 108-173 under this section of this proposed rule, we will generally refer to a hospital's number of unweighted allopathic and osteopathic FTE residents in a particular period as a hospital's ``resident level.'' We will also refer to a hospital's resident level in the applicable ``reference period,'' as explained further below, as the hospital's ``reference resident level.'' In addition, we will refer to the ``otherwise applicable resident cap'' as the hospital's FTE resident cap that is applicable during a particular cost reporting period. Thus, we are proposing that if a hospital's resident level is less than the hospital's otherwise applicable resident cap in the ``reference period'' (as explained below), effective for portions of cost reporting periods occurring on or after July 1, 2005, we would permanently reduce the hospital's FTE resident cap by 75 percent of the difference between a reference resident level and the otherwise applicable FTE resident cap. For example, if a hospital's otherwise applicable FTE resident cap for the reference period is 100, and its resident level for that period is 80 FTEs, we would reduce the hospital's FTE resident cap by 15 FTEs [0.75 (100-80)] = 15). (Proposed redesignated Sec. 413.79(c)(3)). d. Exemption From FTE Resident Cap Reduction for Certain Rural Hospitals

Section 1886(h)(7)(A)(i)(II) of the Act, as added by section 422 of Public Law 108-173, specifically exempts rural hospitals (as defined in section 1886(d)(2)(D)(ii) of the Act) with less than 250 acute care inpatient beds from the possible 75 percent reduction to their FTE resident caps. Section 1886(d)(2)(D)(ii) of the Act defines a rural area as any area outside a Metropolitan Statistical Area (MSA). Under the existing regulations at Sec. 413.62(f)(ii), an ``urban area'' means (1) a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA); or (2) the following New England counties: Litchfield County, Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack County, New Hampshire; and Newport County, Rhode Island. Under existing Sec. 413.62(f)(iii), a ``rural area'' means any area outside an urban area. In addition, we note that under section III. of this preamble, which discusses wage areas, we are proposing to no longer recognize NECMAs as a distinct category of wage areas. Thus, for purposes of the amendments made by section 422, we are proposing that any hospital located in an area that is not in a MSA is a rural hospital, regardless of any reclassification under Sec. 412.102 or Sec. 412.103. We note that this definition of ``rural'' is consistent with our proposal under section III. of this preamble concerning designation of wage index areas.

A hospital's bed size is based on its number of available beds, as determined for IME payment purposes under Sec. 412.105 of the regulations. For purposes of determining whether a rural hospital has less than 250 beds, we are proposing to use data from the rural hospital's most recent cost reporting period ending on or before September 30, 2002. (This information may be found on Worksheet S-3, Part I of the Medicare cost report, CMS-2552-96, column 2, the sum of lines 1 and 6 through 10, divided by the number of days in the cost reporting period.) This is the cost reporting period under section 1886(h)(7)(A)(ii)(I) of the Act that is to be used in determining a hospital's reference resident level (the unweighted allopathic and osteopathic FTE resident count) (unless a hospital makes and CMS grants a timely request under section 1886(h)(7)(A)(ii)(II) of the Act). We are proposing that if a rural hospital has less than 250 beds in its most recent cost reporting period ending on or before September 30, 2002, it would not be subject to a possible reduction to its FTE resident cap under section 1886(h)(7)(A) of the Act. However, if a rural hospital has at least 250 beds in its most recent cost reporting period ending on or before September 30, 2002, we are proposing that the rural hospital would be subject to a possible reduction to its FTE resident cap. (Proposed redesignated Sec. 413.79(c)(3)(i)). e. Determining the Estimated Number of FTE Resident Slots Available for Redistribution

Under section 1886(h)(7)(A) of the Act, we will determine the number of resident positions available for redistribution by estimating possible reductions to hospitals' FTE resident caps. We believe that section 422 allows us to distinguish between the FTE counts that are used to determine the number of FTE resident slots that are available for redistribution (that is, the ``resident pool''), and the actual number of FTE residents by which hospitals' FTE resident caps are ultimately reduced. We are proposing to estimate the reduction to a hospital's FTE resident cap under section 1886(h)(7)(A) of the Act for purposes of determining the number of FTEs that a hospital might contribute to the resident pool. This proposed interpretation is based on the language at section 1886(h)(7)(B)(i) of the Act, as added by section 422(a)(3), which states that the ``aggregate number of increases in the otherwise applicable

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resident limits under this subparagraph may not exceed the Secretary's estimate of the aggregate reduction in such limits * * *'' (emphasis added). We are proposing to interpret this language to mean that we would have complied with the statute as long as the aggregate number of FTE residents by which we increase the FTE resident caps of qualifying hospitals under section 1886(h)(7)(B) of the Act is not more than the estimate of the aggregate number of FTE residents by which we would reduce the FTE resident caps of hospitals whose reference resident levels are less than their otherwise applicable FTE resident caps. However, we could subsequently perform an audit, as described further in section IV.O.2.f.(3) of this preamble, in order to make a final determination regarding any reductions to a hospital's FTE resident cap.

To ensure that we will begin making payments for most hospitals based on the revised FTE resident caps by July 1, 2005, we are proposing to set a date by which we will have estimated a hospital's resident level and compared it to the hospital's otherwise applicable resident cap to estimate whether, and by how much, the hospital's FTE resident cap would be reduced. We are not proposing to commit to make a final determination as to whether, and by how much, a particular hospital's FTE resident cap should be reduced as of this date, nor are we proposing to commit to inform any hospital that it will receive an increase to its FTE resident cap by this date. Rather, we are only proposing to use this date as an internal ``deadline'' to ensure that we will have sufficient time to distribute the resident pool and begin making payments for most hospitals based on the revised FTE resident caps by July 1, 2005. We are proposing that this date be May 1, 2005, and that date would apply for all hospitals for purposes of determining an estimate of whether and by how much their FTE resident caps should be reduced.

Accordingly, in the event that the fiscal intermediaries have not completed an audit (explained further under section IV.O.2.f.(3) of this preamble) by May 1, 2005, we are proposing that CMS may estimate the number of FTE residents by which a hospital's FTE resident cap should be reduced by May 1, 2005. For example, a fiscal intermediary may estimate by May 1, 2005, that Hospital A's FTE resident cap should be reduced by 10 FTEs. Thus, we would place 10 FTEs into the resident pool. It is possible that even after May 1, 2005, the fiscal intermediary may continue to audit Hospital A's relevant cost report(s) to determine if, in fact, 10 FTEs is the appropriate amount by which to reduce Hospital A's FTE resident cap, and could ultimately conclude that Hospital A's FTE resident cap should only be reduced by 8 FTEs. If the fiscal intermediary makes this final determination by May 1, 2005, we would change the number of FTE residents in the resident pool attributable to Hospital A from 10 FTEs to 8 FTEs. If the fiscal intermediary does not make this determination by May 1, 2005, based on the audit, we would only reduce Hospital A's FTE resident cap by 8 FTEs effective July 1, 2005, but the number of FTE residents in the resident pool attributable to Hospital A would remain at 10 FTEs (the estimated number as of May 1, 2005). Similarly, if the fiscal intermediary ultimately concluded that Hospital A's FTE resident cap should be reduced by 12 FTEs, but this final determination is not made by May 1, 2005, Hospital A's FTE resident cap would be reduced by 12 FTEs effective July 1, 2005, but the number of FTE residents in the resident pool attributable to Hospital A would remain at 10 FTEs.

As we stated above, because we believe that section 422 allows us to distinguish between the FTE counts that are used to determine the size of the resident pool, and the actual number of FTE residents by which hospitals' FTE resident caps are ultimately reduced, we are proposing, in certain instances, to use estimated information to determine possible reductions to hospitals' FTE resident caps. As described further below, sections 1886(h)(7)(A)(ii) and (h)(7)(A)(iii) of the Act direct CMS to adjust a hospital's reference resident level in certain instances, due to an expansion of an existing program that is not reflected on the most recent settled cost report, or to include the number of residents for which a new program was accredited, or for hospitals that are members of a Medicare GME affiliated group as of July 1, 2003. We note that, in adjusting the reference resident level in these instances, the number of FTE residents by which we adjust the reference resident level for purposes of determining possible reductions to a hospital's FTE resident cap may not be the actual or audited number of FTE residents that we would otherwise use for direct GME or IME payment purposes. For example, for expansions under newly approved programs (as explained in more detail in section IV.O.2.f.(3) of this preamble), we are proposing to adjust the reference resident level to include the number of residents for which a new program was accredited at a hospital, even though at the time the fiscal intermediary is determining possible reductions to a hospital's FTE resident cap, the hospital may not be training the full complement of residents for which the program was accredited. Thus, the number of FTE residents (including those training in the newly accredited program) for purposes of IME and direct GME payment would be dependent upon the actual number of FTEs the hospital is permitted to count in a particular cost reporting period, as determined in accordance with the regulations at Sec. 412.105 for IME and Sec. 413.86 for direct GME.

In addition, we realize that there may be instances where a hospital's FTE resident cap or a hospital's FTE resident count for the reference cost reporting period might be under appeal. We believe that appeals related to these issues should be resolved through the normal course of business. In the event that an appeal that may affect determinations made under section 1886(h)(7)(A) of the Act is not resolved by May 1, 2005, we are proposing that we would estimate the number of FTE residents by which a hospital's FTE resident cap should be reduced (or not reduced, as applicable) by May 1, 2005. f. Determining the Possible Reduction to a Hospital's FTE Resident Cap (1) Reference Resident Level--General

In order to determine if a hospital's resident level is less than the hospital's otherwise applicable FTE resident cap, section 1886(h)(7)(A)(ii) of the Act, as added by section 422 of Public Law 108-173, directs the Secretary to use one of two reference cost reporting periods. Section 1886(h)(7)(A)(ii)(I) of the Act directs CMS to use a hospital's most recent cost reporting period ending on or before September 30, 2002, ``for which a cost report has been settled (or, if not, submitted (subject to audit)), as determined by the Secretary,'' as the reference period, unless we grant the hospital's timely request to use a later cost report under section 1886(h)(7)(A)(ii)(II) of the Act, as described under section IV.O.2.f.(2) of this preamble. Generally, if the hospital's resident level for either direct GME or IME is less than the hospital's otherwise applicable resident cap for direct GME or IME, respectively, for the most recent cost reporting period ending on or before September 30, 2002, the hospital's FTE resident cap for direct GME or IME will be reduced by 75 percent of the difference between the resident level and the otherwise

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

[[pp. 28295-28344]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

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applicable FTE resident cap. On April 30, 2004, we issued a One-Time Notification (OTN) (Transmittal 77, CR 3247), ``Redistribution of Unused Resident Positions, Section 422 of the Medicare Modernization Act of 2003 (MMA), Public Law 108-173, for Purposes of Graduate Medical Education (GME) Payments'' that prescribed certain requirements related to the implementation of section 422 and established a deadline by which a hospital must exercise its option to request that we use of later cost report as the reference cost report. If the hospital's cost report for the most recent cost reporting period ending on or before September 30, 2002, is settled by April 30, 2004, the date on which the OTN was issued, we are proposing to use that cost report to determine if, and by how much, a hospital's FTE resident cap should be reduced. We note that the ``settled'' cost report does not necessarily mean the initial cost report settlement. The fiscal intermediary may have previously settled the cost report, reopened it to audit it, and then settled the cost report again, issuing a revised Notice of Program Reimbursement (NPR). Thus, we would refer to the more recently issued NPR. When a hospital's cost report for the most recent cost reporting period ending on or before September 30, 2002, has been settled by April 30, 2004, we are proposing to use the most recently settled cost report as of April 30, 2004, to determine any reduction to the hospital's FTE resident cap under section 1886(h)(7)(A)(ii)(I) of the Act (unless we grant the hospital's timely request under section 1886(h)(7)(A)(ii)(II) of the Act to use a later cost report, as described in section IV.O.2.f.(2) of this preamble). If the hospital's cost report for the most recent cost reporting period ending on or before September 30, 2002 has not yet been settled as of April 30, 2004, the as-submitted cost report would be used to determine any reduction in the FTE resident cap, subject to audit by the fiscal intermediary. If the cost report was initially settled, but then reopened, and the fiscal intermediary has not issued a revised NPR prior to April 30, 2004, the data from the initially settled cost report will be used to determine the possible reductions to the FTE resident caps. (2) Expansion of an Existing Program

Section 1886(h)(7)(A)(ii)(II) of the Act, as added by section 422(a) of Public Law 108-173, provides that if a hospital's resident level increased due to an expansion of an existing program, and that expansion is not reflected on the hospital's most recent settled cost report, a hospital may make a timely request to CMS that, rather than using its most recent cost reporting period ending on or before September 30, 2002, to determine if its FTE resident cap should be reduced, CMS should use the cost report for the hospital's cost reporting period that includes July 1, 2003. For example, assume a hospital's most recent settled cost report is September 30, 2000 (that is, no NPRs were issued for subsequent year cost reports). The hospital increased its resident level due to an expansion of an existing program in its fiscal year ending September 30, 2001. The hospital may submit a timely request that CMS use its cost report that includes July 1, 2003 (which would be its cost report for the fiscal year ending September 30, 2003), to determine if and by how much the hospital's FTE resident cap should be reduced. (Proposed redesignated Sec. 413.79(c)(3)(ii)(A)(2)). As explained on page 3 of the OTN, to be considered a timely and proper request, a hospital's request to use its cost reporting period that includes July 1, 2003, must be signed and dated by the hospital's chief financial officer (or equivalent) and submitted to its fiscal intermediary on or before June 4, 2004. In its timely request, the hospital must include the following:

(1) The FTE resident caps for direct GME and IME and the number of unweighted allopathic and osteopathic FTE residents for direct GME and IME in its most recently settled cost report (that is, its cost report that is more recently settled as of April 30, 2004).

(2) The FTE resident caps for direct GME and IME and the unweighted allopathic and osteopathic FTE residents for direct GME and IME for each cost report after its most recently settled cost report, up to and including its cost reporting period that includes July 1, 2003. If the cost reporting period that includes July 1, 2003, has not ended as of June 4, 2004, the hospital must report the estimated number of unweighted allopathic and osteopathic residents for that cost reporting period.

(3) If not already reported in accordance with steps 1 and 2 above, the FTE resident caps for direct GME and IME and the number of unweighted allopathic and osteopathic FTE residents for direct GME and IME in its most recent cost reporting period ending on or before September 30, 2002.

In addition, as we stated in the One-Time Notification (OTN), (Transmittal 77, CR 3247), ``Redistribution of Unused Resident Positions, Section 422 of the Medicare Modernization Act of 2003 (MMA), Public Law 108-173, for Purposes of Graduate Medical Education a hospital should refer to its most recently settled cost report as of the issuance of the OTN (that is, April 30, 2004) to determine whether the hospital believes it has expanded an existing program in a cost reporting period subsequent to the one for the most recently settled cost report.

We also are proposing that, for purposes of this provision, an ``expansion of an existing program'' means that, except for expansions due to newly approved programs, as described below in section IV.O.2.f.(4) of this preamble, the hospital's total number of unweighted allopathic and osteopathic FTE residents training in existing programs in a cost reporting period up to and including the hospital's cost report that includes July 1, 2003, is greater than the resident level in the hospital's most recent settled cost report. (Proposed redesignated Sec. 413.79(c)(3)(ii)(A)(3)). In other words, generally, as long as a hospital trained more unweighted allopathic and osteopathic FTE residents in a cost reporting period after its most recent settled cost report in programs that were existing during the cost reporting period for the most recently settled cost report, it may submit a timely request that its cost report that includes July 1, 2003, be used for purposes of determining any FTE resident cap reduction under section 1886(h)(7)(A)(i) of the Act. We note that if a hospital expanded an existing program after its most recent settled cost report, and then subsequently reduced its FTE resident count to the extent that it actually trained fewer unweighted allopathic and osteopathic FTE residents in its cost report that includes July 1, 2003, than in its most recent cost reporting period ending on or before September 30, 2002, the hospital would not benefit from, and would likely not make, a timely request that its cost report that includes July 1, 2003, be used for purposes of determining a possible reduction to its FTE resident cap. (3) Audits of the Reference Cost Reporting Periods

As mentioned under section IV.O.2.f.(1) of this preamble, to determine a possible reduction to a hospital's FTE resident cap, section 1886(h)(7)(A)(ii)(I) of the Act, as added by section 422(a) of Public Law 108-173, directs CMS to use a hospital's most recent cost reporting period ending on or before September 30, 2002, ``for which a cost report has been settled (or, if not, submitted (subject to audit), as determined by the Secretary'' (emphasis added). We are proposing to interpret

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this language to mean that, if a hospital's cost report for the most recent cost reporting period ending on or before September 30, 2002, has been settled, then, unless the hospital submits a timely request to use the cost reporting period that includes July 1, 2003, we would use the hospital's settled cost report without further audit to determine possible reductions to the FTE resident caps. We also are proposing to interpret this language to mean that if a hospital's cost report for the most recent cost reporting period ending on or before September 30, 2002, has not been settled, the hospital's as-submitted cost report for the most recent cost reporting period ending on or before September 30, 2002, would be subject to audit by the fiscal intermediary. In addition, as stated under section 1886(h)(7)(A)(ii)(II) of the Act, use of a hospital's cost report that includes July 1, 2003 is made ``after audit and subject to the discretion of the Secretary.'' A hospital's cost report that includes July 1, 2003 may be at various stages of settlement, or may not even be submitted at the time this proposed rule is published. For example, if a hospital has a fiscal year end of June 30, its cost reporting period that includes July 1, 2003 would not end until June 30, 2004. This cost report is not required to be submitted until 5 months after the cost reporting period closes, which would be by December 1, 2004. In any case, the fiscal intermediary would need to make a determination as to whether a hospital has actually increased its resident level due to an expansion of an existing program that is not reflected on the most recent settled cost report. Further, the FTE resident counts that are included (or would be included) in the cost report that includes July 1, 2003, are subject to audit by the fiscal intermediary to ensure that an appropriate determination is made as to whether, and by how much, a hospital's FTE resident cap will be reduced. To facilitate these determinations, we are proposing that the fiscal intermediaries may audit the FTE resident counts as necessary in the most recently settled cost reports and in the cost reports up to and including the cost report for the cost reporting period that includes July 1, 2003.

Fiscal intermediaries will perform desk or onsite audits related to section 422, using instructions that will be issued in a separate document. As we explained in the OTN, Transmittal No. 77, CR 3247, in the interest of time and the most efficient use of audit resources, we have required that if a hospital would like CMS to use its cost report that includes July 1, 2003, as its reference period due to an expansion of an existing program, the hospital must notify the fiscal intermediary in accordance with the instructions provided in the OTN by June 4, 2004. If a hospital submits a timely request that its cost report that includes July 1, 2003, be used, the fiscal intermediary would audit that cost report and previous cost reports as necessary to determine if the hospital increased its resident level due to an expansion of an existing program that is not reflected on the most recent settled cost report. If a hospital does not submit a timely request to the fiscal intermediary that its cost report that includes July 1, 2003, be used, the fiscal intermediary would use the cost report for the most recent cost reporting period ending on or before September 30, 2002, to determine if, and by how much, a hospital's FTE resident cap should be reduced, as specified under section 1886(h)(7)(A)(ii)(I) of the Act. If the cost report that is used to determine the possible reduction to a hospital's FTE resident count is for a period of less than or more than 12 months, we are proposing that the fiscal intermediary would prorate the FTE resident caps and unweighted FTE residents to equal 12-month counts. (4) Expansions Under Newly Approved Programs

Under section 1886(h)(7)(ii)(III) of the Act, as added by section 422(a)(3) of Public Law 108-173, a hospital may request that its reference resident level be adjusted to include residents in certain newly approved programs. Specifically, if a hospital's new program was accredited by the appropriate accrediting body (that is, the Accreditation Council on Graduate Medical Education (ACGME) or the American Osteopathic Association (AOA)) before January 1, 2002, but was not in operation during the hospital's reference period, the hospital may submit a timely request that we adjust the reference resident level to include the number of residents for which a new program was accredited at a hospital(s). For a hospital that requests an adjustment due to a newly approved program, we are proposing to determine a hospital's reference period as we otherwise would. If a hospital received accreditation for a new medical residency training program before January 1, 2002, but the program was not in operation (that is, the hospital did not begin training residents in that program) during its reference period (which will be either the most recent cost reporting period ending on or before September 30, 2002, or the cost reporting period that includes July 1, 2003), the hospital may submit a timely request by June 4, 2004, as explained in the OTN, that its resident level for its reference period be adjusted to reflect the number of accredited slots for which that new medical residency training program was approved. We note that section 1886(h)(7)(A)(ii)(III) of the Act does not require that CMS include the number of residents for which the new program is accredited in the hospital's reference cost reporting period for purposes of determining direct GME and IME payment in that reference cost reporting period. Rather, CMS is only required to include the number of residents for which a new program was accredited in the resident level for purposes of determining if, and by how much, a hospital's FTE resident cap should be reduced.

For example, assume a hospital that has a fiscal year end of June 30 received accreditation in October 2001 to train 10 residents in a new surgery program. The hospital does not have an expansion of an existing program not reflected on its most recent settled cost report, so its reference period is the most recent cost reporting period ending on or before September 30, 2002. The hospital first begins to train residents in the new surgery program on July 1, 2002. The new surgery residents are not reflected on the hospital's June 30, 2002 cost report, which is the hospital's most recent cost reporting period ending on or before September 30, 2002. Thus, the hospital may submit a timely request that we increase its resident level for the cost report ending June 30, 2002, by 10 FTE residents to reflect the residents approved for the new surgery program for purposes of determining if the hospital's reference resident level is below its otherwise applicable resident cap. However, we note that if the hospital's fiscal year end in this example was September 30, a program accredited in October 2001 and begun on July 1, 2002, would be in operation during the hospital's cost reporting period ending on September 30, 2002, and the hospital could not receive an increase to its resident level for its cost reporting period ending September 30, 2002, to include the total number of accredited resident positions in the new surgery program. If the new program was accredited for a range of residents (for example, a hospital receives accreditation to train 6 to 8 residents in a new internal medicine program), we are proposing that the hospital may request that its resident level for its most recent cost reporting period ending on or before September 30, 2002 be

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adjusted to reflect the maximum number of accredited positions (which, in this example, would be 8 internal medicine residents). We also are proposing that at the time the hospital makes the timely request to have its resident level adjusted to include the number of accredited resident positions, the new program need not be training the full complement of residents for which the program was accredited. (Proposed redesignated 413.79(c)(3)(A)(3)(ii)). In addition, if more than one hospital was approved as a training site for the residents in the newly accredited program (that is, more than one hospital sponsors the program or there are other participating institutions that serve as training sites for the residents in the program), we are proposing that the adjustment to a requesting hospital's reference resident level would reflect the appropriate portions of the FTE residents in the new program that would be training at that hospital.

Similarly, if, in addition to having accreditation for a new program, a hospital has an expansion of an existing program that is not reflected on the most recent settled cost report, that hospital may submit a timely request that its resident level for the cost reporting period that includes July 1, 2003, be adjusted to include the number of resident positions for which a new program was accredited. We are proposing that a hospital whose reference period is the one that includes July 1, 2003, may only request that its reference resident level be adjusted to include the accredited number of residents for a new program if, in accordance with section 1886(h)(7)(A)(ii)(III) of the Act, the new program was approved by the appropriate accrediting body before January 1, 2002, but was not in operation during the cost reporting period that includes July 1, 2003. This proposal is based on our interpretation of the statutory language, which states that ``the Secretary shall adjust the reference resident level specified under subclause (I) or (II) to include the number of residents that were approved * * * for a medical residency program * * * but which was not in operation during the cost reporting period used under subclause (I) or (II) * * *'' (emphasis added). Because the statute provides for an adjustment to the reference resident level ``specified under subclause I or II,'' as mentioned above, for hospitals that request an adjustment under section 1886(h)(7)(A)(ii)(III) of the Act, we are proposing to identify the applicable reference period as we otherwise would under section 1886(h)(7)(A)(ii)(I) and (II) of the Act. That is, we are proposing to use the hospital's most recent cost reporting period ending on or before September 30, 2002, as the reference cost reporting period, unless the hospital submits a timely request to use the cost reporting period that includes July 1, 2003, due to an expansion of an existing program that is not reflected on the most recent settled cost report. We also note that, as mentioned above, subclause (III) requires that the program be accredited before January 1, 2002, but not be in operation during the hospital's reference cost reporting period, or in this case, the period that includes July 1, 2003. This means that, in order for the hospital to receive an adjustment to its reference resident level under section 1886(h)(7)(A)(ii)(III) of the Act for the cost reporting period that includes July 1, 2003, the new program also cannot be in operation in the cost reporting period that includes July 1, 2003. Thus, while we believe it is possible for a hospital to qualify for this adjustment because the hospital started a new program that is not reflected on its most recent cost reporting period ending on or before September 30, 2002, we believe that few, if any, hospitals will qualify for this adjustment for a new program that was not in operation in the cost report that includes July 1, 2003, because it is unlikely that a program would receive its accreditation prior to January 1, 2002, and still not be in operation by July 1, 2003. (5) Affiliations

Section 1886(h)(7)(A)(iii) of the Act, as added by section 422(a)(3) of Public Law 108-173, directs the Secretary to consider whether a hospital is a member of a Medicare GME affiliated group (as defined under Sec. 413.86(b)) as of July 1, 2003, in determining whether a hospital's FTE resident cap should be reduced. As described above, some hospitals that have reduced their resident levels below their FTE resident caps may have affiliated with other hospitals that would otherwise exceed their FTE resident caps. Thus, while some hospitals were below their FTE resident caps prior to entering into a Medicare GME affiliation agreement, upon affiliating, their FTE resident caps were temporarily reduced because some or all of their excess FTE slots were temporarily added to the FTE caps of other hospitals as part of the affiliation agreement. Under the Medicare GME affiliation agreement, these otherwise ``excess'' FTE slots have been transferred for use by other hospitals, and, therefore, CMS would take into account the revised caps under the affiliation agreement for both the hospital that would otherwise be below its FTE resident cap and the revised caps of the other hospital(s) that are part of an affiliated group. In determining whether hospitals' FTE resident caps should be reduced under section 1886(h)(7)(A)(i) of the Act, section 1886(h)(7)(A)(iii) of the Act directs CMS to consider hospitals ``which are members of the same affiliated group * * * as of July 1, 2003.'' We are proposing that hospitals that are affiliated ``as of July 1, 2003'' means hospitals that have in effect a Medicare GME affiliation agreement, as defined in existing Sec. 413.86(b), for the program year July 1, 2003 through June 30, 2004, and have submitted a Medicare GME affiliation agreement by July 1, 2003 to their fiscal intermediaries with a copy to CMS. These hospitals may have already been affiliated prior to July 1, 2003, or may have affiliated for the first time on July 1, 2003. In either case, in determining possible reductions to a hospital's FTE resident cap, we are proposing to use a hospital's cap as revised by the July 1, 2003 Medicare GME affiliation agreement. We believe this interpretation is consistent with the intent of section 1886(h)(7)(A)(iii) of the Act, as added by section 422(a)(3) of Public Law 108-173, in that a hospital's FTE resident cap should not be reduced if some or all of its excess resident slots have been transferred for use by hospitals with which it is affiliated (that is, the hospital is training at least as many FTE residents as are in its ``affiliated'' FTE resident cap).

Although hospitals in an affiliated group base the FTE cap adjustments on an aggregate FTE resident cap, we are proposing that we would determine whether a hospital's FTE resident cap should be reduced on a hospital-specific basis. Section 1886(h)(7)(A)(iii) of the Act states that ``the provisions of clause (i) shall be applied to hospitals which are members of the same affiliated group * * *'' (emphasis added). Clause (i) of section 1886(h)(7)(A), as described above, requires the reduction of hospitals' FTE resident caps under certain circumstances, based on the otherwise applicable FTE resident cap and the resident level in the applicable reference period, as described above (which would be either a hospital's most recent cost reporting period ending on or before September 30, 2002, or the cost reporting period that includes July 1, 2003). We are proposing to interpret this reference to clause (i) to mean that the Secretary is to use a hospital's July 1, 2003 ``affiliated'' FTE resident cap as

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the otherwise applicable FTE resident cap when determining a possible reduction to the FTE resident cap. In other words, if a hospital is affiliated as of July 1, 2003, we are proposing to superimpose the ``affiliated'' FTE resident cap onto the hospital's reference cost reporting period.

Specifically, as we stated under section IV.O.2.f.(1) of this preamble, consistent with section 1886(h)(7)(A)(ii)(I) of the Act, to determine possible reductions to a hospital's FTE resident cap, we would use a hospital's most recent cost reporting period ending on or before September 30, 2002. If a hospital is part of a Medicare affiliated group for the program year beginning July 1, 2003, we are proposing to compare the hospital's July 1, 2003 ``affiliated'' FTE resident cap to its resident level on the most recent cost report ending on or before September 30, 2002. If the hospital's resident level from its most recent cost report ending on or before September 30, 2002, is below its July 1, 2003 ``affiliated'' FTE resident cap, we are proposing to permanently reduce the hospital's FTE resident cap, that is, the hospital's FTE resident cap without the temporary adjustment under the July 1, 2003 affiliation agreement, by 75 percent of the difference between the hospital's resident level and the July 1, 2003 ``affiliated'' FTE resident cap.

Alternatively, as stated above under section IV.O.2.f.(2) of this preamble, consistent with section 1886(h)(7)(A)(ii)(II) of the Act, a hospital may submit a timely request to CMS that its cost report that includes July 1, 2003, be used as the reference period to determine possible FTE resident cap reductions because of an expansion of an existing program that is not reflected on the hospital's most recent settled cost report. If a hospital is affiliated for the program year beginning July 1, 2003, and we grant the hospital's timely request to use the cost reporting period that includes July 1, 2003, because its expansion of an existing program(s) is not reflected on the most recent settled cost report, we are proposing to compare the hospital's July 1, 2003 ``affiliated'' FTE resident cap to its resident level on the cost report that includes July 1, 2003. If the hospital's resident level from its cost report that includes July 1, 2003 is below its July 1, 2003 ``affiliated'' FTE resident cap, we are proposing to permanently reduce the hospital's FTE resident cap, that is, the hospital's FTE resident cap without the temporary adjustment under the July 1, 2003 affiliation agreement, by 75 percent of the difference between the hospital's resident level and the July 1, 2003 ``affiliated'' FTE resident cap.

For example, Hospital A's most recent cost report ending on or before September 30, 2002 is FYE December 31, 2001. Hospital A has a direct GME FTE resident cap (unadjusted for an affiliation) of 100, and an IME FTE resident cap (unadjusted for an affiliation) of 90. Hospital A did not have an expansion of an existing program that was not reflected on its most recent settled cost report, and therefore, its FYE December 31, 2001 cost report is being used as the reference period for purposes of determining a possible reduction to its FTE resident caps. Hospital A's unweighted direct GME count of allopathic and osteopathic FTE residents on its December 31, 2001 cost report is 60. Hospital A's IME count of allopathic and osteopathic FTE residents on its December 31, 2001 cost report is 55.

Hospital B, with a FYE of September 30, expanded an existing program, and that expansion is not reflected on its most recent settled cost report. Hospital B has submitted, and we have granted, a timely request that its cost report that includes July 1, 2003 (that is, its FYE September 30, 2003 cost report) be used for purposes of determining a possible reduction to its FTE resident caps. Hospital B has a direct GME FTE resident cap (unadjusted for an affiliation) of 100, and an IME FTE resident cap (unadjusted for an affiliation) of 95. Hospital B's direct GME unweighted count of allopathic and osteopathic FTE residents on its September 30, 2003 cost report is 120, and its IME count of allopathic and osteopathic FTE residents for the same period is 110.

On July 1, 2003, Hospital A and Hospital B entered into a Medicare GME affiliation agreement. Under the affiliation agreement, the hospitals' FTE resident caps are revised as follows:

Affiliation Year July 1, 2003 Through June 30, 2004

Direct GME FTE resident Direct GME

IME FTE IME affiliated cap affiliated cap resident cap

cap.

Hospital A......................................

100

60

90

55 Hospital B......................................

100

140

95

130

To apply section 1886(h)(7)(A)(i) of the Act, Hospital A's affiliated FTE resident caps as of July 1, 2003, are compared to its direct GME and IME allopathic and osteopathic FTE resident counts from its FYE December 31, 2001 cost report, and Hospital B's affiliated FTE resident caps as of July 1, 2003, are compared to its direct GME and IME allopathic and osteopathic FTE resident counts from its FYE September 30, 2003 cost report, as follows:

Unweighted Affiliated allopathic and Unweighted count below If yes, reduce actual FTE resident cap by 75 direct GME cap osteopathic FTE

affiliated cap?

percent of difference between affiliated cap count

and unweighted count.

Hospital A...............................

60

\1\ 60 No......................... Hospital B...............................

140

\2\ 120 Yes........................ 100-[.75(140-120)] = 85

\1\ From FYE 12/31/01. \2\ From FYE 9/30/03.

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Allopathic and

If yes, reduce actual FTE resident cap by 75 Affiliated IME osteopathic FTE Count below affiliated cap? percent of difference between affiliated cap cap

count

and unweighted count.

Hospital A...............................

55

\1\ 55 No......................... Hospital B...............................

130

\2\ 110 Yes........................ 95-[.75(130-110)] = 80

From FYE 12/31/01. From FYE 9/30/03.

Effective for portions of cost reporting periods beginning on or after July 1, 2005, Hospital A's FTE resident caps for direct GME and IME will remain at 100 and 90, respectively, while Hospital B's FTE resident caps for direct GME and IME will be reduced to 85 and 80, respectively.

We also note that there are hospitals that may have been members of a Medicare GME affiliated group in program years that coincide with or overlap the reference cost reporting periods, but these hospitals were not affiliated as of July 1, 2003. As such, they are not subject to the proposed policy described above applicable to section 1886(h)(7)(A)(iii) of the Act, as added by section 422(a)(3). For such hospitals, we are proposing to compare the resident level in the applicable reference period to the FTE resident cap as adjusted by the affiliation agreement applicable to that reference period. If a hospital's resident level is below its otherwise applicable FTE resident cap for that reference period cost report, we are proposing to permanently reduce the hospital's FTE resident cap, that is, the hospital's FTE resident cap without the temporary adjustment under the affiliation agreement for that period, by 75 percent of the difference between the hospital's resident level and the otherwise applicable FTE resident cap. (Proposed redesignated Sec. 413.79(c)(3)(iv)(B)). For example, assume a hospital with a June 30 fiscal year end affiliated for one program year from July 1, 2001, through June 30, 2002. On its June 30, 2002 cost report (that is, its most recent cost report ending on or before September 30, 2002), its FTE resident cap is 20, its cap as revised by the affiliation agreement is 25, and its resident level is 21 FTEs. Because this hospital's resident level of 21 is below its otherwise applicable FTE resident cap of 25, the hospital's FTE resident cap of 20 will be reduced as follows: 20-[(.75(25-21)] = 17. We are proposing to apply the same methodology described above in the event that the reference period is a hospital's cost report that includes July 1, 2003 (that is, for a hospital that had an expansion of a program that is not reflected on its most recent settled cost report and that made a timely request to use the period that includes July 1, 2003), if that hospital is not affiliated as of July 1, 2003, but its cost report that includes July 1, 2003 overlaps with a program year for which the hospital was affiliated. In other words, section 1886(h)(7)(A)(i) of the Act will be applied by comparing a hospital's reference resident level to the otherwise applicable FTE resident cap, as adjusted for any affiliation agreement for the reference period. g. Criteria for Determining Hospitals That Will Receive Increases in Their FTE Resident Caps

Generally, under section 1886(h)(7) of the Act, as added by section 422(a)(3) of Public Law 108-173, CMS is to reduce by 75 percent the ``unused'' resident slots from hospitals that were below their FTE resident caps in a specific reference period, and ``redistribute'' the FTE slots for use by other hospitals. Under section 1886(h)(7)(B) of the Act, as added by section 422 of Public Law 108-173, the Secretary is authorized to increase the otherwise applicable FTE resident cap for each qualifying hospital that submits a timely application by a number that the Secretary may approve, for portions of cost reporting periods occurring on or after July 1, 2005. In implementing section 1886(h)(7)(B) of the Act, we note the difficulty in deciding which teaching hospitals are more ``deserving'' than others to receive the redistributed unused resident slots. Therefore, we are proposing a decision making process that is an objective process. In addition, we note that section 422 does not provide detailed guidance to the Secretary for deciding which hospitals should receive the unused resident slots, but rather gives the Secretary discretion in making the choice of which hospitals should qualify.

Section 1886(h)(7)(B) of the Act, as added by section 422, does establish certain parameters in the statutory language for hospitals to qualify to receive increases in their FTE resident caps. First, section 1886(h)(7)(B)(i) of the Act states that the aggregate number of increases in the otherwise applicable resident limits (caps) may not exceed the estimate of the aggregate reduction in the resident limits determined under section 1886(h)(7)(A) of the Act (as specified in section IV.O.2.e. of this preamble). Section 1886(h)(7)(B)(iv) of the Act states that in no case will any hospital receive an FTE cap increase of more than 25 FTE additional residency slots as a result of the redistribution. (Proposed redesignated 413.79(c)(4)). In addition, section 1886(h)(7)(B)(ii) of the Act specifies that in determining which hospitals will receive the increases in their FTE resident caps, the Secretary is required to take into account the demonstrated likelihood that the hospital would be able to fill the position(s) within the first three cost reporting periods beginning on or after July 1, 2005.

In setting up an application process for hospitals to apply for the unused resident slots discussed in section IV.O.2.h. of this preamble, we are proposing to implement this ``demonstrated likelihood'' requirement as an eligibility criterion that a hospital must meet in order for CMS to further consider the hospital's application for an increase in its FTE resident cap. Thus, we are proposing that, in order to be eligible for consideration for an increase under section 1886(h)(7)(B) of the Act, a hospital must first demonstrate the likelihood that it will able to fill the slots within the first three cost reporting periods beginning on or after July 1, 2005, by meeting at least one of the following four criteria and by providing documentation that it meets that criterion in its application for an increase in its FTE resident cap:

Demonstrated Likelihood Criterion 1. The applying hospital intends to use the additional FTEs to establish a new residency program(s) on or after July 1, 2005 (that is, a newly approved program that begins training residents on or after July 1, 2005).

The hospital must meet the requirements in provisions (1) and (2) below:

(1) In order to demonstrate that the hospital is, in fact, establishing a new residency program, the hospital must--

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Submit an application for approval of a new residency program to the ACGME or the AOA by December 1, 2004, and include a copy of that application with the application for an increase in its FTE resident cap; or

Submit an application for approval of a new residency program to the ACGME or the AOA by December 1, 2004, and, if establishing an allopathic program, include a copy of the hospital's institutional review document or program information form concerning the new program with the application for the unused FTE resident slots; or

Submit an application for approval of a new residency program to the ACGME or the AOA by December 1, 2004, and include written correspondence from the ACGME or AOA acknowledging receipt of the application for the new program, or other types of communication from the accrediting bodies concerning the new program approval process (such as notification of site visit).

(2) To demonstrate that the hospital will be likely to fill the slots requested, the hospital must comply with one of the following:

If the hospital has other previously established programs, submit documentation that each of the hospital's existing residency programs had a resident fill rate of at least 95 percent in each of program years 2001 through 2003; or

If the hospital has other previously established residency programs, submit copies of the cover page of the hospital's employment contracts with the residents who are or will be participating in the new residency program (resident specific information may be redacted); or

If the hospital is establishing a new residency program in a particular specialty, submit documentation indicating that the specialty has a resident fill rate nationally, across all hospitals, of at least 95 percent.

Demonstrated Likelihood Criterion 2. The applying hospital intends to use the additional FTEs to expand an existing residency training program (that is, to increase the number of FTE resident slots in the program) on or after July 1, 2005, and before July 1, 2008.

The hospital must comply with the requirements in provisions (1) and (2) below:

(1) To demonstrate that the hospital intends to expand an existing program, the hospital must comply with one of the following:

Document that the appropriate accrediting body (the ACGME or the AOA) has approved the hospital's expansion of the number of FTE residents in the program; or

Document that the National Residency Match Program or the American Osteopathic Association Residency Match Program has accepted or will be accepting the hospital's participation in the match for the existing program that will include additional resident slots in that residency training program; or

If expanding an allopathic program, submit a copy of the hospital's institutional review document or program information form for the expansion of the existing residency training program.

(2) To demonstrate that the hospital will be likely to fill the slots of the expanded residency program, the hospital must comply with one of the following:

Submit copies of the cover page of the hospital's employment contracts with the residents who are or will be participating in the expanded program (resident specific information may be redacted) and copies of the cover page of the hospital's employment contracts with the residents participating in the program prior to the expansion of the program.

If the hospital has other previously established residency programs, submit documentation that each of the residency programs had a resident fill rate of at least 95 percent in each of program years 2001 through 2003.

If the hospital is expanding an existing program in a particular specialty, submit documentation that the specialty has a resident fill rate nationally, across all hospitals, of at least 95 percent.

If the hospital is expanding a program in order to train residents that need a program because another hospital in the State has closed a similar program, and the applying hospital received a temporary adjustment to its FTE cap(s) (under the requirements of Sec. 413.86(g)(9)), submit documentation of this action.

Demonstrated Likelihood Criterion 3. The hospital is applying for an increase in its FTE resident cap because the hospital is already training residents in an existing residency training program(s) in excess of its direct GME FTE cap or IME FTE cap, or both.

The hospital must submit, with its application, each of the following:

Copies of the most recent as-submitted Medicare cost reports documenting on Worksheet E, Part A and Worksheet E3, Part IV the resident counts and FTE resident caps for both direct GME and IME for the relevant cost reporting periods.

Copies of the 2004 residency match information concerning the number of residents the hospital intends to have in its existing programs.

Copies of the most recent accreditation letters on all of the hospital's training programs in which the hospital trains and counts FTE residents for direct GME and IME.

Demonstrated Likelihood Criterion 4. The hospital is applying for the unused FTE resident slots because the hospital is at risk of losing accreditation of a residency training program if the hospital does not increase the number of FTE residents in the program on or after July 1, 2005.

The hospital must submit, with its application for an increase in its FTE resident cap, documentation from the appropriate accrediting body of the hospital's risk of lost accreditation as a result of an insufficient number of residents in the program.

We are proposing that each hospital must meet at least one of the above criteria in order to demonstrate the likelihood that it will be able to fill the additional slots associated with any increase in the hospital's FTE resident cap within the first three cost reporting periods beginning on or after July 1, 2005. In other words, each hospital that wishes to apply for an increase in its FTE resident cap must, as a preliminary matter, meet the eligibility requirement of demonstrating the likelihood that it will fill the additional positions, in order for CMS to further consider the hospital's application for an increase in its FTE resident cap. h. Application Process for the Increases in Hospitals' FTE Resident Caps

As stated above, we are proposing an objective decision making process for determining how hospitals will be prioritized when identifying the hospitals that will receive increases in their FTE resident caps. In order for hospitals to be considered for increases in their FTE resident caps, section 1886(h)(7)(B)(i) of the Act, as added by section 422(a)(3) of Public Law 108-173, requires that each ``qualifying hospital'' submit a ``timely application.'' We are proposing that each hospital must submit the following information on its application for an increase in its FTE resident cap:

The name and Medicare provider number of the hospital.

The total number of requested FTE resident slots (for all residency programs at the hospital) for direct GME or IME, or both (up to 25 FTEs).

A completed copy of the CMS Evaluation Form (as described below) for each residency program for which

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the applicant hospital intends to use the requested increase in the number of FTE residents and source documentation to support the assertions made by the hospital on the Evaluation Form. (For example, if the hospital checks off on the Evaluation Form that the hospital is located in a geographic Health Professions Shortage Area (HPSA), the hospital would include documentation to support that assertion.) A copy of the blank proposed CMS Evaluation Form appears at the end of this section of the preamble.

FTE resident counts for direct GME and IME and FTE resident caps for direct GME and IME reported by the hospital in the most recent as-filed cost report.

An attestation, signed and dated by an officer or administrator of the hospital who signs the hospital's Medicare cost report, of the following information in the hospital's application for an increase in its FTE resident cap:

``I hereby certify that I understand that misrepresentation or falsification of any information contained in this application may be punishable by criminal, civil, and administrative action, fine and/or imprisonment under federal law. Furthermore, I understand that if services identified in this application were provided or procured through payment directly or indirectly of a kickback or where otherwise illegal, criminal, civil, and administrative action, fines and/or imprisonment may result. I also certify that, to the best of my knowledge and belief, it is a true, correct, and complete application prepared from the books and records of the hospital in accordance with applicable instructions, except as noted. I further certify that I am familiar with the laws and regulations regarding Medicare payment to hospitals for the training of interns and residents.''

We are further proposing that any hospital that wishes to receive an increase in its FTE resident cap(s) must submit a copy of its completed application (as described above) to the CMS Central Office and to the CMS Regional Office for the region in which the applicant hospital is located, and that the application must be received on or before December 1, 2004. (The mailing addresses for the CMS offices are indicated at the end of this section of the preamble.) We note that some hospitals' FTE counts will be subject to audit for purposes of section 1886(h)(7)(B) of the Act, and those audits may not be completed by December 1, 2004. Because the results of such an audit may be a factor in a hospital's decision whether to request an increase in its FTE resident cap under section 1886(h)(7)(B) of the Act, we are proposing to allow a later date for those hospitals to apply for increases in their FTE resident caps. Therefore, if a hospital's resident level is audited for purposes of section 1886(h)(7)(A) of the Act, and that hospital also wishes to apply for an increase in its FTE resident cap(s) available through section 1886(h)(7)(B) of the Act, we are proposing that such a hospital must submit a completed application to CMS and that the application must be received on or before March 1, 2005. We are proposing that all completed applications that are timely received according to the above deadlines will be evaluated by CMS according to the criteria described under section IV.O.2.i. of this preamble for determining the priority distribution of FTE resident slots. Hospitals that satisfy at least one of the ``demonstrated likelihood'' criteria will be further evaluated by the evaluation criteria described below. Those hospitals that are chosen to receive an increase in their FTE resident caps would be notified by CMS by July 1, 2005. i. CMS Evaluation of Applications for Increases in FTE Resident Caps

As noted in section IV.O.2.h. of this preamble, we are proposing to require hospitals to submit, with their applications for increases in their FTE resident caps, a completed copy of the CMS Evaluation Form. As we have stated, we are proposing to make the process of evaluating the applications as objective as possible. Therefore, we are proposing to use a CMS Evaluation Form that the hospital must complete and submit as part of its application. The CMS Evaluation Form will ask the hospital to check off which of the ``demonstrated likelihood'' criteria (described above in section IV.O.2.g. of this preamble) the hospital meets. We also are proposing to require the hospital to provide the documentation that supports the ``demonstrated likelihood'' criteria it has checked off on the Evaluation Form.

Assuming that hospitals interested in applying for the increase in their FTE caps meet the eligibility criterion of ``demonstrated likelihood,'' we are proposing that applicant hospitals indicate on the CMS Evaluation Form the category(ies) for which it believes it will qualify. CMS will use this indication to prioritize the applications. Such prioritization is derived from section 1886(h)(7)(B) of the Act, as added by section 422 of Public Law 108-173. That section established the following priority order to determine the hospitals that will receive increases in their FTE caps:

First, to hospitals that are ``located in rural areas, as defined in section 1886(d)(2)(D)(ii) of the Act'' (section 1886(h)(7)(B)(iii)(I) of the Act). Section 1886(d)(2)(D)(ii) of the Act defines a rural area as any area outside a Metropolitan Statistical Area (MSA). Under the existing implementing regulations at Sec. 413.62(f)(ii), an ``urban area'' means (1) a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA); or (2) the following New England counties: Litchfield County, Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack County, New Hampshire; and Newport County, Rhode Island. Under existing Sec. 413.62(f)(iii), a ``rural area'' means any area outside an urban area. However, we note that under section III. of this preamble, which discusses proposed changes in wage areas for FY 2005, we are proposing to no longer recognize NECMAs as a distinct category of wage areas. Thus, for purposes of the amendments made by section 422, we are proposing that any hospital located in an area that is not in a MSA is a rural hospital, regardless of any reclassification under Sec. 412.102 or Sec. 412.103. We note that this definition of ``rural'' is consistent with our proposal under section III. of this preamble concerning designation of wage index areas.

Second, to hospitals that are located in urban areas that are not large urban areas, as defined for purposes of section 1886(d) of the Act (section 1886(h)(7)(B)(iii)(II) of the Act). Section 1886(d)(2)(D) of the Act defines ``large urban area'' as an ``urban area which the Secretary determines * * * has a population of more than 1,000,000.'' Existing implementing regulations at Sec. 412.63(c)(6) state generally that the term ``large urban area'' means an MSA with a population of more than 1,000,000. Again, we note that we are proposing changes to the definition of ``urban area'' to reflect the new geographic areas designated by the Office of Management and Budget under section III. of the preamble of this proposed rule. Therefore, if the eligible hospital applying for an increase in its FTE resident cap is an urban hospital that is located in the proposed redefined MSA area with a population of less than 1,000,000, CMS will give such a hospital second priority (after all rural hospitals in the first priority category under the statute) in deciding which hospitals should receive an increase in their FTE resident caps.

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Third, hospitals that currently operate, or will operate, a residency training program in a specialty for which there are not other residency training programs in the State (section 1886(h)(7)(B)(iii)(III) of the Act). We are proposing to interpret ``a specialty for which there are not other residency training programs in the State'' to mean the only specialty in either allopathy or osteopathy in a particular State. For example, if in State X, Hospital A would like to use the additional FTE residents in order to establish a new osteopathic emergency medicine program (which would be the first osteopathic emergency medicine program in State X), and Hospital B has already established an allopathic emergency medicine program in State X, Hospital A's application for an increase in its FTE resident cap(s) would be put in the third priority category because Hospital A would be establishing a new osteopathic emergency medicine program, a specialty for which there are not other osteopathic emergency medicine programs in the State. We believe that a more ``expansive'' interpretation of ``a specialty for which there are not other residency programs'' allows more hospitals to fit into this third priority category. In addition, it is our understanding that allopathic and osteopathic programs are, at least, nominally different disciplines in medicine. As a result, we believe that this more ``expansive'' interpretation for ``a specialty for which there are not other residency programs'' is the more appropriate interpretation.

As we described above, we are proposing that applicant hospitals indicate on the CMS Evaluation Form the category(ies) for which it believes it will qualify; we will use this indication to prioritize the applications. Each of the categories (described below) is derived from the priorities established by section 1886(h)(7)(B) of the Act, as added by section 422 of Public Law 108-173. We would use the following categories to determine the order in which hospitals would be eligible to receive increases in their FTE resident caps:

First Level Priority Category: The hospital is a rural hospital and has the only specialty training program in the State.

Second Level Priority Category: The hospital is a rural hospital only.

Third Level Priority Category: The hospital is a ``small'' urban hospital (that is, an urban hospital that is located in a ``not large urban area'') and has the only specialty program in the State.

Fourth Level Priority Category: The hospital is a ``small'' urban hospital only.

Fifth Level Priority Category: The hospital has the only specialty training program in the State.

Sixth Level Priority Category: The hospital meets none of the statutory priority criteria.

We believe the proposed first and third level categories are appropriate for CMS evaluation purposes (which is explained further below) because some hospitals that apply for the additional resident slots may fit into more than one of the three statutory priority categories listed in section 1886(h)(7)(B) of the Act. In addition, we are proposing to give consideration first to those hospitals that meet more than one of the statutory priority categories over those hospitals that meet only one of the statutory priorities (see second, fourth, and fifth level priority categories.) We also are proposing a sixth level priority category to identify those section 1886(d) hospitals that apply for additional resident slots, but do not fit into any of the priority categories listed in section 1886(h)(7)(B) of the Act (for example, hospitals in large urban areas).

As specified by the statute, we are proposing to put each hospital's application for an increase in its FTE resident cap (based on how the hospital describes itself on the CMS Evaluation Form) into one of the ``level priority categories'' for evaluation purposes, giving first and second priority to the rural hospitals, as defined above. In addition, we note that we are proposing that hospital applicants provide residency specialty program information as part of the application for the increase to the cap(s), as well as a CMS Evaluation Form for each residency program for which the applicant hospital intends to use the increased FTE resident slots. Our intention in proposing these requirements is for CMS to be able to discern within which level priority category the applicant hospital's application should be placed based on the residency specialty program for which the FTE cap increase is being requested. In other words, it is possible that a hospital will apply for an increase in its FTE caps for more than one residency program at the hospital. It is possible that applications for the programs would fall within different level priority categories, for example, if a hospital is applying for an increase in its cap(s) for one program that is the ``only specialty training program in the State'' (which would place the hospital's application in the fifth level priority category on the CMS Evaluation Form) and for another program that is NOT the only program in the State (which, assuming the hospital is an urban hospital, would place the hospital on that Evaluation Form in the sixth level priority category). Therefore, we are proposing that hospitals complete an Evaluation Form for each residency program for which it is requesting an increase in its FTE resident cap.

We note that section 1886(h)(7)(B)(iii) of the Act states that ``increases of residency limits within the same priority category * * * shall be determined by the Secretary.'' Therefore, we are proposing to use the following criteria for evaluating the applications for increases in hospitals' FTE resident caps within each of the six level priority categories described above:

Evaluation Criterion One. The hospital that is requesting the increase in its FTE resident cap(s) has a Medicare inpatient utilization over 60 percent, as reflected in at least two of the hospital's last three most recent audited cost reporting periods for which there is a settled cost report. We have selected 60 percent utilization because it will identify hospitals where Medicare beneficiaries will benefit the most from the presence of a residency program, and it is consistent with the utilization percentage required for Medicare-dependent, small rural hospitals (MDHs) as specified in Sec. 412.108. In addition, it identifies a type of hospital that warrants atypical treatment by the Medicare program because it is so reliant on Medicare funding.

Evaluation Criterion Two. The hospital will use the additional slots to establish a new geriatrics residency program, or to add residents to an existing geriatrics program. We believe that, of all the medical specialties, geriatrics is the one specialty that is devoted primarily to the care of Medicare beneficiaries. In addition, we note that encouraging residency training in geriatrics is consistent with Congressional intent as expressed, among other places, in section 712 of Public Law 108-173.

Evaluation Criterion Three. The hospital does not qualify for an adjustment to its FTE caps under existing Sec. 413.86(g)(12) (proposed to be redesignated as Sec. 413.79(k) in this proposed rule) for a rural track residency program, but is applying for an increase in its FTE resident cap(s) under section 1886(h)(7)(B) of the Act because it rotates (or in the case of a new program, will rotate) residents for at least 25 percent of the duration of the residency program to any combination of the following: A rural area, as defined in section 1886(d)(2)(D)(ii) of the Act

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and Sec. 412.62(f)(1)(iii) of the regulations; a rural health clinic (RHC), as defined in section 1861(aa)(1) of the Act and Sec. 491.2 of the regulations; or a Federally Qualified Health Center (FQHC), as defined in section 1861(aa)(3) of the Act and Sec. 405.2401(b) of the regulations. We believe that Congress intended that the Secretary use section 422 to encourage resident training in rural areas, and we believe this criterion furthers this intention. We are proposing to include residency training in FQHCs in this criterion because we understand that some FQHCs are located in rural areas. In addition, we would like to encourage residency training at FQHCs because we believe that, similar to rural providers and RHCs, FQHCs provide services for medically underserved areas or populations, or both.

Evaluation Criterion Four. In portions of cost reporting periods prior to July 1, 2005, the hospital qualified for a temporary adjustment to its FTE cap under existing Sec. 413.86(g)(9) (proposed to be redesignated as Sec. 413.79(h) in this proposed rule) because it was training displaced residents from either a closed program or a closed hospital, and, even after the temporary adjustment, the hospital continues to train residents in the specialty(ies) of the displaced residents and is training residents in excess of the hospital's direct GME FTE cap or IME FTE cap, or both, for that reason. We believe this criterion is appropriate because it will help to sustain the level of residency training in the community.

Evaluation Criterion Five. The hospital is above its FTE caps because it was awaiting accreditation of a new program from the ACGME or the AOA during the base period for its FTE cap(s), but was not eligible to receive a new program adjustment as stated under existing Sec. 413.86(g)(6)(ii) (proposed to be redesignated as Sec. 413.79(e)(2) in this proposed rule). Under existing Sec. 413.86(g)(6)(ii) and Sec. 413 .86(g)(13) (proposed to be redesignated as Sec. 413.79(l) in this proposed rule), a hospital that had allopathic or osteopathic residents in its most recent cost reporting period ending on or before December 31, 1996 could receive an adjustment to its unweighted FTE cap for a new medical residency training program that either received its initial accreditation or began training residents on or after January 1, 1995 and on or before August 5, 1997. If a hospital failed to meet those deadlines, it was not eligible to have its cap(s) adjusted to include residents in a new program. Under this proposed criterion, a hospital would apply for additional FTE residents if the hospital had submitted its application for a new program to the accrediting body before August 5, 1997, and received its accreditation after August 5, 1997 but before August 5, 1998. This would allow some hospitals to receive increases in their FTE resident caps in cases in which, in good faith, the hospital had submitted an application for accreditation for a new program prior to the date of enactment of FTE resident caps under the BBA, but because of the timing of the implementation of the FTE resident cap(s), had not yet received direct GME and IME payment for residents in the newly accredited program during the base period for the hospital's FTE resident cap(s).

Evaluation Criterion Six. The hospital is training residents in excess of its FTE resident caps because, despite qualifying for an FTE cap adjustment for a new program under Sec. 413.86(g)(6)(i) or (g)(6)(ii) (proposed to be redesignated as Sec. 413.79(e)(1) and (e)(2) in this proposed rule), it was unable to ``grow'' its program to the full complement of residents for which the program was accredited before the hospital's FTE resident cap was permanently set beginning with the fourth program year of the new program. Similar to evaluation criterion five above, this criterion would allow some hospitals that had, in good faith, started up a new residency program as required in the regulations but could not completely fill the new program within the allowed regulatory period, to receive increases in their FTE resident caps. For instance, this could have occurred because the program was a program of long duration (such as a 5-year general surgery program), and the hospital did not have the opportunity to ``grow'' the program to its full complement of residents because the regulations at Sec. Sec. 413.86(g)(6)(i) or (g)(6)(ii) allow a program to grow for only 3 years before the hospital's FTE resident cap is permanently adjusted for the new program.

Evaluation Criterion Seven. The hospital is located in any one (or a combination) of the following: a geographic HPSA, as defined in 42 CFR 5.2; a population HPSA, (also defined at 42 CFR 5.2); or a Medicare physician scarcity county, as defined under section 413 of Public Law 108-173. We are proposing to use this 3-part criterion in order to capture, as objectively as possible, medically underserved areas or patient populations (many of which are Medicare beneficiaries), or both. We understand that if a particular community has been designated a HPSA (either a geographic or population HPSA), the designation information is available to hospitals from the Health Resources and Services Administration (HRSA) HPSA database at the Web site: http://belize.hrsa.gov/newhpsa/newhpsa.cfm. In addition, hospitals will be

able to determine whether they are located in a Medicare physician scarcity county (consistent with section 413 of Pub. L. 108-173) on the CMS Internet Web site at http://www.cms.hhs.gov or upon publication of the

annual final rule setting forth the Medicare physician fee schedule (which is generally published by November 1 of each year). We note that if Medicare does not publish the final rule setting forth the Medicare physician fee schedule in time for the application deadline for increases in FTE resident caps (December 1, 2004, or March 1, 2005, depending on the hospital), we are proposing that we will not use the Medicare physician scarcity county designations (as defined under section 413 of Pub. L. 108-173) for purposes of this criterion.

Evaluation Criterion Eight. The hospital is in a rural area (as defined under section 1886(d)(2)(D)(ii) of the Act) and is a training site for a rural track residency program (as specified under Sec. 413.86(g)(12) (proposed to be redesignated as Sec. 413.79(k) in this proposed rule)), but is unable to count all of the FTE residents training at the rural hospital in the rural track because the rural hospital's FTE cap is lower than the hospital's unweighted count of allopathic or osteopathic FTE residents beginning with portions of cost reporting periods on or after July 1, 2005.

Evaluation Criterion Nine. The hospital is affiliated with a historically Black medical college. According to the language in the Conference Report for Public Law 108-173 (pages 204-205), the Conference agreement on section 422 generally restated the three statutory priority categories described above (rural, ``small'' urban, and only specialty program in the State) in terms of giving guidance to the Secretary for deciding which hospitals should receive the redistributed FTE resident slots. However, there was one additional cited criterion that the Conference indicated the Secretary should use in evaluating the hospital applications. Specifically, the Conference agreement states that the Secretary should consider whether the hospital is a ``historically large medical college'' (emphasis added). Upon consideration of this particular terminology, which, on its face, seems to contradict the three statutory priority categories (that is, rural, ``small'' urban, and only specialty program in the State), we are proposing to view the reference to ``historically large medical colleges''

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as a scrivener's error, and to read this language to refer to ``historically Black medical colleges.'' This proposed interpretation accomplishes two goals: first, we believe this interpretation serves the greater policy goal of encouraging residency training for the benefit of medically underserved populations. Second, we believe that this interpretation reflects the Conferees' intent in the language in the Conference Report. In addition, we are proposing to identify ``historically Black medical colleges'' as Howard University College of Medicine, Morehouse School of Medicine, Meharry Medical College, and Charles R. Drew University of Medicine and Science. These four medical schools are identified as ``historically Black medical colleges'' by the American Medical Association (see http://www.ama-assn.org/ama/pub/category/7952.html ). We are proposing that the hospital will meet this

criterion if it intends to use an increase in its FTE resident cap(s) under section 1886(h)(7)(B) of the Act to count residents in residency programs sponsored by a historically Black medical college listed above.

Evaluation Criterion Ten. The hospital is training residents in residency program(s) sponsored by a medical school(s) that is designated as a Center of Excellence for Underserved Minorities (COE) under section 736 of the Public Health Service Act in FY 2003. We understand that the COE program was established to be a catalyst for institutionalizing a commitment to underserved students and faculty, and to serve as a national resource and educational center for diversity and minority health issues. Therefore, we believe that it is appropriate to encourage hospitals to train residents in residency programs sponsored by medical schools that are designated as COEs. A hospital can verify whether it is training residents in programs sponsored by a medical school that is a COE. Medical schools that are COEs in FY 2003 are listed at the following Web site: http://bhpr.hrsa.gov/diversity/coe/grantees2003.htm. We note that, in FY 2003,

there were 28 medical schools that were designated to be COEs.

We are proposing to use the above set of criteria to evaluate the applications by hospitals for increases in their FTE resident caps that fall within each of the six level priority categories. We would place each application in the appropriate priority level category based on the information the hospitals check off on the proposed CMS Evaluation Form for each allopathic and osteopathic specialty program requested by the applicant hospital, and the corresponding requested FTE cap increase (see the proposed form below). We are proposing to place all of these evaluation criteria on the Evaluation Form and to ask the hospital to check off on the form which criteria apply for each specialty program for which an FTE cap increase is requested. Based on the assertions checked off on the form, CMS would score each CMS Evaluation Form (one point per criterion checked off). The higher scoring CMS Evaluation Form(s) for each applicant hospital within each level priority category would be awarded the FTE resident cap increases first. As we described above, we are proposing to award the cap increases in the order of the six specified level priority categories because, as a general rule, we believe hospitals that meet more than one of the statutory priorities should be awarded the increases in their FTE resident caps first before other hospitals. However, we also believe that hospitals that meet a higher statutory priority category should receive first consideration by CMS over hospitals that meet lower statutory priorities. That is the reason, for instance, we are proposing the first level (rural hospital + only specialty program in the State) and second level (rural only) priority categories to give all rural hospitals first consideration by CMS before any small urban hospital, as required by the statute.

Thus, first level priority category hospitals that score highest on the evaluation criteria on the CMS Evaluation Form for a particular specialty program would receive the increases in their FTE resident caps first. For example, if Hospital D is a rural hospital and is establishing the first osteopathic internal medicine residency program in State Y, thereby falling within the first level priority category, and Hospital D checks off on the CMS Evaluation Form that it has a Medicare utilization of 60 percent, is located in a geographic HPSA, and is affiliated with a historically Black medical college, Hospital D would receive a score of 3 points on the completed CMS Evaluation Form for the osteopathic internal medicine residency program and accompanying application. We are proposing that we would first award FTE cap increases to hospitals whose CMS Evaluation Forms for a particular program receive 10 points based on the number of evaluation criteria checked off by the hospital for the program (if there are any) and then to those with successively fewer points within the level priority category. Hospital D would receive the increase in its FTE resident cap(s) requested on its application after all the hospitals in the first level priority category whose applications receive 10 through 4 points are awarded their requests first.

We are proposing that we would award the increases in FTE resident caps to all those hospitals that are in the first level priority category (rural hospitals + only specialty program in the State) before evaluating those hospitals in the second level priority category (rural hospital), and would award the FTE resident slots to all those hospitals in the second level priority category before evaluating those hospitals in the third level priority category (``small'' urban hospital + only specialty in the State), and so on. Once we reach an aggregate number of FTE resident cap increases from the aggregate estimated pool of FTE resident positions under section 1886(h)(7)(A) of the Act, but are unable, based on the number of remaining slots, to meet all of the requests at the next level priority category at the next score level, we are proposing to prorate any remaining estimated FTE resident slots among all the applicant hospitals within that level priority category and with the same score on the hospital's application.

For example, assume all applicant hospitals in the first through fourth level priority categories receive the requested increases in their FTE resident caps by CMS, and CMS next evaluates hospital applications and accompanying CMS Evaluation Forms in the fifth level priority category (only specialty program in the State). At the point that CMS has awarded cap increases for all the fourth level priority category hospitals that scored 5 or above on their CMS Evaluation Forms for each residency program, CMS finds that there is only a sufficient number of resident slots remaining in the estimated pool to grant half of the requests for slots from hospitals that scored 4 points. We are proposing that we would prorate all of the remaining FTEs among the 4- point CMS Evaluation Forms and accompanying applications in the fourth level priority category. Thus, if CMS could have awarded a total of 200 FTE slots for direct GME and 185 FTE slots for IME to only the first 50 percent of the 4-point CMS Evaluation Forms in the fourth level priority category at the point that the estimated pool of FTE slots is spent, we are proposing to prorate all of the 200 FTE slots for direct GME and 185 FTE slots for IME among all of the 4-point CMS Evaluation Forms and accompanying applications in that fourth priority category, no matter what level of FTE resident cap increase was requested on the individual hospital's application.

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We recognize the complexity of this proposed evaluation process for the award of increases in hospital's FTE resident caps under section 1886(h)(7)(B) of the Act. Therefore, we are including some further examples depicting the proposed procedures:

Example 1: Hospital M in State Z is an urban hospital located in an MSA that has a population of less than 1 million. Hospital M can demonstrate the likelihood that it will fill the requested five FTEs resident slots for direct GME and IME because it is currently training a number of FTE residents in geriatrics that exceeds both of its FTE caps, and has attached to its application for an increase in its FTE resident caps a copy of Hospital M's past three Medicare cost reports (as filed or audited, whichever is most recent and available), which documents on Worksheet E, Part A and Worksheet E3, Part IV that, according to the resident counts and the FTE resident caps, Hospital M is training residents in excess of its caps. Hospital M has taken on residents from a teaching hospital in the community that closed, and is also located in a Medicare physician scarcity county.

Hospital M's application would be evaluated by CMS accordingly: Fourth level priority category (``small'' urban hospital); score of 3 (expanding geriatrics program, Medicare physician scarcity area, residents from a closed hospital).

Example 2: Hospital K is a large academic medical center located in an MSA with a population of greater than 1,000,000 and is in a population HPSA. Hospital K regularly trains residents in programs sponsored by Meharry Medical College, and wishes to add more residents from Meharry, and therefore, has requested accreditation from the ACGME to expand the number of Meharry residents training in both allopathic surgery and osteopathic pediatrics programs. Hospital K is above both its direct GME and IME FTE caps.

Hospital K's CMS Evaluation Forms for allopathic surgery and osteopathic pediatrics would be evaluated (separately) by CMS accordingly: Sixth level priority category (large urban hospital); can demonstrate likelihood of filling the slots (because Hospital K can document both that the hospital is above its caps and that it has requested ACGME accreditation to expand the programs); and a score of 2 (population HPSA, historically Black medical college).

Example 3: Hospital E is a rural hospital located in a Medicare physician scarcity area and a geographic HPSA. It is a rural training site for a rural track residency program that has only been a training site since 2002. Therefore, Hospital E has an FTE resident cap of zero FTEs for direct GME and IME.

Hospital E's CMS Evaluation Form for the rural track family practice program and accompanying application would be evaluated CMS accordingly: Second level priority category (rural hospital); can demonstrate the likelihood of filling slots (because Hospital E can document that it is both over its cap of zero FTEs, and that it is a training site for an accredited rural track residency program; and a score of 2 (a training site for a rural track, and a Medicare physician scarcity area, and a geographic HPSA).

Example 4: Hospital W is a rural hospital that has FTE caps of 15 FTEs for both direct GME and IME. Hospital W requests an FTE cap adjustment of 25 FTEs for both direct GME and IME; 5 FTEs to expand an existing geriatric fellowship; 20 FTEs to establish the first osteopathic emergency medicine program in State K, in which Hospital W is located. Hospital W can document that it is at its FTE caps with existing residency programs. CMS would make the following assessment for Hospital W's Evaluation Form for the geriatric fellowship: Hospital W falls into the second level priority category for being a rural hospital; can demonstrate the likelihood that it will fill the 5 FTE slots of the geriatric program by documenting that it has requested additional slots in the accreditation of the geriatrics program and that Hospital W is above its caps. Hospital W would receive a score of 1 on its CMS Evaluation Form for the geriatrics program. CMS would make the following assessment for Hospital W's CMS Evaluation Form for the new osteopathic emergency medicine program: Hospital W would meet the first level priority category for this Evaluation Form because, not only is it a rural hospital, but it is also requesting 20 FTEs for the only osteopathic emergency medicine program in the State; can demonstrate the likelihood that it will fill the 20 osteopathic emergency medicine FTEs by documenting the accreditation request and that it is over its FTE caps. Hospital W would receive a score of zero, because it did not meet any of the 10 evaluation criteria on the CMS Evaluation Form. j. Application of Locality-Adjusted National Average Per Resident Amount (PRA)

Section 1886(h)(7)(B)(v) of the Act, as added by section 422 of Public Law 108-173, provides that, with respect to additional residency slots attributable to the increase in the hospital's FTE resident cap as a result of redistribution of resident positions, the approved FTE resident amount, or PRA, is deemed to be equal to the locality-adjusted national average per resident amount computed for that hospital. In other words, section 1886(h)(7)(B)(v) of the Act requires that, for purposes of determining direct GME payments for portions of cost reporting periods occurring on or after July 1, 2005, a hospital that receives an increase in its direct GME FTE resident cap under section 1886(h)(7)(B) of the Act will receive direct GME payments with respect to those additional FTE residents using the locality-adjusted national average PRA. Thus, we are proposing that a hospital that receives an increase in its FTE resident cap under section 1886(h)(7)(B) of the Act would receive direct GME payments based on the sum of two different direct GME calculations: one that is calculated using the hospital's actual PRAs (primary care PRA or nonprimary care PRA) applicable under existing Sec. 413.86(e)(4) (proposed to be redesignated as Sec. 413.77(d) in this proposed rule) and the hospital's number of FTE residents not attributable to an FTE cap increase under section 1886(h)(7)(B) of the Act; and another that is calculated using the locality-adjusted national average PRA under existing Sec. 413.86(e)(4)(ii)(B) (proposed to be redesignated as Sec. 413.77(d)(2)(ii) in this proposed rule) inflated to a hospital's current cost reporting period, and the hospital's number of FTE residents that is attributable to the increase in the hospital's FTE resident cap under section 1886(h)(7)(B).

Section 422(a) of Public Law 108-173 contains a cross-reference in the new section 1886(h)(7)(B)(v) of the Act to the locality adjusted national average PRA ``computed under paragraph (4)(E).'' However, section 1886(h)(4)(E) of the Act does not relate to the locality- adjusted national average PRA. Rather, it relates to the circumstances under which a hospital may count FTE resident time spent training in nonhospital sites.

We have concluded that the cross-reference to section 1886(h)(4)(E) of the Act is a legislative drafting error, or scrivener's error. Instead, we believe Congress intended to refer to section 1886(h)(2)(E), which explicitly provides for the determination of locality-adjusted national average PRAs. Because the drafting error is apparent, and a literal reading of the cross-reference as specified in the statute would produce absurd results, we are proposing to interpret the cross-reference to section 1886(h)(4)(E) of the Act in the new section 1886(h)(7)(B)(v) of the Act as if the reference were to section 1886(h)(2)(E) of the Act.

We note that section 1886(h)(7)(B)(v) of the Act, which addresses the applicability of the locality-adjusted national average PRAs with respect to redistributed slots for the direct GME payment, makes no reference to section 1886(h)(4)(G) of the Act, which is the provision concerning the rolling average count of FTE residents. That is, the statute does not provide for an exclusion from application of the rolling average for residents counted as a result of FTE cap increases under section 1886(h)(7)(B) of the Act. In light of the absence of a specific pronouncement in section 1886(h)(7)(B) of the Act exempting those residents from application of the rolling average, and with no apparent reason to treat residents counted as a result of the FTE

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cap increases under section 1886(h)(7)(B) of the Act differently for purposes of the rolling average, we are proposing to require that if a hospital increases its direct GME FTE count of residents as a result of an FTE resident cap increase under section 1886(h)(7)(B) of the Act, those FTE residents are immediately subject to the rolling average calculation. Furthermore, we believe that, given potentially significant shifts of FTE slots among hospitals as a result of section 1886(h)(7) of the Act, the inclusion of FTE residents counted as a result of section 1886(h)(7)(B) of the Act in the rolling average introduces a measure of stability and predictability, and mitigates radical shifts in direct GME payments from period to period. Thus, any increase in a hospital's direct GME payment relating to an FTE cap increase under section 1886(h)(7)(B) of the Act will be phased-in over a 3-year period because the additional FTE residents are immediately included in the rolling average calculation and would only gradually be included in the hospital's FTE count.

Following is an example of how direct GME payment would be determined for a hospital that received an increase in its direct GME FTE cap under section 1886(h)(7)(B) of the Act. Hospital A has a fiscal year end (FYE) of June 30, and a direct GME FTE resident cap of 20 FTEs. During its FYEs June 30, 2004 and June 30, 2005, Hospital A trained 20 nonprimary care residents. During FYE June 30, 2006, Hospital A trains 25 nonprimary care FTE residents. Hospital A's FYE June 30, 2006 nonprimary care PRA is $100,000. The FYE June 30, 2006 locality-adjusted national average PRA for Hospital A is $84,000. Hospital A's Medicare utilization is 35 percent. Effective July 1, 2005, under section 1886(h)(7)(B) of the Act, Hospital A receives an increase to its direct GME FTE resident cap of 5 FTEs, for a total adjusted direct GME FTE resident cap of 25 FTEs. For the FYE June 30, 2006 cost report, the direct GME payment is calculated as follows:

Step 1. For residents NOT counted pursuant to section 1886(h)(7)(B) of the Act--

For July 1, 2005 through June 30 2006:

Rolling average count: 20 + 20 + 20/3 = 20.

Direct GME computation: $100,000 x 20 x .35 = $700,000.

Step 2. For residents counted pursuant to section 1886(h)(7)(B) of the Act--

For July 1, 2005 through June 30, 2006:

Rolling average count: 25 + 20 + 20/3 = 21.7

Difference between rolling average count for residents counted pursuant to section 1886(h)(7)(B) of the Act and rolling average count for residents counted not pursuant to section 1886(h)(7)(B) of the Act (rolling average count under step 2 minus rolling average count under step 1): 21.7 - 20 = 1.7.

Direct GME computation: $84,000 x 1.7 x .35 = $49,980.

Step 3. Direct GME payment for FYE June 30, 2006: $700,000 + $49,980 = $749,980. k. Application of Section 422 to Hospitals That Participate in Demonstration Projects or Voluntary Reduction Programs

Section 1886(h)(7)(B)(vi) of the Act, as amended by section 422(a)(3) of Public Law 108-173, states that ``Nothing in this subparagraph shall be construed as permitting the redistribution of reductions in residency positions attributable to voluntary reduction programs * * * under a demonstration project approved as of October 31, 2003.'' This language is referring to the New York Medicare GME Demonstration Project and the Voluntary Resident Reduction Project (VRRP) under section 402 of Public Law 90-248. In July 1997, 42 New York teaching hospitals participated in the demonstration project. As there were two entry points for this demonstration, an additional seven hospitals joined the program in July 1998. The purpose of the demonstration project was to test reimbursement changes associated with residency training to determine whether hospitals could use time- limited transition funding to replace and reengineer the services provided by a portion of their residency trainees. In exchange for reducing its count of residents by 20 to 25 percent over a 5-year period, while maintaining or increasing its primary care-to-specialty ratio of residents, a participating hospital (or consortium of hospitals) would receive ``hold harmless payments'' for 6 years. These payments represented a declining percentage of the Medicare GME reimbursement the participating hospitals would have received had their number of residents not been reduced.

For hospitals that successfully completed the demonstration project, the Balanced Budget Act of 1997 states that if a hospital increases the number of full-time equivalent residents permitted under its reduction plan as of the completion of the plan, it is liable for repayment of the total amounts paid under the demonstration. Following the demonstration's period of performance, which ended June 30, 2003, if a hospital exceeds its post-demonstration cap and trains residents in excess of the FTE levels achieved under the demonstration, the hospital is not permitted to count those excess residents for purposes of Medicare GME payments until such time as the hold harmless funds paid under the demonstration project have been repaid in full.

Similarly, with the VRPP, hospitals could use time-limited transition funding to replace the services provided by a portion of their residents. In exchange for reducing its count of residents by 20 to 25 percent over a 5-year period, while maintaining or increasing its primary care-to-specialty ratio of residents, a VRRP participating hospital would receive ``hold harmless payments'' for 5 years. These payments represented a declining percentage of the Medicare GME reimbursement the VRRP participating hospital would have received had its number of residents not been reduced.

We believe that the language of section 1886(h)(7)(B)(vi) of the Act precludes the Secretary from redistributing residency positions that are unused due to a hospital's participation in a demonstration project or the VRRP to other hospitals that seek to increase their FTE resident caps under section 1886(h)(7)(B)(i) of the Act. That is, if we were to propose that hospitals that participated in a demonstration project or the VRRP are subject to possible reductions to their FTE resident caps under section 1886(h)(7)(A)(i) of the Act, any excess slots resulting from reductions made under section 1886(h)(7)(A)(i) of the Act attributable to the demonstration or the voluntary reduction program at these hospitals would not be allocated to the resident pool and redistributed to other hospitals. We also believe that section 1886(h)(7)(B)(vi) of the Act is silent as to whether the Secretary should apply the possible reductions under section 1886(h)(7)(A)(i) of the Act to the FTE resident caps of these hospitals. Congress recognized the unique status of reductions in FTE resident counts made by these hospitals that participated in a demonstration project under the authority of section 402 of Public Law 90-248, or a VRRP under section 1886(h)(6) of the Act, in which these hospitals received hold- harmless payments from Medicare for reducing the number of residents that they were training. Accordingly, we are proposing to recognize the unique status of FTE reductions made by these hospitals, and

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are applying the discretion that Congress has granted the Secretary under section 1886(h)(7)(A)(ii) of the Act in determining the reference resident level applicable to these hospitals, to determine the extent to which section 1886(h)(7)(A)(i) of the Act applies to these hospitals.

We note that section 1886(h)(7)(B)(vi) of the Act only applies to these hospitals to the extent that a hospital's ``reductions in residency positions'' were ``attributable'' to its participation in the demonstration project or the VRRP. In determining the reference resident level for these hospitals, we are proposing to adjust the reference resident level for ``reductions in residency positions attributable'' to participation in the demonstration project or the VRRP. We are proposing to define ``reductions in residency positions attributable'' to participation in the demonstration project or the VRRP as the difference between the number of unweighted allopathic and osteopathic residents training at the hospital at the start of a hospital's participation in the demonstration project or the VRRP, (that is, the base number of residents as defined by the terms of the demonstration project and the VRRP,) and the number of such residents training at the hospital in the hospital's most recent cost reporting period ending on or before September 30, 2002. We are proposing that, in determining any possible adjustments to the reference resident level for hospitals that participated in the demonstration project or the VRRP, we would differentiate between hospitals that withdrew from participation prior to the beginning of the most recent cost reporting period ending on or before September 30, 2002, and hospitals that either have not withdrawn from participation, or withdrew sometime during or after the most recent cost reporting period ending on or before September 30, 2002.

Specifically, we are proposing that, if a hospital was participating in the demonstration project or the VRRP at any time during the hospital's most recent cost reporting period ending on or before September 30, 2002, for purposes of determining possible reductions to the FTE resident caps, we would compare the higher of the hospital's base number of residents, and the resident level in the hospital's most recent cost reporting period ending on or before September 30, 2002, to the hospital's otherwise applicable FTE resident cap. If the higher of the base number of residents or the resident level in the hospital's most recent cost reporting period ending on or before September 30, 2002, is still less than the otherwise applicable FTE resident cap, we are proposing to reduce the hospital's FTE resident cap amount by 75 percent of the difference, effective July 1, 2005. We would also use those slots in the redistribution process under section 1886(h)(7)(B) of the Act since those slots are not ``attributable'' to participation in the demonstration project or the VRRP.

Under section 1886(h)(7)(A)(ii)(II) of the Act, a hospital may submit a timely request to use its cost report that includes July 1, 2003, for purposes of determining the reference resident level if the hospital has an expansion of an existing program that is not reflected on the hospital's most recent settled cost report. If a hospital that was still participating in the demonstration project or the VRRP at some time during its most recent cost reporting period ending on or before September 30, 2002, had an expansion of an existing program that is not reflected on its most recent settled cost report, and the resident level for its cost reporting period that includes July 1, 2003, is higher than the resident level for the most recent cost reporting period ending on or before September 30, 2002, and is higher than the base number of residents, we anticipate that the hospital would submit a timely request that its resident level from its cost reporting period that includes July 1, 2003, be compared to its otherwise applicable FTE resident cap, for purposes of determining a possible reduction to the hospital's FTE resident cap. We believe that under the proposed policy discussed above, a hospital would only request that we utilize its cost reporting period that includes July 1, 2003, if the number of allopathic and osteopathic residents it trained in that cost reporting period is higher than its base number of residents and its base number of residents is less than its FTE resident cap. If we grant the hospital's request that we utilize its cost reporting period that includes July 1, 2003, and the resident level for that period is less than the FTE resident cap, we would reduce the FTE resident cap by 75 percent of the difference between the two numbers. We would also use those slots in the redistribution process under section 1886(h)(7)(B) of the Act, since those slots are not ``attributable'' to participation in the demonstration project or the VRRP.

If a hospital withdrew from participation in the demonstration project or the VRRP prior to its most recent cost reporting period ending on or before September 30, 2002, we are proposing that such a hospital would be subject to the procedures applicable to all other hospitals for determining possible reductions to the FTE resident caps. However, we note that such a hospital may still apply for an increase to its FTE caps as specified under section 1886(h)(7)(B) of the Act (the proposals for applying for the increase are described above). l. Application of Section 422 to Hospitals That File Low Utilization Medicare Cost Reports

In general, section 422 of Public Law 108-173 applies to hospitals that are Medicare-participating providers and that train residents in approved residency programs. However, because Medicare-participating children's hospitals primarily serve a non-Medicare population and, therefore, receive minimal Medicare payments relative to other Medicare-participating hospitals, some children's hospitals choose (with approval from their fiscal intermediaries) to submit low utilization (abbreviated) Medicare cost reports. Typically, such low utilization cost reports do not include the information that would be necessary for us to calculate Medicare GME payments, such as FTE resident counts and caps. Thus, children's hospitals that submit these low utilization cost reports do not receive Medicare GME payments.

Under section 1886(h)(7)(A) of the Act, as added by section 422(a) of Public Law 108-173, we are proposing that determinations as to whether, and by how much, a children's hospital's FTE resident cap will be reduced will be made using the same methodology (that is, utilizing the same reference cost reporting periods and the same reference resident levels) that we are proposing for other Medicare-participating teaching hospitals. We note that the low utilization cost reports may be filed with or without Worksheet E-3, Part IV (the worksheet on which the Medicare direct GME payment is calculated). If a children's hospital files a low utilization cost report in a given cost reporting period, and does not file the Worksheet E-3, Part IV, for Medicare purposes, that hospital is not considered by Medicare to be a teaching hospital in that cost reporting period. (We realize that a children's hospital that files a low utilization cost report may have a ``resident cap'' that is applicable for payment purposes under the Children's Hospital Graduate Medical Education (CHGME) Payment Program, administered by the Health Resources and Services Administration (HRSA), but this resident cap is not the Medicare FTE resident cap.) As stated in the One-Time Notification published on April 30, 2004 (Transmittal 77, CR

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3247), if a children's hospital filed a low utilization cost report in its most recent cost reporting period ending on or before September 30, 2002, and did not file the Worksheet E-3, Part IV, there could be no reduction under section 1886(h)(7)(A) of the Act because there is no reference resident level for such a hospital. This would be the case even in instances where such a children's hospital has a FTE resident cap (for example, from 1996) that is recognized for Medicare purposes, because there would still be no reference resident level for its most recent cost reporting period ending on or before September 30, 2002, on which to determine a possible reduction to the children's hospital FTE resident cap.

Although section 1886(h)(7)(A) of the Act does not apply to children's hospitals that filed a low utilization cost report (and no Worksheet E-3, Part IV) for the most recent cost reporting period ending on or before September 30, 2002, we are proposing that, regardless of how a children's hospital has previously filed its Medicare cost report (that is, a full cost report or an abbreviated one), or how it is treated for CHGME payment purposes, a children's hospital would be eligible to apply for an increase in its FTE resident cap under section 1886(h)(7)(B) of the Act, subject to the same demonstrated likelihood and evaluation criteria proposed above for all hospitals. However, we are proposing that, in order to receive an increase in its FTE resident cap under section 1886(h)(7)(B) of the Act, effective July 1, 2005, in addition to complying with the proposed application requirements described above, the hospital must file Worksheet E-3, Part IV, with its Medicare cost report for its cost reporting period that includes July 1, 2005. We are proposing that the children's hospital comply with this requirement because section 422 is intended to allow a hospital to increase its FTE counts for purposes of Medicare GME payments. We do not believe it would be appropriate to grant an increase in a hospital's FTE resident cap under section 1886(h)(7)(B) of the Act if the hospital does not use the slots for Medicare purposes (but only for purposes of the CHGME Payment Program) as would be evidenced by not filing a Worksheet E-3, Part IV. m. Specific Solicitation for Public Comment on the Proposals

We specifically solicit public comment on the proposals in this section IV.O.2. In particular, in section IV.O.2.g. of this preamble on the determination of the hospitals that will receive increases in their FTE resident caps, we have considered many possible alternatives to evaluate hospital applications. We specifically solicit public comments on how hospitals should ``demonstrate the likelihood'' of filling the additional residency slots, and in a way that is documentable for all hospitals and verifiable by CMS. We also specifically solicit public comments on the criteria we have proposed for evaluating the hospital applications and are open to suggestions from the public on what other criteria we should use to determine which hospitals should receive the increases in their FTE resident caps. We ask the public to keep in mind that criteria should be documentable for all hospitals and verifiable by CMS. n. CMS Evaluation Form

CMS Evaluation Form as Part of the Application for the Increase in a Hospital's FTE Cap(s) Under Section 422 of the Medicare Modernization Act of 2003

Directions: Please fill out the information below for each residency program for which the applicant hospital intends to use the increase in its FTE cap(s). CMS notes that the applicant hospital is responsible for complying with the other requirements listed in the FY 2005 hospital inpatient prospective payment system proposed rule in order to complete its application for the increase in its FTE cap(s) under section 422 of Public Law 108-173. NAME OF HOSPITAL:----------------------------------------------------- MEDICARE PROVIDER NUMBER:--------------------------------------------- NAME OF SPECIALTY TRAINING PROGRAM:-----------------------------------

(Check one): [ballot] Allopathic Program [ballot] Osteopathic Program

NUMBER OF FTE SLOTS REQUESTED FOR PROGRAM:

Direct GME:---------- IME:----------

Section A: Demonstrated Likelihood of Filling the FTE Slots

(Place an ``X'' in the box for the applicable criterion and subcriteria.)

[ballot] A1: Demonstrated Likelihood Criterion 1. The hospital intends to use the additional FTEs to establish a new residency program (listed above) on or after July 1, 2005 (that is, a newly approved program that begins training residents on or after July 1, 2005).

[ballot] (1) Hospital is establishing this newly approved residency program. (Check one of the following.)

[ballot] Application for approval of the new residency program has been submitted to the ACGME or the AOA by December 1, 2004. (Copy attached.)

[ballot] The hospital has submitted an institutional review document or program information form concerning the new program in an application for approval of the new program by December 1, 2004. (Copy attached.)

[ballot] The hospital has received written correspondence from the ACGME or AOA acknowledging receipt of the application for the new program, or other types of communication from the accrediting bodies concerning the new program approval process (such as notification of site visit). (Copy attached.)

[ballot] (2) Hospital will likely fill the slots requested. (Check one of the following.)

[ballot] The hospital s existing residency programs had a resident fill rate of at least 95 percent in each of program years 2001 through 2003. (Documentation attached.)

[ballot] The hospital has the cover page of its employment contracts with the residents who are or will be participating in the new residency program (resident specific information may be redacted). (Copies attached.)

[ballot] The specialty program (listed above) has a resident fill rate nationally, across all hospitals, of at least 95 percent. (Documentation attached.)

[ballot] A2: Demonstrated Likelihood Criterion 2. The applying hospital intends to use the additional FTEs to expand an existing residency training program that is listed above (that is, to increase the number of FTE resident slots in the program) on or after July 1, 2005, and before July 1, 2008.

[ballot] (1) Hospital intends to expand an existing program. (Check one of the following.)

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[ballot] The appropriate accrediting body (the ACGME or the AOA) has approved the hospital s expansion of the number of FTE residents in the program. (Documentation attached.)

[ballot] The National Residency Match Program or the American Osteopathic Association Residency Match Program has accepted or will be accepting the hospital s participation in the match for the existing program that will include additional resident slots in that residency training program. (Documentation attached.)

[ballot] The hospital has institutional review document or program information form for the expansion of the existing residency training program. (Copy attached.)

[ballot] (2) Hospital will likely fill the slots of the expanded residency program. (Check one of the following.)

[ballot] Hospital has employment contracts with the residents who are or will be participating in the expanded program (resident specific information may be redacted) and employment contracts with the residents participating in the program prior to the expansion of the program. (Copy of the cover page of both documents attached.)

[ballot] Hospital has other previously established residency programs. (Documentation attached evidencing that each of the residency programs had a resident fill rate of at least 95 percent in each of program years 2001 through 2003.)

[ballot] Hospital is expanding an existing program in a particular specialty. (Documentation attached evidencing that the specialty has a resident fill rate nationally, across all hospitals, of at least 95 percent.)

[ballot] Hospital is expanding a program in order to train residents that need a program because another hospital in the State has closed a similar program, and the applying hospital received a temporary adjustment to its FTE cap(s) (under the requirements of Sec. 413.86(g)(9)). (Documentation attached.)

[ballot] A3: Demonstrated Likelihood Criterion 3. Hospital is applying for an increase in its FTE resident cap because the hospital is already training residents in an existing residency training program(s) in excess of its direct GME FTE cap or IME FTE cap, or both. (Copies of EACH of the following attached.)

Copies of the most recent as-submitted Medicare cost reports documenting on Worksheet E, Part A and Worksheet E3, Part IV the resident counts and FTE resident caps for both direct GME and IME for the relevant cost reporting periods.

Copies of the 2004 residency match information concerning the number of residents the hospital intends to have in its existing programs.

Copies of the most recent accreditation letters on all of the hospital s training programs in which the hospital trains and counts FTE residents for direct GME and IME.

[ballot] A4: Demonstrated Likelihood Criterion 4. The hospital is applying for the unused FTE resident slots because the hospital is at risk of losing accreditation of a residency training program if the hospital does not increase the number of FTE residents in the program on or after July 1, 2005. (Documentation attached from the appropriate accrediting body of the hospital's risk of lost accreditation as a result of an insufficient number of residents in the program.)

Section B. Level Priority Category

[ballot] (Place an ``X'' in the appropriate box that is applicable to the level priority category that describes the applicant hospital.)

[ballot] B1: First Level Priority Category: The hospital is a rural hospital and has the only specialty training program in the State (for the program requested on page 1 of this CMS Evaluation Form).

[ballot] B2: Second Level Priority Category: The hospital is a rural hospital only.

[ballot] B3: Third Level Priority Category: The hospital is a small urban hospital (that is, an urban hospital that is located in a ``not large urban area'' ) and has the only specialty program in the State (for the program requested on this CMS Evaluation Form).

[ballot] B4: Fourth Level Priority Category: The hospital is a ``small'' urban hospital only.

[ballot] B5: Fifth Level Priority Category: The hospital has the only specialty training program in the State (for the program requested on page 1 of this CMS Evaluation Form).

[ballot] B6: Sixth Level Priority Category: The hospital meets none of the statutory priority criteria.

Section C. Evaluation Criteria

(Place an X in the box for each criterion that is appropriate for the applicant hospital and for the program for which the increase in the FTE cap is requested.)

[ballot] C1: Evaluation Criterion One. The hospital that is requesting the increase in its FTE resident cap(s) has a Medicare inpatient utilization over 60 percent, as reflected in at least two of the hospital s last three most recent audited cost reporting periods for which there is a settled cost report.

[ballot] C2: Evaluation Criterion Two. The hospital needs the additional slots to establish a new geriatrics residency program, or adding residents to an existing geriatrics program.

[ballot] C3: Evaluation Criterion Three. The hospital does not qualify for an adjustment to its FTE caps under existing Sec. 413.86(g)(12) for a rural track residency program, but is applying for an increase in its FTE resident cap(s) under section 1886(h)(7)(B) of the Act because it rotates (or in the case of a new program, will rotate) residents for at least 25 percent of the duration of the residency program to any one (or in combination thereof) of the following: a rural area, as defined in section 1886(d)(2)(D)(ii) of the Act and Sec. 412.62(f)(1)(iii) of the regulations; a rural health clinic (RHC), as defined in section 1861(aa)(1) of the Act and Sec. 491.2 of the regulations; or a Federally Qualified Health Center (FQHC), as defined in section 1861(a)(3) of the Act and Sec. 405.2401(b) of the regulations.

[ballot] C4: Evaluation Criterion Four. In portions of cost reporting periods prior to July 1, 2005, the hospital qualified for a temporary adjustment to its FTE cap under existing Sec. 413.86(g)(9) because it was training displaced residents from either a closed program or a closed hospital, and, even after the temporary adjustment, the hospital continues to train residents in the specialty(ies) of the displaced residents and is above the hospital's direct GME FTE cap or IME FTE cap, or both, for that reason.

[ballot] C5: Evaluation Criterion Five. The hospital is above its FTE caps because it was awaiting accreditation of a new program from the ACGME or the AOA during the base period for its FTE cap(s) but was not eligible to receive a new program adjustment as stated under existing Sec. 413.86(g)(6)(ii).

[ballot] C6: Evaluation Criterion Six. The hospital is above its FTE resident caps because, despite qualifying for an FTE cap adjustment for a new program under Sec. 413.86(g)(6)(i) or (g)(6)(ii), it was unable to ``grow'' its program to the full complement of residents for which the program was accredited before the hospital's FTE resident cap was permanently set beginning with the fourth program year of the new program.

[ballot] C7: Evaluation Criterion Seven. The hospital is located in any one (or in combination thereof) of the following: a geographic HPSA, as defined in 42 CFR 5.2; a population HPSA (also defined at 42 CFR 5.2); or a Medicare physician scarcity county, as defined under section 413 of Public Law 108-173.

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[ballot] C8: Evaluation Criterion Eight. The hospital is in a rural area (as defined under section 1886(d)(2)(D)(ii) of the Act) and is a training site for a rural track residency program (as specified under Sec. 413.86(g)(12), but is unable to count all of the FTE residents training at the rural hospital in the rural track because the rural hospital's FTE cap is lower than the hospital's unweighted count of allopathic or osteopathic FTE residents beginning with portions of cost reporting periods on or after July 1, 2005.

[ballot] C9: Evaluation Criterion Nine. The hospital is affiliated with a historically Black medical college.

[ballot] C10: Evaluation Criterion Ten: The hospital is training residents in residency program(s) sponsored by a medical school(s) that is designated as a Center of Excellence for Underserved Minorities (COE) under section 736 of the Public Health Service Act in FY 2003. o. CMS Central and CMS Regional Office Mailing Addresses for Applications for Increases in FTE Resident Caps

Central Office

Centers for Medicare and Medicaid Services (CMS), Director, Division of Acute Care, 7500 Security Boulevard, Mail Stop C4-08-06, Baltimore, Maryland 21244.

Region I (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region I, JFK Federal Building, Room 2325, Boston, MA 02203, Phone: (617) 565- 1185.

Region II (New York, New Jersey, U.S. Virgin Islands, and Puerto Rico)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region II, 26 Federal Plaza, 38th Floor, New York, NY 10278, Phone: (212) 264- 3657.

Region III (Delaware, Maryland, Pennsylvania, Virginia and West Virginia, and the District of Columbia)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region III, Public Ledger Building, Suite 216, 150 South Independence Mall West, Philadelphia, PA 19106, Phone: (215) 861-4140.

Region IV (Alabama, North Carolina, South Carolina, Florida, Georgia, Kentucky, Mississippi, and Tennessee)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region IV, Atlanta Federal Center, 61 Forsyth Street, SW., Suite 4T20, Atlanta, GA 30303-8909, Phone: (404) 562-7500.

Region V (Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region V, 233 North Michigan Avenue, Suite 600, Chicago, IL 60601, Phone: (312) 886-6432.

Region VI (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region VI, 1301 Young Street, Suite 714, Dallas, TX 75202, Phone: (214) 767- 6423.

Region VII (Iowa, Kansas, Missouri, and Nebraska)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region VII, Richard Bolling Federal Building, Room 235, 601 East 12th Street, Kansas City, MO 64106.

Region VIII (Colorado, Montana, North Dakota, South Dakota, Utah and Wyoming)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Managment, Region VIII, Colorado State Bank Building, 1600 Broadway, Suite 700, Denver, CO 80202, Phone: (303) 844-2111.

Region IX (Arizona, California, Hawaii, and Nevada and Territories of American Samoa, Guam and the Commonwealth of the Northern Mariana Islands)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region IX, 75 Hawthorne St., Suite 408, San Francisco, CA 94105, Phone: (415) 744-3501.

Region X (Alaska, Idaho, Oregon, and Washington)

Centers for Medicare and Medicaid Services (CMS), Associate Regional Administrator, Division of Medicare Financial Management, Region X, 2201 Sixth Avenue, MS-40, Seattle, WA 98121, Phone: (206) 615-2306. 3. Direct GME Initial Residency Period (Proposed New Sec. 413.79, a Proposed Redesignation of Existing Sec. 413.86(g)) a. Background

As we have generally described above, the amount of direct GME payment to a hospital is based in part on the number of FTE residents who are training at the hospital during a year. The number of FTE residents training at a hospital, and thus the amount of direct GME payment to a hospital, is directly affected by CMS policy on how ``initial residency periods'' are determined for residents.

Section 1886(h)(5)(A) of the Act defines ``approved medical residency training program'' as ``a residency or other postgraduate medical training program, participation in which may be counted toward certification in a specialty or subspecialty.'' This provision is implemented in regulations at existing Sec. 413.86(b). In accordance with section 1886(h)(5)(I) of the Act, the term ``resident'' is defined to include ``an intern or other participant in an approved medical residency training program.'' Existing Sec. 413.86(b) defines ``resident'' as an ``intern, resident, or fellow who participates in an approved medical residency training program * * * as required in order to become certified by the appropriate specialty board.''

Section 1886(h)(4)(C)(ii) of the Act provides that while a resident is in the ``initial residency period,'' the resident is weighted at 1.00 (existing Sec. 413.86(g)(2) of the regulations). Section 1886(h)(4)(C)(iii) of the Act requires that if a resident is ``not in the resident's initial residency period,'' the resident is weighted as .50 FTE resident (existing Sec. 413.86(g)(3) of the regulations).

Section 1886(h)(5)(F) of the Act defines ``initial residency period'' as the ``period of board eligibility,'' and, subject to specific exceptions, limits the initial residency period to an ``aggregate period of formal training'' of no more than 5 years for any individual. Section 1886(h)(5)(G) of the Act generally defines ``period of board eligibility'' for a resident as ``the minimum number of years of formal training necessary to satisfy the requirements for initial board eligibility in the particular specialty for which the resident is training.'' Existing Sec. 413.86(g)(1) of the regulations generally defines ``initial residency period'' as the ``minimum number of years required for board eligibility.''Existing Sec. 413.86(g)(1)(iv) provides that ``time spent in residency programs that do not lead to certification in a specialty or subspecialty, but that otherwise meet the definition of approved programs . . . is counted toward the initial residency period limitation.'' Section 1886(h)(5)(F) of the Act further provides that ``the initial residency period shall be determined, with respect to a resident, as of the time the resident enters the residency training program.''

The initial residency period is determined as of the time the resident enters the ``initial'' or first residency training program and is based on the period of board eligibility associated with that medical specialty. Thus, this

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provision limits the amount of direct GME that Medicare pays a hospital for a resident who switches specialties to a program with a longer period of board eligibility or completes training in a specialty and then continues training in a subspecialty (for example, cardiology and gastroenterology are subspecialties of internal medicine). b. Direct GME Initial Residency Period Limitation: Simultaneous Match Issue

CMS understands there are numerous programs, including anesthesiology, dermatology, psychiatry, and radiology, that require a year of generalized clinical training to be used as a prerequisite for the subsequent training in the particular specialty. For example, in order to become board eligible in anesthesiology, a resident must first complete a generalized training year and then complete 3 years of training in anesthesiology. This first year of generalized residency training is commonly known as the ``clinical base year.'' Commonly, the clinical base year requirement is fulfilled by completing either a preliminary year in internal medicine (although the preliminary year can also be in other specialties such as general surgery or family practice), or a transitional year program (which is not associated with any particular medical specialty).

In many cases, during the final year of medical school, medical students apply for training in specialty programs. Typically, a medical student who wants to train to become a specialist is ``matched'' to both the clinical base year program and the residency training specialty program at the same time. For example, the medical student who wants to become an anesthesiologist will apply and ``match'' simultaneously for a clinical base year in an internal medicine program for year 1 and for an anesthesiology training program in years 2, 3, and 4.

Based on our interpretation of the statute, CMS' policy is that the initial residency period is determined for a resident based on the program in which he or she participates in the resident's first year of training, without regard to the specialty in which the resident ultimately seeks board certification. Therefore, for example, a resident that chooses to fulfill the clinical base year requirement for an anesthesiology program with a preliminary year in an internal medicine program will be ``labeled'' with the initial residency period associated with internal medicine, or 3 years (3 years of training are required to become board eligible in internal medicine), even though the resident may seek board certification in anesthesiology, which requires a minimum of 4 years of training to become board eligible. As a result, this resident would be weighted at 0.5 FTE in his or her fourth year of training for purposes of direct GME payment.

We understand that some hospitals have been assigning residents that complete a clinical base year in a different specialty from the one in which they ultimately train an initial residency period and a weighting factor based on the specialty associated with second program year in which the residents train. As a result, some residents have been assigned a weighting factor of 1.0 FTE for years beyond their initial residency periods, rather than the applicable 0.5 FTE weighting factor. This error results in Medicare overpayments, the size of which is dependent upon the hospital's direct GME PRA and its Medicare utilization. In addition, we have received numerous requests from the health care industry to revise our policy concerning the initial residency period for residency programs that require a clinical base year because some entities in the industry believe that our current policy is unfair to those individuals who ``match'' simultaneously for both a preliminary year (for example, the clinical base year in internal medicine) and the longer specialty residency program (for example, anesthesiology, dermatology, or radiology).

To address these concerns, we are considering making a change in policy that addresses these ``simultaneous match'' residents. Specifically, we are considering a policy that, if a hospital can document that a particular resident matches simultaneously for a first year of training in a clinical base year in one medical specialty, and for additional year(s) of training in a different specialty program, the resident's initial residency period would be based on the period of board eligibility associated with the specialty program in which the resident matches for the subsequent year(s) of training and not on the period of board eligibility associated with the clinical base year program, for purposes of direct GME payment. In addition, we are considering a new definition of ``residency match'' to mean, for purposes of direct GME, a national process by which applicants to approved medical residency programs are paired with programs on the basis of preferences expressed by both the applicants and the program directors.

This policy could apply regardless of whether the resident completes the first year of training in a separately accredited transitional year program or in a preliminary (or first) year in another residency training program such as internal medicine.

Under such a policy, hospitals would apply a weight of 1.0 FTE (instead of 0.5) for an additional year or two to some residents who, as a prerequisite for training in a specialty program, complete a first year of training in a different specialty program. This would probably cause an increase in direct GME payments. This provision would apply to such programs as anesthesiology, dermatology, radiology, and physical medicine and rehabilitation. In 2004, there were approximately 1,840 residents in these specialties that would be affected by this proposal, as compared to the approximately 83,000 residents in total for whom Medicare makes direct GME payments. Under current policy, these 1,840 residents would be weighted at 0.5 FTE in their 4th year (and 5th year, if applicable) of training. Therefore, direct GME spending for these 1,840 residents should currently be $26.5 million (1,840 x 0.5 x 82,249 \5\ x .35 \6\). Under the policy CMS is considering, direct GME spending would be twice that amount at $53 million (1,840 x $82,249 x .35). However, because we believe a number of fiscal intermediaries may have been applying current policy incorrectly and instead have been weighting approximately 920 residents at 1.0 in their 4th year (and 5th year, if applicable) of training, the cost of this change would be expected to be closer to $13.25 million (920 x 0.5 x $82,249 x .35). We are providing this cost impact analysis to the public for its information in consideration of any such proposed change.

\5\ $82,249 is the estimated national average per resident amount for FY 2005.

\6\ .35 is the estimated average Medicare utilization.

We note that in the Conference Committee report that accompanied Public Law 108-173, the Committee stated: ``The conferees also clarify that under section 1886 (h)(5)(F), the initial residency period for any residency for which the ACGME requires a preliminary or general clinical year of training is to be determined in the resident's second year of training.'' (Conference Committee Agreement Accompanying Public Law 108-173, 108 Cong., 2d Sess., 276 (2003)) The Conference Committee included this language as part of its explanation of section 712 of Public Law 108-173, which clarifies an exception to the initial residency period for geriatric fellowship programs (see section IV.O.3.c. of this preamble). We are

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considering making a policy change for determining the initial residency period for a resident who participates in a clinical base year program based on the resident's second year of training, as the Conference Committee suggests. However, we understand that not all residents who participate in the clinical base year programs simultaneously match in specialty training programs before the residents' first year of training. Thus, if we were to propose a ``second year'' policy, there would be no way to distinguish in the second year of training among those residents who simultaneously matched in a specialty program prior to their first year of training; those residents who did not match simultaneously, but participated in a clinical base year and then continued on to train in a different specialty; and those residents who simply switched specialties in their second year. As we have stated earlier, the initial residency period is to be determined based on the ``initial'' or first program in which a resident trains. Section 1886(h)(5)(F) of the Act provides that ``the initial residency period shall be determined, with respect to a resident, as of the time the resident enters the residency training program.'' (Emphasis added.)

Therefore, we believe it is appropriate for us to consider changes to the ``simultaneous match'' policy that would allow for documentation that the residents' training program is arranged to continue in another medical specialty after the resident completes the clinical base year. However, we also specifically solicit comments concerning the issue of how to establish the initial residency period for a resident who does not match simultaneously for the first and second year, completes the first year in a preliminary program in one specialty, and then continues his or her training in a different specialty program that requires completion of a clinical base year.

We note that if we were to propose such a change in the initial residency period policy, the change, if finalized, could result in an adjustment to the PRA applicable for the direct GME payments made to the hospital for a resident in a clinical base year. By treating the first year as part of a nonprimary care specialty program (for example, anesthesiology), the hospital would be paid at the lower nonprimary care PRA rather than the higher primary care PRA, which would be used for residents training in a clinical base year in a primary care program (for example, internal medicine). We note in conjunction with our proposal that the initial residency period would be established based upon the period of board eligibility for the specialty program for residents who simultaneously match with a clinical base year and a specialty program that we believe all of the programs that require a clinical base year are nonprimary care specialties. Because we are considering a policy change that the initial residency period would be based upon the period of board eligibility for the specialty program rather than the clinical base year, we would also consider a policy change that the nonprimary care PRA would apply for the duration of their initial residency period.

Thus, we are considering making the above policy changes to address the clinical base year initial residency period issue. We specifically solicit comments on the changes we are considering to the existing initial residency period policy and other approaches to address this issue, particularly those that do not increase Medicare expenditures. c. Exception to Initial Residency Period for Geriatric Residency or Fellowship Programs (Section 712 of Public Law 108-173 and Proposed Redesignated Sec. 413.79(a) (a proposed redesignation of existing Sec. 413.86(g)(1))

As explained further below, under Medicare direct GME payment rules, the initial residency period is generally defined as the minimum number of years of training required for a resident to become board eligible in a specialty (not to exceed 5 years) and is established at the time the resident enters his or her first training program. For purposes of direct GME payments, a resident's full-time equivalent (FTE) training time is weighted at 1.0 during the initial residency period and 0.5 for training that continues beyond the initial residency period. Section 1886(h)(5)(F) of the Act generally limits a resident's initial residency period to no longer than 5 years. That section also provides an exception that allows FTE training time spent by residents in an approved geriatric residency program to be treated as part of the resident's initial residency period, that is, weighted at 1.0 FTE for up to an additional 2 years after conclusion of the otherwise applicable initial residency period.

We understand, based on information provided by the American Geriatric Society (AGS), that in 1998, the American Board of Internal Medicine and the American Board of Family Physicians (hereinafter ``the Boards'') reduced the minimum number of years of formal training required for residents to become board eligible in geriatrics from 2 years to 1 year. As a result, the initial residency period, and full direct GME funding for residents in geriatric training programs, would be limited to 1 year.

However, we understand that many teaching hospitals continue to run geriatric residency or fellowship programs of at least 2 years in length (some are even 3 years). We also understand that, despite the decrease in the minimum requirements for board eligibility, the Accreditation Council for Graduate Medicare Education (ACGME) continues to accredit some geriatric training programs for the full duration of the fellowships. For example, if a hospital's geriatric fellowship is 3 years in length, the program may continue to be accredited by the ACGME for the full 3 years, but the FTE time spent by a resident training in the geriatric program would be weighted at 1.0 for the first year of the resident's training and at 0.50 for the second and third year of the fellowship. (However, we note that FTE residents' time is not weighted for purposes of IME payments.)

Effective October 1, 2003, section 712 (a) of Public Law 108-173 clarified that Congress intended to provide an exception to the initial residency period for purposes of direct GME payments for geriatric residency or fellowship programs such that ``where a particular approved geriatric training program requires a resident to complete 2 years of training to initially become board eligible in the geriatric specialty, the 2 years spent in the geriatric training program are treated as part of the resident's initial residency period, but are not counted against any limitation on the initial residency period.'' Therefore, we are proposing that, effective for cost reporting periods beginning on or after October 1, 2003, if a resident is training in an accredited geriatric residency or fellowship program of 2 (or more) years in duration, hospitals may treat training time spent during the first 2 years of the program as part of the resident's initial residency period and weight the resident's FTE time at 1.0 during that period, regardless of the fact that the minimum number of years of training required for board eligibility in geriatrics is only 1 year. We note that the statutory language quoted above does not allow a hospital to treat time spent by a resident in the second year of geriatric training as part of the resident's initial residency period in the case where the resident trained in a geriatric residency or fellowship program that is accredited as a 1-year program because, in that case, the

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resident could be board eligible after only 1 year of training.

Even though Congress gave the Secretary authority to implement section 712 of Public Law 108-173 through an interim final rule with comment period, we chose to provide instructions in a One-Time Notification (OTN) to fiscal intermediaries and providers (Transmittal 61, CR 3071), ``Changes to the FY 2004 Graduate Medical Education (GME) Payments as Required by the Medicare Modernization Act of 2003 (MMA), P.L. 108-173,'' issued on March 12, 2004, and are implementing the statutory provision in our regulations through this notice and comment rulemaking process. We are proposing to revise proposed redesignated Sec. 413.79(a) (a proposed redesignation of Sec. 413.86(g)(1)) to incorporate the provision of section 712(a) of Public Law 108-173. 4. Per Resident Amount: Extension of Update Limitation on High-Cost Programs

(Section 711 of Public Law 108-173 and Sec. 413.77(d)(2)(iii)(B)(3) (a proposed redesignation of existing Sec. 413.86(e)(4)(ii)(C)(2)(iii)))

Section 1886(h)(2) of the Act, as amended by section 311 of the Balanced Budget Refinement Act (BBRA) of 1999 (Pub. L. 106-113), establishes a methodology for the use of a national average per resident amount (PRA) in computing direct GME payments for cost reporting periods beginning on or after October 1, 2000, and on or before September 30, 2005. Generally, section 1886(h)(2)(D)(ii) of the Act establishes a ``floor'' for hospital-specific PRAs at 70 percent of the locality-adjusted national average PRA. In addition, section 1886(h)(2)(D)(iv) of the Act establishes a ``ceiling'' that limits the annual adjustment of a hospital-specific PRA if the PRA exceeded 140 percent of the locality-adjusted national average PRA. Section 511 of the Benefits Improvement and Protection Act (BIPA) of 2000 (Pub. L. 106-554) further amended section 1886 (h)(2) of the Act to increase the floor that was established by the BBRA to 85 percent of the locality- adjusted national average PRA. For purposes of calculating direct GME payments, each hospital-specific PRA is compared to the floor and ceiling to determine whether the hospital-specific PRA should be revised. (We direct readers to Program Memorandum A-01-38, March 21, 2001 for historical reference on calculating the floor and ceiling.)

Section 711 of Public Law 108-173 amended section 1886 (h)(2)(D)(iv) of the Act to freeze the annual CPI-U updates to hospital-specific PRAs for those PRAs that exceed the ceiling for FYs 2004 through 2013. Therefore, we are proposing that, for cost reporting periods beginning during FY 2004 through FY 2013, we would calculate a ceiling that is equal to 140 percent of the locality-adjusted national average PRA for each hospital and compare it to each hospital-specific PRA. If the hospital-specific PRA for the preceding year is greater than 140 percent of the locality-adjusted national average PRA ``ceiling'' in the current fiscal year, the hospital-specific PRA for the current year is frozen at the preceding fiscal year's hospital- specific PRA and is not updated by the CPI-U factor. We note that a hospital may have more than one PRA. Each of a hospital's PRAs must be separately compared to the ``ceiling'' PRA to determine whether that PRA should be frozen at the level for the previous year or updated by the CPI-U factor.

For example, to determine the applicable PRA for a cost reporting period beginning during FY 2004, we would compare the hospital-specific PRA from the cost reporting period that began during FY 2003 to the FY 2004 locality-adjusted national average PRA for that hospital. If the FY 2003 hospital-specific PRA exceeds 140 percent of the FY 2004 locality-adjusted national average PRA, the FY 2004 hospital-specific PRA is frozen at the level of the FY 2003 hospital-specific PRA and is not updated by the CPI-U factor for FY 2004.

Due to the effective date of the statutory provision of section 711 of Public Law 108-173, we issued a notification to fiscal intermediaries and providers regarding the provision in the OTN issued on March 12, 2004 (Transmittal 61, CR 3071). In this proposed rule, to incorporate the changes made by section 711 of Public Law 108-173 in our regulations regarding the determination of PRAs, we are proposing to: (1) revise proposed redesignated Sec. 413.77(d)(2)(iii)(B)(3) (a proposed redesignation of existing Sec. 413.86(e)(4)(ii)(C)(2)(iii)) to make it applicable only to FY 2003; (2) further redesignate proposed newly redesignated Sec. 413.77(d)(2)(iii)(B)(4) (the proposed redesignation of existing Sec. 413.86(e)(4)(ii)(C)(2)(iv)) as Sec. 413.77(d)(2)(iii)(B)(4); and (3) add a proposed new Sec. 413.77(d)(2)(iii)(B)(4). 5. Residents Training in Nonhospital Settings a. Background

With respect to reimbursement of direct GME costs, since July 1, 1987, hospitals have been allowed to count the time residents spend training in sites that are not part of the hospital (referred to as ``nonprovider'' or ``nonhospital sites'') under certain conditions. Section 1886(h)(4)(E) of the Act requires that the Secretary's rules concerning computation of FTE residents for purposes of direct GME payments ``provide that only time spent in activities relating to patient care shall be counted and that all the time so spent by a resident under an approved medical residency training program shall be counted towards the determination of full-time equivalency, without regard to the setting in which the activities are performed, if the hospital incurs all, or substantially all, of the costs for the training program in that setting.'' (Section 1886(h)(4)(E) of the Act, as added by section of 9314 of the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509.)

Regulations regarding time spent by residents training in nonhospital sites for purposes of direct GME payment were first implemented in the September 29, 1989 final rule (54 FR 40286). We stated in that rule (under Sec. 413.86(f)(3)) that a hospital may count the time residents spend in nonprovider settings for purposes of direct GME payment if the residents spend their time in patient care activities and there is a written agreement between the hospital and the nonprovider entity stating that the hospital will incur all or substantially all of the costs of the program. The regulations at that time defined ``all or substantially all'' of the costs to include the residents' compensation for the time spent at the nonprovider setting.

Prior to October 1, 1997, for IME payment purposes, hospitals could only count the time residents spend training in areas subject to the IPPS and outpatient areas of the hospital. Section 4621(b)(2) of the Balanced Budget Act of 1997 (Pub. L. 105-33) revised section 1886(d)(5)(B) of the Act to allow providers to count time residents spend training in nonprovider sites for IME purposes, effective for discharges occurring on or after October 1, 1997. Specifically, section 1886(d)(5)(B)(iv) of the Act was amended to provide that ``all the time spent by an intern or resident in patient care activities under an approved medical residency program at an entity in a nonhospital setting shall be counted towards the determination of full-time equivalency if the hospital incurs all, or substantially all, of the costs for the training program in that setting.''

In the regulations at Sec. Sec. 412.105(f)(1)(ii)(c) and 413.86(f)(4)

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(as issued in the July 31, 1998 Federal Register), we specify the requirements a hospital must meet in order to include the time spent by a resident training in a nonhospital site in its FTE count for Medicare reimbursement for portions of cost reporting periods occurring on or after January 1, 1999 for both direct GME and for IME payments. The regulations at Sec. 413.86(b) redefine ``all or substantially all of the costs for the training program in the nonhospital setting'' as the residents' salaries and fringe benefits (including travel and lodging where applicable), and the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct GME. A written agreement between the hospital and the nonhospital site is required before the hospital may begin to count residents training at the nonhospital site; the agreement must provide that the hospital will incur the costs of the resident's salary and fringe benefits while the resident is training in the nonhospital site. The hospital must also provide reasonable compensation to the nonhospital site for supervisory teaching activities, and the written agreement must specify that compensation amount. b. Moratorium on Disallowances of Allopathic or Osteopathic Family Practice Residents Training Time in Nonhospital Settings (Section 713 of Pub. L. 108-173 and Proposed Redesignated Sec. 413.78 (a proposed redesignation of existing Sec. 413.86(f))

As we mentioned above, under existing Sec. 413.86(f)(4), for portions of cost reporting periods occurring on or after January 1, 1999, the time residents spend in nonhospital settings such as freestanding clinics, nursing homes, and physicians' offices in connection with approved programs may be included in determining the hospital's number of FTE residents for purposes of calculating both direct GME and IME payments, if the following conditions are met:

(1) The resident spends his or her time in patient care activities.

(2) There is a written agreement between the hospital and the nonhospital site that indicates that the hospital will incur the costs of the resident's salary and fringe benefits while the resident is training in the nonhospital site, and the hospital is providing reasonable compensation to the nonhospital site for supervisory teaching activities. The agreement must indicate the compensation the hospital is providing to the nonhospital site for supervisory teaching activities.

(3) The hospital incurs ``all or substantially all'' of the costs for the training program in the nonhospital setting. ``All or substantially all'' means the residents'' salaries and fringe benefits (including travel and lodging where applicable) and the portion of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education.

In order for the hospital to incur ``all or substantially all'' of the costs in accordance with the regulations, the actual cost of the time spent by teaching physicians in supervising residents in the nonhospital setting must be compensated by the hospital. The amount of supervisory GME costs is dependent upon the teaching physician's salary and the percentage of time that he or she devotes to activities related to the residency program at the nonhospital site. As long as there are supervisory costs associated with the nonhospital training, the hospital must reimburse the nonhospital setting for those costs in order to count FTE resident time spent in the nonhospital site for purposes of IME and direct GME payments.

Many hospitals have entered into written agreements with teaching physicians that state that the teaching physician is ``volunteering'' his or her time in the nonhospital site, and, therefore, the hospital is not providing any compensation to the teaching physician. Other hospitals have paid only a nominal amount of compensation for the supervisory teaching physicians' time in the nonhospital setting. Because the existing regulations at Sec. 413.86(f)(4) state that the hospital must incur all or substantially all of the direct GME costs, including those costs associated with the teaching physician, regardless of whether the written agreement states that the teaching physician is ``volunteering,'' we have required that the hospital must pay these costs in order to count FTE residents training in the nonhospital site, as long as these teaching physician costs exist.

However, during the 1-year period from January 1, 2004 through December 31, 2004, section 713 of Public Law 108-173, through a moratorium, allows hospitals to count allopathic or osteopathic family practice residents training in nonhospital settings for IME and direct GME purposes, without regard to the financial arrangement between the hospital and the teaching physician practicing in the nonhospital setting to which the resident is assigned. We implemented section 713 in the One-Time Notification (OTN), ``Changes to the FY 2004 Graduate Medical Education (GME) Payments as Required by the Medicare Modernization Act of 2003 (MMA)'' (CR 3071, Transmittal 61, issued on March 12, 2004). Generally, to implement the provisions of section 713, we stated in the OTN that, when settling prior year cost reports during this 1-year period, or for family practice residents actually training in nonhospital settings during this 1-year period, the fiscal intermediaries should allow the hospitals to count allopathic and osteopathic family practice residents training in the nonhospital setting for direct GME and IME payment purposes without regard to the financial arrangement between the hospital and the nonhospital site pertaining to the teaching physicians' costs associated with the residency program.

(1) Cost Reports That Are Settled Between January 1, 2004 and December 31, 2004.

When fiscal intermediaries settle cost reports during January 1, 2004 through December 31, 2004 (Calendar Year (CY) 2004), a hospital that seeks to count allopathic or osteopathic family practice FTE residents training in a nonhospital setting(s) is allowed to count those FTEs for IME and direct GME purposes, even in instances where the written agreement between the hospital and a teaching physician or a nonhospital site does not mention teaching physician compensation, specifies only a nominal amount of compensation, or states that the teaching physician is ``volunteering'' his or her time training the residents. For example, when a fiscal intermediary is settling a cost report during CY 2004 that has a fiscal year end of June 30, 2001, the fiscal intermediary will allow the hospital to count family practice FTE residents that trained in a nonhospital setting during the period covered by the June 30, 2001 cost report, regardless of the financial arrangement in place between the hospital and the teaching physician at the nonhospital site during the period covered by the June 30, 2001 cost report.

We note that this moratorium does not apply to cost reports that are not settled during January 1 through December 31, 2004, that do not coincide with, or overlap, the January 1 through December 31, 2004 period. For example, if a cost report for fiscal year ended December 31, 2003 (or June 30, 2003, or others) is not settled during the January 1 through December 31, 2004 period, the moratorium would not apply.

(2) Family Practice Residents That Are Training in Nonhospital Settings Between January 1, 2004 and December 31, 2004.

In addition to allowing family practice residents that trained in nonhospital settings to be counted in

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cost reports that the fiscal intermediaries settle during the period of January 1, 2004 through December 31, 2004, without regard to the financial arrangements between the hospital and the teaching physician at the nonhospital site, the fiscal intermediaries are to allow family practice residents that actually are or will be training in nonhospital settings during January 1, 2004 through December 31, 2004, without regard to the financial arrangements between the hospital and the teaching physician at the nonhospital site. That is, when fiscal intermediaries settle cost reports that cover service periods of January 1, 2004 through December 31, 2004, a hospital that seeks to count allopathic or osteopathic family practice FTE residents training in a nonhospital setting(s) would be allowed to count those FTEs, even in instances where the written agreement between the hospital and a teaching physician or a nonhospital site does not mention teaching physician compensation, specifies only a nominal amount of compensation, or states that the teaching physician is ``volunteering'' his or her time training the residents. If a hospital has a fiscal year that is other than a calendar year, the hospital may count the family practice residents training in the nonhospital setting during those portions of its fiscal years that fall within the January 1, 2004 and December 31, 2004 period. For example, when a fiscal intermediary is settling a hospital's June 30, 2004 cost report, the hospital would be allowed to count family practice FTE residents that trained in a nonhospital setting during the period of January 1, 2004 through June 30, 2004, regardless of the financial arrangement between the hospital and the teaching physician at the nonhospital site from January 1 through June 30, 2004. Similarly, when a fiscal intermediary settles the hospital's June 30, 2005 cost report, the hospital would be allowed to count family practice FTE residents that trained in a nonhospital setting during the period of July 1, 2004 through December 31, 2004, regardless of the financial arrangement between the hospital and the teaching physician at the nonhospital site from July 1 through December 31, 2004. (However, we note that family practice residents that train in nonhospital settings beginning January 1, 2005, and after are not subject to the moratorium provided under section 713 of Pub. L. 108- 173.)

Because we are interpreting this moratorium to apply to prior period cost reports that are settled during calendar year (CY) 2004, and to cost reports that are settled after CY 2004 that cover training that occurred during the period of January 1, 2004 through December 31, 2004, a gap in applicability of the moratorium may result for family practice residents training in nonhospital settings. For example, a hospital might be permitted to count certain FTE family practice residents that are included in its FY 2001 cost report in accordance with the moratorium because that cost report is settled during CY 2004. However, the hospital might not be permitted to count certain FTE family practice residents in its FY 2002 and FY 2003 cost reports because these cost reports would not be settled during CY 2004 and the moratorium would not apply. The hospital then could be permitted to count certain FTE family practice residents in its FY 2004 cost report in accordance with the moratorium, because the FY 2004 cost report would contain family practice residents who actually trained in a nonhospital setting during CY 2004.

Regardless of whether the fiscal intermediaries are settling prior period cost reports during CY 2004, or settling cost reports after CY 2004 that cover training during the period of January 1, 2004 through December 31, 2004, we emphasize that the moratorium provided in section 713 of Public Law 108-173 only applies for purposes of counting FTE residents in allopathic and osteopathic general family practice programs that were in existence (that is, training residents) as of January 1, 2002 and where the requirement to incur the teaching physician compensation related to direct GME may not have been met. Therefore, for residents training in nonhospital settings, we are proposing that the moratorium applies only: (1) To FTE residents in general family practice programs (and not to dental, podiatric, or other allopathic or osteopathic specialty programs); (2) to family practice programs that were in existence as of January 1, 2002; and (3) with the exception of teaching physician compensation, to training in nonhospital settings that meet the requirements in the existing regulations at Sec. 413.86(f)(4) (proposed to be redesignated as Sec. 413.78(d)).

We are not proposing any regulation text changes to address this provision at this time. We note that section 713(b) of Public Law 108- 173 directs the Inspector General of the Department of Health and Human Services to conduct a study of the appropriateness of alternative methodologies for payment of residency training in nonhospital settings and to submit a report to Congress on the results of the study, along with recommendations, as appropriate, by December 8, 2004. We will await the release of the Inspector General's report and may consider additional policy and regulation changes at that time if they are warranted. c. Requirements for Written Agreements for Residency Training in Nonhospital Settings (Proposed redesignated Sec. 413.78 (a proposed redesignation of existing Sec. 413.86(f)).

As mentioned above, under section 1886(h)(4)(E) of the Act, a hospital may count residents training in nonhospital settings for direct GME purposes (and under section 1886(d)(5)(B)(iv) of the Act, for IME purposes), if the residents spend their time in patient care activities and if ``* * * the hospital incurs all, or substantially all, of the costs for the training program in that setting.'' We believe Congress intended to facilitate residency training in nonhospital settings by requiring hospitals to commit to incur, and actually incur, all or substantially all of the costs of the training programs in the nonhospital sites. Accordingly, in implementing section 1886(h)(4)(E) of the Act, first in the regulations at Sec. 413.86(f)(3), effective July 1, 1987, and later at Sec. 413.86(f)(4), effective January 1, 1999, we required that, in addition to incurring all or substantially all of the costs of the program at the nonhospital setting, there must be a written agreement between the hospital and the nonhospital site stating that the hospital will incur all or substantially all of the costs of training in the nonhospital setting. The later regulations further specify that the written agreement must indicate the amount of compensation provided by the hospital to the nonhospital site for supervisory teaching activities. (We note that, in this proposed rule, Sec. 413.86(f)(3) is proposed to be redesignated as Sec. 413.78(c), and Sec. 413.86(f)(4) is proposed to be redesignated as Sec. 413.78(d).)

We required the written agreements in regulations in order to provide an administrative tool for use by the fiscal intermediaries to assist in determining whether hospitals would incur all or substantially all of the costs of the training in the nonhospital setting in accordance with Congressional intent. Furthermore, CMS policy has required that the written agreement between the hospital and the nonhospital site be in place prior to the time that the hospital begins to count the FTE residents training in the nonhospital site. A written agreement signed before the time the residents begin training at the nonhospital site that states that the

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hospital will incur the costs of the training program at the nonhospital site indicates the hospital's ongoing commitment to incur the costs of training at that site.

In settling cost reports where hospitals have included residents training at nonhospital sites in their FTE count, the fiscal intermediaries have encountered numerous situations where hospitals have complied with the requirement to incur all or substantially all of the costs of training in nonhospital settings. However, despite our longstanding regulations that state the requirement for a written agreement, these hospitals have not met the regulatory requirements related to written agreements. For example, some hospitals had no written agreement in place during the training in the nonhospital setting, or written agreements were not timely (that is, they were prepared after the residents began or, in some cases, finished training at the nonhospital site), or the agreements did not include a specific amount of compensation to be provided by the hospital to the nonhospital site for supervisory teaching activities. As a result, hospitals have faced disallowances of direct GME and IME payments relating to FTE residents training in nonhospital settings because the hospitals did not comply with the regulatory requirements concerning written agreements.

In retrospect, we believe the regulatory requirements concerning the written agreements may not have been the most efficient aid to fiscal intermediaries in determining whether hospitals would actually incur all or substantially all of the costs of the training programs in nonhospital settings. The fiscal intermediaries have been required to ensure that hospitals are complying with the regulations regarding written agreements, in addition to determining whether a hospital actually incurred the appropriate costs. We believe it would be more appropriate and less burdensome for both fiscal intermediaries and hospitals if we instead focus the fiscal intermediaries' reviews on the statutory requirement that hospitals must incur all or substantially all of the costs of the program in the nonhospital setting. Therefore, we are proposing to revise the regulations under proposed new Sec. 413.78 (a proposed redesignation of existing Sec. 413.86(f)) to remove the requirement for a written agreement between the hospital and the nonhospital setting as a precondition for a hospital to count residents training in nonhospital settings for purposes of direct GME and IME payments. However, consistent with our belief that Congress intended that hospitals commit to incur, and actually incur, all or substantially all of the costs of the training programs in the nonhospital sites in order to facilitate training at nonhospital sites, we are also proposing that, in order for the hospital to count residents training in a nonhospital setting, the hospital must pay for the nonhospital site training costs concurrently with the training that occurs during the cost reporting period.

We understand that residents' rotations, including those to nonhospital settings, are generally in discrete blocks of time (for example, 4-week or 6-week rotations). Therefore, to account for various rotation lengths, we are proposing under the new proposed Sec. 413.78(e) that, in order to count residents training in a nonhospital setting, a hospital must pay all or substantially all of the costs of the training in a nonhospital setting(s) by the end of the month following a month in which the training in the nonhospital site occurred. If a hospital is counting residents training in a nonhospital setting for direct GME and IME purposes in any month of its cost reporting period, the hospital must make payment by the end of the following month to cover all or substantially all of the costs of training in that setting attributable to the preceding month. If the residents are employed by the hospital, and receive their salary payments (and fringe benefits) every 2 weeks, the hospital may continue to pay the residents' salaries every 2 weeks during the residents' rotation to the nonhospital setting. This should still result in payment being made for residents' time spent in nonhospital settings by the end of the following month. (We also note that the hospital must pay travel and lodging expenses, if applicable.) We are proposing that the hospital would be required to pay the nonhospital site for the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct GME by the end of the month following the month in which the training in the nonhospital setting occurred. We are proposing that if a hospital does not pay for all or substantially all of the costs of the program in the nonhospital setting by the end of the month following the month in which the training occurred, the hospital could not count those FTE residents in the month that the training occurred. Therefore, we are proposing to determine if residents training in nonhospital sites should be counted on a month- to-month basis, depending on whether a hospital paid for the training costs of those residents by the end of the month following the month in which the training occurred.

Following are examples of how a hospital that sends residents to train in nonhospital sites would make payments concurrently with the nonhospital site training:

Example 1. Hospital A, with a fiscal year end (FYE) of December 31, trains 10 internal medicine residents and 6 family practice residents. Each January, April, July, and October, Hospital A sends 5 internal medicine FTE residents to the Physicians' Clinic for 4 weeks. Each month, Hospital A sends 2 family practice FTE residents to the Family Clinic. The residents are employed by Hospital A, and the residents receive fringe benefits from and are paid every 2 weeks by Hospital A, regardless of whether they are training in Hospital A or at a nonhospital site. In order to make payments concurrently with the training that is occurring in the nonhospital sites, Hospital A must pay the Physicians' Clinic by the end of February, May, August, and November, respectively, of each cost reporting year, to cover the costs of teaching physician compensation and fringe benefits attributable to direct GME. Similarly, because residents are training at the Family clinic each month, Hospital A must pay the Family Clinic by the end of each month for the previous month's costs of teaching physician compensation and fringe benefits attributable to direct GME. There are no travel and lodging costs associated with these rotations to nonhospital sites.

Example 2. University A will sponsor an ophthalmology program with eight residents beginning on July 1, 2005. The residents will be on the payroll of the University, but they will train at Hospital B and at the University's Eye Clinic, which is a nonhospital setting. Hospital B has a June 30 FYE. Four of the residents will train in the Eye Clinic from August 1 to October 15, and the other four residents will train in the Eye Clinic from February 15 to April 30. Thus, residents are training in the Eye Clinic during the months of August, September, October, February, March, and April. If Hospital B wishes to count these FTE residents for IME and direct GME purposes in its cost reporting year ending June 30, 2006, and onward, it must pay the Eye Clinic at the end of September, October, November, March, April, and May, respectively, for the previous month's cost of the residents' salaries and fringe benefits, and the teaching physician compensation and fringe benefits attributable to direct GME.

Example 3. Hospital C sends a resident to train at a nonhospital site from January 28 to February 20. The resident was employed by the nonhospital site during this time. Hospital C paid the nonhospital site for the cost of the resident's salary and fringe benefits and the teaching physician compensation and fringe benefits attributable to direct GME by February 28 to account for the training that occurred from January 28 through January 31. However, Hospital C did not pay the nonhospital site by March 31 to

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account for the training that occurred in February. Therefore, Hospital C could not count the resident's time in the nonhospital setting from February 1 through February 20 for direct GME and IME purposes.

We note that our proposal to require hospitals to pay for the nonhospital site training costs concurrently with the training that occurs in the nonhospital site is a departure from our current policy concerning the timeframe in which a hospital must make payment for the training costs. Currently, we apply the existing regulations at Sec. 413.100(c)(2)(i), which state that a short-term liability (such as the hospital's obligation to pay the nonhospital site for the residency training costs) must be liquidated within 1 year after the end of the cost reporting period in which the liability is incurred. However, because we are proposing to no longer require that a written agreement between the hospital and the nonhospital site be in place prior to the time that the hospital begins to count the FTE residents training in the nonhospital site, we believe that a reasonable alternative to ensure that a hospital is facilitating the training at the nonhospital site through its ongoing commitment to incur all or substantially all of the costs is to require the hospital to make payments concurrently with the training that occurs in the nonhospital site in order to count the FTE residents for purposes of direct GME and IME payments.

We are aware that there are situations where, rather than providing direct financial compensation to the nonhospital site for supervisory teaching activities, the hospital is incurring all or substantially all of the teaching physician costs through nonmonetary, in-kind arrangements. We are proposing that, in order to be considered concurrent with the nonhospital site training, in-kind arrangements must be provided or made available to the teaching physician at least quarterly, to the extent that there are residents training in a nonhospital setting(s) in a quarter.

We are proposing to revise Sec. 413.86(f) (proposed to be redesignated as Sec. 413.78 in this proposed rule) to add a new paragraph (Sec. 413.78 (e)) to state that a hospital must incur all or substantially all of the costs of training in a nonhospital setting by the end of the month following a month in which the training in the nonhospital site occurred, to the extent that there are residents training in a nonhospital setting in a month. This proposed change would be effective for portions of cost reporting periods occurring on or after October 1, 2004. We would revise paragraph (d) of the proposed redesignated Sec. 413.78 to reflect the effective cost reporting periods of the provisions under the new paragraph (e).

P. Rural Community Hospital Demonstration Program

[If you choose to comment on issues in this section, please include the caption ``Rural Community Hospital Demonstration'' at the beginning of your comment.]

Section 410A(a) of Public Law 108-173 requires the Secretary to establish a demonstration to test the feasibility and advisability of establishing ``rural community hospitals'' for Medicare payment purposes for covered inpatient hospital services furnished to Medicare beneficiaries. A rural community hospital, as defined in section 410A(f)(1), is a hospital that--

Is located in a rural area (as defined in section 1886(d)(8)(E) of the Act) or treated as being so located under section 1886(d)(5)(F) of the Act;

Has fewer than 51 beds (excluding beds in a distinct part psychiatric or rehabilitation unit) as reported in its most recent cost report;

Provides 24-hour emergency care services; and

Is not designated or eligible for designation as a CAH.

Section 410A(a)(3) of Public Law 108-173 specifies that the Secretary is to select for participation not more than 15 rural community hospitals in rural areas of States that the Secretary identifies as having low population densities. Using 2003 data from the U.S. Census Bureau, we have identified 10 States with the lowest population density in which rural community hospitals must be located to participate in the demonstration: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and Wyoming. (Source: U.S. Census Bureau Statistical Abstract of the United States: 2003)

Under the demonstration, participating hospitals will be paid the reasonable costs of providing covered inpatient hospital services (other than services furnished by a psychiatric or rehabilitation unit of a hospital that is a distinct part), applicable for discharges occurring in the first cost reporting period beginning on or after implementation of the demonstration program. For discharges occurring in subsequent cost reporting periods, payment is the lesser of reasonable cost or a target amount, which is the prior year's cost or, after the second cost reporting period, the prior year's target amount, adjusted by the inpatient prospective payment update factor. Covered inpatient hospital services means inpatient hospital services (defined in section 1861(b) of the Act) and includes extended care services furnished under an agreement under section 1883 of the Act.

Sections 410A(a)(5) and (a)(6) require the demonstration to be implemented not later than January 1, 2005, but not before October 1, 2004. The demonstration is to operate for 5 years. We intend to implement the payment change for a participating hospital under this demonstration with the hospital's first cost reporting period beginning on or after October 1, 2004.

Section 410A of Public Law 108-173 requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' Generally, when CMS implements a demonstration on a budget neutral basis, the demonstration is budget neutral in its own terms; in other words, aggregate payments to the participating providers do not exceed the amount that would be paid to those same providers in the absence of the demonstration. This form of budget neutrality is viable when, by changing payments or aligning incentives to improve overall efficiency, or both, a demonstration may reduce the use of some services or eliminate the need for others, resulting in reduced expenditures for the demonstration participants. These reduced expenditures offset increased payments elsewhere under the demonstration, thus ensuring that the demonstration as a whole is budget neutral or yields savings. However, the small scale of this demonstration, in conjunction with the payment methodology, makes it extremely unlikely that this demonstration could be viable under the usual form of budget neutrality. Specifically, cost-based payments to 15 small rural hospitals is likely to increase Medicare outlays without producing any offsetting reduction in Medicare expenditures elsewhere. Therefore, a rural community hospital's participation in this demonstration is unlikely to yield benefits to the participant if budget neutrality were to be implemented by reducing other payments for these providers.

In order to achieve budget neutrality, we are proposing to adjust national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we are proposing to apply budget neutrality across the payment system as

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a whole rather than merely across the participants of this demonstration. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. This is because the statutory language refers merely to ensuring that ``aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented,'' and does not identify the range across which aggregate payments must be held equal. We invite public comment on this proposal. We discuss the payment rate adjustment that would be required to ensure the budget neutrality of this demonstration in the Addendum of this proposed rule.

To participate in this demonstration, a hospital must be located in one of the identified States and meet the criteria for a rural community hospital. Eligible hospitals that desire to participate in the demonstration must submit an application to CMS. Information about the demonstration and details on how to apply can be found on the CMS Web site: http://www.cms.hhs.gov/researchers/demos/rch.asp.

This demonstration has been approved by OMB under the title ``Medicare Waiver Demonstration Application,'' under OMB approval number 0938-0880, with a current expiration date of July 30, 2006.

Q. Special Circumstances of Hospitals Facing High Malpractice Insurance Rate Increases

[If you choose to comment on issues in this section, please include the caption ``Malpractice Insurance'' at the beginning of your comment.]

We have received comments from several hospitals about the effects of rapidly escalating malpractice insurance premiums on hospital financial performance and continued access for Medicare beneficiaries to high quality inpatient hospital services. We are aware that malpractice insurance premiums have increased at a high rate in some areas of the country during the last few years. While we are not aware of any specific situations in which malpractice premiums have created issues of access to inpatient hospital services for Medicare beneficiaries, some hospitals have expressed concern that they may be compelled to curtail their current operations by the rate of increase in their malpractice premiums. Therefore, we are inviting comments on the effect of increases in malpractice insurance premiums on hospitals participating in the Medicare program, and whether increasing malpractice costs may pose access problems for Medicare beneficiaries.

V. Proposed Changes to the PPS for Capital-Related Costs

[If you choose to comment on issues in this section, please include the caption ``Capital PPS'' at the beginning of your comment.]

A. Background

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient acute hospital services ``in accordance with a PPS established by the Secretary.'' Under the statute, the Secretary has broad authority in establishing and implementing the PPS for capital-related costs. We initially implemented the PPS for capital-related costs in the August 30, 1991 IPPS final rule (56 FR 43358), in which we established a 10-year transition period to change the payment methodology for Medicare hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

Federal fiscal year (FY) 2001 was the last year of the 10-year transition period established to phase in the PPS for hospital inpatient capital-related costs. For cost reporting periods beginning in FY 2002, capital PPS payments are based solely on the Federal rate for the acute care hospitals (other than certain new hospitals and hospitals receiving certain exception payments). The basic methodology for determining capital prospective payments using the Federal rate is set forth in Sec. 412.312. For the purpose of calculating payments for each discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA Adjustment for hospitals located in Alaska and Hawaii) x (1 + Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if applicable)

Hospitals also may receive outlier payments for those cases that qualify under the thresholds established for each fiscal year as specified in Sec. 412.312(c) of the existing regulations.

The regulations at Sec. 412.348(f) provide that a hospital may request an additional payment if the hospital incurs unanticipated capital expenditures in excess of $5 million due to extraordinary circumstances beyond the hospital's control. This policy was originally established for hospitals during the 10-year transition period, but as we discussed in the August 1, 2002 IPPS final rule (67 FR 50102), we revised the regulations at Sec. 412.312 to specify that payments for extraordinary circumstances are also made for cost reporting periods after the transition period (that is, cost reporting periods beginning on or after October 1, 2001).

During the transition period, under Sec. Sec. 412.348(b) through (e), eligible hospitals could receive regular exception payments. These exception payments guaranteed a hospital a minimum payment percentage of its Medicare allowable capital-related costs depending on the class of hospital (Sec. 412.348(c)), but were available only during the transition period. After the end of the transition period, eligible hospitals can no longer receive this exception payment. However, even after the transition period, hospitals receive additional payments under the special exceptions provisions at Sec. 412.348(g), which guarantees all eligible hospitals a minimum payment of 70 percent of its Medicare allowable capital-related costs provided that special exceptions payments do not exceed 10 percent of total capital IPPS payments. Special exceptions payments may be made only for the 10 years from the cost reporting year in which the hospital completes its qualifying project, and the hospital must have completed the project no later than the hospital's cost reporting period beginning before October 1, 2001. Thus, an eligible hospital may receive special exceptions payments for up to 10 years beyond the end of the capital PPS transition period. Hospitals eligible for special exceptions payments were required to submit documentation to the intermediary indicating the completion date of their project. (For more detailed information regarding the special exceptions policy under Sec. 412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR 39911 through 39914) and the August 1, 2002 IPPS final rule (67 FR 50102).)

Under the PPS for capital-related costs, Sec. 412.300(b) of the regulations defines a new hospital as a hospital that has operated (under current or previous ownership) for less than 2 years (56 FR 43418, August 30, 1991). During the 10-year transition period, a new hospital was exempt from the capital PPS for its first 2 years of operation and was paid 85 percent of its reasonable costs during that period. Originally, this provision was effective only through the transition period and, therefore, ended with cost reporting periods beginning in FY 2002. Because we believe that special protection to new hospitals is also appropriate even after the transition period, as discussed in the August 1, 2002 IPPS final rule (67 FR 50101), we revised the regulations at Sec. 412.304(c)(2)

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to provide that, for cost reporting periods beginning on or after October 1, 2002, a new hospital (defined under Sec. 412.300(b)) is paid 85 percent of its allowable Medicare inpatient hospital capital- related costs through its first 2 years of operation, unless the new hospital elects to receive fully prospective payment based on 100 percent of the Federal rate. (Refer to the August 1, 2001 IPPS final rule (66 FR 39910) for a detailed discussion of the statutory basis for the system, the development and evolution of the system, the methodology used to determine capital-related payments to hospitals both during and after the transition period, and the policy for providing exception payments.)

B. Payments to Hospitals Located in Puerto Rico

As explained in section III.G. of this preamble, operating PPS and capital PPS payments to hospitals located in Puerto Rico are currently paid based on a blend of 50 percent of the Federal rate and 50 percent of the Puerto Rico rate. The Puerto Rico capital rate is derived from the costs of Puerto Rico hospitals only, while the capital Federal rate is derived from the costs of all acute care hospitals participating in the IPPS (including Puerto Rico). As also described in the section III.G. of this preamble, section 504 of Public Law 108-173 increases the national portion of the operating IPPS payment for Puerto Rico hospitals from 50 percent to 75 percent and decreases the Puerto Rico portion of the operating IPPS payments from 50 percent to 25 percent for discharges occurring on or after October 1, 2004. Under the broad authority of section 1886(g) of the Act, for the PPS, for capital- related costs we are proposing to revise the calculations of capital IPPS payments to hospitals located in Puerto Rico, as well, to parallel the change in operating IPPS payments to hospitals located in Puerto Rico, for discharges occurring on or after October 1, 2004. Accordingly, we are proposing to revise Sec. 412.374 of the regulations to provide that, for discharges occurring on or after October 1, 2004, payments under the PPS for capital-related costs to hospitals located in Puerto Rico would be based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate. This proposed change would increase capital IPPS payments to hospitals located in Puerto Rico because the proposed Federal capital rate is higher than the proposed Puerto Rico capital rate. In addition, we note that this proposed change is similar to the change in capital IPPS payments made to hospitals located in Puerto Rico beginning in FY 1998 that had paralleled the statutory change in the Puerto Rico blended payment amount required for operating IPPS payments to hospitals located in Puerto Rico as mandated by section 4406 of Public Law 105-33 (62 FR 46012 and 46048, August 29, 1997).

C. Exception Payment for Extraordinary Circumstances

During the transition period, hospitals were guaranteed a minimum payment of a percentage of their Medicare allowable capital-related costs, depending on the class of hospital; that is, the minimum payment level for sole community hospitals was no greater than 90 percent, for urban hospitals with at least 100 beds meeting particular disproportionate share criteria, the minimum payment level was 80 percent, and for all other hospitals, the minimum payment level was 70 percent (Sec. Sec. 412.348(c)(i) through (iii)). Regular exception payments provided the means to ensure that hospitals received the minimum levels of capital payment. However, any amount by which a hospital's cumulative capital payments exceeded its cumulative minimum payment levels was deducted from the additional exception payment the hospital was eligible to receive (Sec. 412.348(e)). This type of exception payment ended with the end of the transition period.

In the August 1, 2002 IPPS final rule (67 FR 50102), we specified that payments to hospitals that incur capital expenditures in excess of $5 million due to extraordinary circumstances beyond the hospital's control would be made for cost reporting periods after the transition period, that is, cost reporting periods beginning on or after October 1, 2001, as established at Sec. 412.312(e). Generally, the exception payments for extraordinary circumstances are 85 percent of Medicare's share of allowable capital-related costs attributed to the extraordinary circumstances (100 percent for sole community hospitals). This amount is offset by any amount by which a hospital's cumulative payments exceed its cumulative minimum payment levels (adjusted for the extraordinary circumstances) under the PPS for capital-related costs. The minimum payment levels and the offsetting amounts were the same as those established for regular exceptions as indicated at Sec. 412.348(f)(4). The regulation refers to the regular exception minimum payment levels at Sec. 412.348(c)(1) and the offsetting amounts at Sec. 412.348(e)(2).

Because the regulations governing the regular exception payments, which include the minimum payment levels regulations at Sec. 412.348(c) and the offsetting amounts at Sec. 412.348(e), were effective during the transition period only, we had not previously addressed whether or not the minimum payment levels under Sec. 412.348(c) and the offsetting amounts at Sec. 412.348(e) remain applicable for extraordinary circumstances exceptions in the post- transition period. In the August 1, 2002 IPPS final rule (67 FR 50102), we clarified our policy at a new Sec. 412.312(e) that exception payments for extraordinary circumstances continued to apply to periods beginning on or after October 1, 2001. When we added Sec. 412.312(e), we did not believe it was necessary to explain in the preamble that the minimum payment levels in Sec. 412.348(c) or the offsetting amounts in Sec. 412.348(e) were incorporated into Sec. 412.312(e). However, in order to avoid any confusion, in this proposed rule, we are clarifying our current policy that although the minimum payment levels established at Sec. 412.348(c)(1) are no longer in effect, they continue to be relevant in order to calculate the extraordinary circumstances exception payments after the end of the transition period. The extraordinary exception payment calculation incorporates the minimum payment levels as well as the offsetting deduction for cumulative payments. Thus, although the regular exception payments themselves have expired, it has always been our policy that the minimum payment levels will continue to be part of the formula for calculating extraordinary exception payments after the end of the transition period. In this proposed rule, we are proposing to amend Sec. 412.312(e) to reflect our current policy that, for cost reporting periods beginning on or after October 1, 2001, the minimum payment levels established at Sec. 412.348(c)(1) are part of the formula for calculating extraordinary circumstances exception payments.

Similarly, in this proposed rule, we clarify our current policy that the offsetting amounts established at Sec. 412.348(e)(2) also are part of the formula for determining extraordinary circumstances exception payments after the end of the transition period, in spite of the fact that the regular exception payment provision that included the offsetting amounts at Sec. 412.348(e)(2) expired at the end of the transition period. Accordingly, we are proposing to revise Sec. 412.348(e) to clarify that, for cost reporting periods beginning on or after October 1, 2001, the offsetting

[[Page 28320]]

amounts established at Sec. 412.348(e)(2) remain in effect for extraordinary circumstances exception payments.

In addition, we also are proposing to revise the period of time used to determine the offsetting amounts in Sec. 412.348(e)(2). Under existing regulations, the additional payment for extraordinary circumstances is offset by any amount by which a hospital's cumulative payments exceed its cumulative minimum payment levels under the PPS for capital-related costs. In order to determine this offsetting amount, a hospital must keep a record of the difference between its cumulative capital payments and its cumulative minimum payment levels since it became subject to the PPS for capital-related costs. For instance, under existing regulations, if a hospital would be eligible for an additional payment for extraordinary circumstances in FY 2005 and the hospital had been subject to the PPS for capital-related cost since that PPS was implemented in FY 1992, the offsetting amount would be the difference in the hospital's cumulative capital payments and its cumulative minimum payment levels for the past 13 years. Similarly, under existing regulations, if a hospital would be eligible for an additional payment for extraordinary circumstances in FY 2012 and the hospital had been subject to the capital PPS since it was implemented in FY 1992, the offsetting amount would be the difference in the hospital's cumulative capital payments and its cumulative minimum payment levels for the past 20 years.

We believe that when the provisions for exception payments were originally implemented with the start of capital IPPS in FY 1992, it was anticipated that the offsetting amounts at Sec. 412.348(e)(2) would be determined based on a period of no longer than 10 years. However, under existing regulations, exception payments for extraordinary circumstances are offset by the difference in the hospital's cumulative payments and its cumulative minimum payment levels since it became subject to the PPS for capital-related-costs, which for most hospitals is over 13 years. Therefore, in this proposed rule, for cost reporting periods beginning during FY 2005 and thereafter, we are proposing to revise Sec. 412.312(e) to specify that the offsetting amounts in Sec. 412.348(e)(2) would be based on the hospital's capital payments and minimum payment levels from the most recent 10 years rather than from the entire period of time the hospital has been subject to the PPS for capital-related costs. If a hospital has been paid under the PPS for capital-related costs for less than 10 years, the offsetting amounts would be based on the hospital's capital payments and minimum payment levels beginning with the date the hospital became subject to the PPS for capital-related costs. For example, if a hospital would be eligible for an additional payment for extraordinary circumstances in FY 2005 and the hospital had been subject to the PPS for capital-related costs since FY 1992 (13 years), the offsetting amounts used in the calculation of the extraordinary circumstances exception payment would be based on the hospital's cumulative capital PPS payments and cumulative minimum payment levels for the hospital's cost reporting period beginning during FY 1995 through FY 2004. Similarly, if a hospital would be eligible for an additional payment for extraordinary circumstances in FY 2005 and the hospital had only been subject to the PPS for capital-related costs since FY 2000 (5 years), the offsetting amounts used in the calculation of the extraordinary circumstances exception payment would be based on the hospital's cumulative capital PPS payments and cumulative minimum payment levels for the hospital's cost reporting periods beginning during FY 2000 through FY 2004.

D. Treatment of Hospitals Previously Reclassified for the Operating PPS Standardized Amounts

As we discussed in section IV.C. of this preamble, prior to April 1, 2003, the standardized amounts varied under the operating IPPS based on a hospital's geographic location (large urban versus other urban and rural areas). Furthermore, previously, a hospital could be reclassified to a large urban area by the MGCRB for the purpose of the standardized amount if certain criteria were met (as described in Part 412, Subpart L of the Medicare regulations).

Similarly, the standard capital Federal rate under the PPS for capital-related costs is adjusted to reflect the higher costs incurred by hospitals located in large urban areas (large urban add-on at Sec. 412.316), as well as for hospitals in urban areas with at least 100 beds serving low-income patients (capital disproportionate share (DSH) adjustment at Sec. 412.320). In the past, if a rural or other urban hospital was reclassified to a large urban area for purposes of the operating IPPS standardized amount under Sec. 412.63, the hospital also was then eligible for a large urban add-on payment, as well as a DSH payment, under the PPS for capital-related costs.

Section 402(b) of the Consolidated Appropriations Resolution, 2003, Public Law 108-7, and section 402 of Public Law 108-89, (a Welfare Reform Act), provide that, for discharges occurring on or after April 1, 2003 and before March 31, 2004, under the operating IPPS, all hospitals are paid based on the large urban standardized amount, regardless of geographic location or MGCRB redesignation. Section 401(a) of Public Law 108-173 amended section 1886(d)(5)(A)(iv) by adding a subsection (II) that permanently equalizes the standardized amounts for large urban areas and for other urban and rural areas for discharges occurring on or after April 1, 2004.

In addition, under section 1886(d) of the Act, a hospital may reclassify under the operating IPPS only for the purpose of either its standardized amount or its wage index adjustment, or both. As further specified in regulations at Sec. 412.230, a hospital may be reclassified for purposes of the standardized amount only if the area to which the hospital seeks redesignation has a higher standardized amount than the hospital currently receives. Because there are no longer differences in standardized amounts due to geographic classification as a result of the section 401 amendment, hospitals are no longer eligible to reclassify solely for standardized amount purposes. Accordingly, the MGCRB has denied all FY 2005 standardized amount reclassification requests. We note that although Public Law 108- 7 and Public Law 108-89 also equalized the standardized amounts for all hospitals in FY 2004, because these laws were not enacted until after the MGCRB had already made its reclassification determinations for FY 2004, eligible hospitals received reclassification approval for the purposes of the standardized amount for FY 2004. However, in this case, Public Law 108-173 was enacted before the MGCRB issued its reclassification decisions for FY 2005. Therefore, no hospitals will be reclassified for the purpose of the standardized amounts in FY 2005.

The changes to the operating IPPS described above, has an effect on payments under the PPS for capital-related costs. Rural and other urban hospitals that were previously eligible to receive the large urban add- on and DSH payments under the PPS for capital-related costs if they reclassified to a large urban area for the purpose of the standardized amount under the operating IPPS, will no longer be reclassified, and therefore, will not be eligible to receive those additional

[[Page 28321]]

payments under the PPS for capital-related costs.

Our analysis indicates that rural and other urban hospitals will gain approximately $0.5 billion in FY 2005 in operating PPS payments due to the equalization of the standardized amounts compared to a relatively small adjustment to payments for capital-related costs under the IPPS. We understand that Congress was aware of the effect of the equalization of the standardized amounts on the rural and other urban hospitals' adjustments under the PPS for capital-related costs. This approach is consistent with section 4203 of the BBA, which prevented hospitals from reclassifying to a different area to get an additional payment solely for DSH purposes under the operating IPPS. The restriction at section 4203 clearly indicates Congress' intent to maintain the principle that reclassifications under section 1886(d) of the Act are only intended to be made for purposes of either the standardized amount or the wage index adjustment.

Therefore, in this proposed rule, we are clarifying that, beginning in FY 2005, only hospitals geographically located in a large urban area (as defined in proposed revised Sec. 412.63(c)(6)) would be eligible for large urban add-on payments under the PPS for capital-related costs under Sec. 412.312(b)(2)(ii) and Sec. 412.316(b). Beginning in FY 2005, only hospitals serving low-income patients that are geographically located in an urban area (as defined in proposed new Sec. 412.64 and discussed in section IV.D. of this preamble) with 100 or more beds (or that meet the criteria in Sec. 412.106(c)(2)) would be eligible for DSH payments under the PPS for capital-related costs under Sec. 412.320.

E. Geographic Classification and Definition of Large Urban Area

1. Core-Based Statistical Areas

As we discuss in greater detail in section III.B. of this preamble, we are proposing to adopt changes to the MSA criteria used to define hospital labor market areas based on the new Core-Based Statistical Areas (CBSA) definitions announced by OMB on June 6, 2003, which are based on 2000 Census data. We currently define hospital labor market areas based on the definitions of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New England County Metropolitan Areas (NECMAs) under standards issued by OMB in 1990. In addition, OMB designates Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of one million or more, comprised of two or more PMSAs (identified by their separate economic and social character). Under the operating PPS, the wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. For purposes of the hospital wage index, we use the PMSAs rather than CMSAs because they allow a more precise breakdown of labor costs. However, if a metropolitan area is not designated as part of a PMSA, we use the applicable MSA.

As we discuss in sections III.B.3. and IV.C. of this preamble, we are proposing to adopt OMB's new CBSA designations to define labor market areas for discharges occurring on or after October 1, 2004, which would be set forth in regulations under a proposed new Sec. 412.64. Currently, the large urban location adjustment under Sec. 412.316(b) and the DSH adjustment for certain urban hospitals under Sec. 412.320 for payments for capital related costs rely on the existing geographic classifications set forth at Sec. 412.63. Because we are proposing to adopt OMB's new CBSA designations for FY 2005 and thereafter under proposed new Sec. 412.64, we are proposing to revise Sec. 412.316(b) and Sec. 412.320(a)(1) to specify that, for discharges on or after October 1, 2004, the payment adjustments under these sections, respectively, would be based on the geographic classifications at proposed new Sec. 412.64. 2. Metropolitan Divisions

Under the revised MSA criteria based on CBSAs, a Metropolitan Division is a county or group of counties located within an MSA with a core population of at least 2.5 million, representing an employment center, plus adjacent counties associated with the main county or counties through commuting ties (see section III.B.3.b. of this preamble for further details). Under the proposed changes to the MSA criteria discussed in section III.B. of this preamble, we are proposing to use the Metropolitan Divisions where applicable under the CBSA definitions. Thus, similar to our treatment of PMSAs as labor market areas where applicable, we would use the Metropolitan Divisions rather than MSAs to define labor market areas.

Currently, under the existing MSA criteria, a large urban area is defined at existing Sec. 412.63(c)(6) as an MSA with a population of more than 1.000,000 or a NECMA with a population of more than 970,000 based on the most recent available population data published by the Bureau of the Census. As noted above, we currently use the PMSAs rather than CMSAs to define labor market areas. Accordingly, we currently determine large urban areas under existing Sec. 412.63(c)(6) based on the most recent available population data for each PMSA rather than the CMSA. Similarly, because we are proposing to treat Metropolitan Divisions of MSAs as labor market areas, under the proposed changes based on CBSA designations, we would designate large urban areas based on the most recent available population data for each Metropolitan Division, rather than the MSA.

As discussed in section III.B.3.b., under the CBSA definitions, there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, D.C. There are a total of 29 Metropolitan Divisions, which would be treated as MSAs. Of those 29 MSAs, 23 meet the definition of large urban area under Sec. 412.63(c)(6) (as denoted in Tables 4A and 4B in the Addendum to this proposed rule). Under the proposed changes to the MSA criteria, there are a total of 62 large urban areas, including those 23 Metropolitan Divisions, as denoted in Tables 4A and 4B in the Addendum to this proposed rule.

In this section, we are proposing to clarify that the current definition of large urban area at existing Sec. 412.63(c)(6) would remain in effect for the purpose of the large urban add-on adjustment to the Federal rate under the PPS for capital-related costs under Sec. Sec. 412.312(b)(2)(ii) and 412.316(b). With the equalization of the operating standardized amounts (as discussed in section IV.D. of this preamble), we are proposing to revise the regulations under Sec. 412.63(c), and making them effective for FYs 1984 through 2004, and to add a new Sec. 412.64 that would be applicable for FYs 2005 and thereafter. Because CMS would compute a single standardized amount for hospitals located in all areas beginning in FY 2005, the term ``large urban area'' is no longer applicable under the operating PPS and therefore, a definition of large urban area would not be included under the proposed new Sec. 412.64. However, the term ``large urban area'' continues to be applicable under the capital PPS for the large urban add-on adjustment at Sec. Sec. 412.312(b)(2)(ii) and 412.316(b). Therefore, we are proposing to revise Sec. Sec. 412.312(b)(2)(ii) and 412.316(b) to state that the definition of large urban area set forth at Sec. 412.63(c)(6) would continue to be in effect under the capital PPS for discharges occurring on or after September 30, 2004.

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VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Excluded Hospitals and Hospital Units (Sec. Sec. 413.40(c), (d), and (f))

[If you choose to comment on issues in this section, please include the caption ``Excluded Hospitals and Units'' at the beginning of your comment.]

1. Payments to Existing Excluded Hospitals and Hospital Units

Section 1886(b)(3)(H) of the Act (as amended by section 4414 of Public Law 105-33) established caps on the target amounts for certain existing hospitals and hospital units excluded from the IPPS for cost reporting periods beginning on or after October 1, 1997 through September 30, 2002. For this period, the caps on the target amounts applied to the following three classes of excluded hospitals or units: psychiatric hospitals and units, rehabilitation hospitals and units, and LTCHs. In accordance with section 1886(b)(3)(H)(i) of the Act and effective for cost reporting periods beginning on or after October 1, 2002, payments to these classes of existing excluded hospitals or hospital units are no longer subject to caps on the target amounts.

In accordance with existing Sec. Sec. 413.40(c)(4)(ii) and (d)(1)(i) and (ii), where applicable, excluded psychiatric hospitals and units continue to be paid on a reasonable cost basis, and payments are based on their Medicare inpatient operating costs, not to exceed the ceiling, up to the date that the inpatient psychiatric facility PPS described in section VII.A. of this preamble becomes effective. The ceiling is computed using the hospital's or unit's target amount from the previous cost reporting period, updated by the rate-of-increase specified in Sec. 413.40(c)(3)(viii) of the regulations, and then multiplying this figure by the number of Medicare discharges.

Effective for cost reporting periods beginning on or after October 1, 2002, rehabilitation hospitals and units are paid in accordance with the IRF PPS at 100 percent of the Federal rate. In addition, effective for cost reporting periods beginning on or after October 1, 2002, LTCHs are no longer paid on a reasonable cost basis, but are paid under a DRG-based PPS. However, as part of the PPS for LTCHs, we have established a 5-year transition period from reasonable cost-based reimbursement to a fully Federal PPS. Under the LTCH PPS, a LTCH that is subject to the blend methodology may elect to be paid based on a 100 percent of the Federal prospective rate. We have proposed, but not finalized, an inpatient psychiatric facility (IPF) prospective payment system under which psychiatric hospitals and psychiatric units would no longer be paid on a reasonable cost basis but would be paid on a prospective per diem basis. (Sections VI.A.3, 4, and 5 of this preamble contain a more detailed discussion of the IRF PPS and the LTCH PPS and the proposed IPF PPS.) 2. Updated Caps for New Excluded Hospitals and Units

Section 1886(b)(7) of the Act established a payment limitation for new hospitals and units that fell within one of three classes of hospitals or units-psychiatric, rehabilitation, and long-term care that first receives payment as a hospital or unit excluded from the IPPS on or after October 1, 1997. A discussion of how the payment limitation was calculated can be found in the August 29, 1997 final rule with comment period (62 FR 46019); the May 12, 1998 final rule (63 FR 26344); the July 31, 1998 final rule (63 FR 41000); and the July 30, 1999 final rule (64 FR 41529). Under the statute, a ``new'' hospital or unit is a hospital or unit that falls within one of the three classes of hospitals or units (psychiatric, rehabilitation or long-term care) that first receives payment as a hospital or unit excluded from the IPPS on or after October 1, 1997.

The amount of payment for a ``new'' psychiatric hospital or unit (as defined at 42 CFR 413.40(f)(2)(ii) would be determined as follows:

Under existing Sec. 413.40(f)(2)(ii), for the first two 12-month cost reporting periods, the amount of payment is the lesser of: (1) The operating costs per case; or (2) 110 percent of the national median (as estimated by the Secretary) of the target amounts for the same class of hospital or unit for cost reporting periods ending during FY 1996, updated by the hospital market basket increase percentage to the fiscal year in which the hospital or unit first receives payments under section 1886 of the Act, as adjusted for differences in area wage levels.

Under existing Sec. 413.40(c)(4)(v), for cost reporting periods following the hospital's or unit's first two 12-month cost reporting periods, the target amount is equal to the amount determined under section 1886(b)(7)(A)(i) of the Act for the preceding cost reporting period, updated by the applicable hospital market basket increase percentage to the third cost reporting period.

The proposed amounts included in the following table reflect the proposed updated 110 percent of the national median target amounts of new excluded psychiatric hospitals and units for cost reporting periods beginning during FY 2005. These figures are updated with the most recent data available to reflect the proposed projected market basket increase percentage of 3.3 percent. This projected percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient hospital services (as projected by the Office of the Actuary of CMS based on its historical experience with the IPPS). For a new provider, the labor- related share of the target amount is multiplied by the appropriate geographic area wage index, without regard to IPPS reclassifications, and added to the nonlabor-related share in order to determine the per case limit on payment under the statutory payment methodology for new providers.

Proposed FY 2005 Proposed FY 2005 Class of excluded hospital or unit labor-related nonlabor-related share

share.

Psychiatric.......................

$7,534.70

$2,994.67

Effective for cost reporting periods beginning on or after October 1, 2002, this payment limitation was no longer applicable to new LTCHs because they are paid 100 percent of the Federal rate. Accordingly, it is no longer necessary to publish an updated cap for new LTCHs.

Effective for cost reporting periods beginning on or after October 1, 2002, this payment limitation is also no longer applicable to new rehabilitation hospitals and units because they are paid 100 percent of the Federal prospective rate under the IRF PPS. Therefore, it is also no longer necessary to update the payment limitation for new rehabilitation hospitals or units.

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3. Implementation of a PPS for IRFs

Section 1886(j) of the Act, as added by section 4421(a) of Public Law 105-33, provided for the phase-in of a case-mix adjusted PPS for inpatient hospital services furnished by a rehabilitation hospital or a rehabilitation hospital unit (referred to in the statute as rehabilitation facilities) for cost reporting periods beginning on or after October 1, 2000, and before October 1, 2002, with a fully implemented PPS for cost reporting periods beginning on or after October 1, 2002. Section 1886(j) of the Act was amended by section 125 of Public Law 106-113 to require the Secretary to use a discharge as the payment unit under the PPS for inpatient hospital services furnished by rehabilitation facilities and to establish classes of patient discharges by functional-related groups. Section 305 of Public Law 106-554 further amended section 1886(j) of the Act to allow rehabilitation facilities, subject to the blend methodology, to elect to be paid the full Federal prospective payment rather than the transitional period payments specified in the Act.

On August 7, 2001, we issued a final rule in the Federal Register (66 FR 41316) establishing the PPS for inpatient rehabilitation facilities, effective for cost reporting periods beginning on or after January 1, 2002. There was a transition period for cost reporting periods beginning on or after January 1, 2002 and ending before October 1, 2002. For cost reporting periods beginning on or after October 1, 2002, payments are based entirely on the Federal prospective payment rate determined under the IRF PPS. 4. Implementation of a PPS for LTCHs

In accordance with the requirements of section 123 of Public Law 106-113, as modified by section 307(b) of Public Law 106-554, we established a per discharge, DRG-based PPS for LTCHs as described in section 1886(d)(1)(B)(iv) of the Act for cost reporting periods beginning on or after October 1, 2002, in a final rule issued on August 30, 2002 (67 FR 55954). The LTCH PPS uses information from LTCH hospital patient records to classify patients into distinct LTC-DRGs based on clinical characteristics and expected resource needs. Separate payments are calculated for each LTC-DRG with additional adjustments applied.

We published in the Federal Register on May 7, 2004, a final rule (69 FR 25673) that updated the payment rates for the LTCH PPS and made policy changes effective for a new LTCH PPS rate year of July l, 2004 through June 30, 2005. The 5-year transition period from reasonable cost-based reimbursement to the fully Federal prospective rate will end with cost reporting periods beginning on or after October 1, 2005 and before October 1, 2006. 5. Development of a PPS for IPFs

Section 124 of the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) requires the development of a per diem prospective payment system (PPS) for payment of inpatient hospital services furnished in psychiatric hospitals and psychiatric units of acute care hospitals (inpatient psychiatric facilities (IPFs)). We published a proposed rule to implement the IPF PPS on November 28, 2003 (68 FR 66920). On January 30, 2004, we published a proposed rule to implement the IPF PPS on November 28, 2003 (68 FR 66920). On January 30, 2004, we published a notice to extend the comment period for 30 additional days (69 FR 4464). The comment period closed on March 26, 2004.

Under the proposed rule, we would compute a Federal per diem base rate to be paid to all IPFs based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF adjusted for budget neutraility. The Federal per diem base rate would be adjusted to reflect certain characteristics such as age, specified DRGs, and selected high-cost comorbidities, and certain facility characteristics such as wage index adjustment, rural location, and indirect teaching costs.

The November 28, 2003 proposed rule assumed an April 1, 2004 effective date for the purpose of ratesetting and calculating impacts. However, we are still in the process of analyzing public comments and developing a final rule for publication. The effective date of the IPF PPS would occur 5 months following publication of the final rule. 6. Technical Changes Related to Establishment of Payments for Excluded Hospitals

We have become aware of a number of technical errors in the existing regulations governing how we determine payments to hospitals that are excluded from the IPPS. The existing regulations under Sec. 413.40 set forth requirements for establishing the ceiling on the rate of increase in operating costs per case for hospital inpatient services furnished to Medicare beneficiaries that will be recognized as reasonable for purposes of determining the amount of Medicare payments. The rate-of-increase ceiling applicable to cost reporting periods has been adjusted a number of times since it was first applied for hospital cost reporting periods beginning on or after October 1, 1982. In revising the regulations over the years to reflect the different applicable adjustments for cost reporting periods for specific providers, we have inadvertently overlooked updating or conforming Sec. 413.40 to reflect various statutory changes. We note that, although we erroneously omitted the technical changes in the regulation text, we did, in fact comply with the changes required by the statute when determining the rate-of-increase ceiling. Therefore, we are proposing to make several changes to Sec. 413.40(c)(4)(iii) in order to conform it to section 1886(b)(3)(J) of the Act. These proposed changes are as follows: (1) In Sec. 413.40(c)(4)(iii)(A)(1) and (c)(4)(iii)(B)(4)(i), the phrase ``on or after October 1, 2001'', should read ``during FY 2001''; and in Sec. 413.40(c)(4)(iii)(A)(2), the phrase ``on or after October 1, 2000'' should read ``during FY 2001''. In order to include pertinent changes that were erroneously omitted from the regulatory text and to conform the text to section 1886(b)(2)(A) of the Act, we are proposing to delete the phrase ``and ending before October 1, 2000'' in Sec. 413.40(d)(4)(i) because, in section 1886(b)(2)(A) of the Act, there is no ending date for the continuous improvement bonus payment. In addition, at Sec. 413.40(d)(4)(ii), we propose to delete the word ``ending'' from the introductory phrase so that the phrase would read, ``For cost reporting periods beginning on or after October 1, 2000 and before September 30, 2001.'' The word ``ending'' in the existing language at best limits the provision to cost reporting periods beginning on October 1, 2000. The provision was intended to apply to cost reporting periods beginning during all of FY 2001.

B. Criteria for Classification of Hospitals-Within-Hospitals

[If you choose to comment on the issues in this section, please include the caption ``Hospitals-Within-Hospitals'' at the beginning of your comment.]

Existing regulations at Sec. 412.22(e) define a hospital-within-a- hospital as a hospital that occupies space in a building as another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital. Moreover, existing Sec. 412.22(f) provides for the grandfathering of hospitals-within-hospitals that were in existence on or before September 30, 1995.

One of the goals of our hospital-within-hospital regulations at Sec. 412.22(e) has been to prevent a LTCH

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co-located with an acute care hospital to function as a unit of that hospital, a situation precluded under section 1886(d)(1)(B) of the Act. This policy protects the integrity of the IPPS by ensuring that costly, long-stay patients who could reasonably continue treatment in that setting would not be unnecessarily discharged to an onsite LTCH, a behavior that would skew and undermine the Medicare IPPS DRG system. Further, there is concern that the hospital-within-hospital configuration could result in patient admission, treatment, and discharge patterns that are guided more by attempts to maximize Medicare payments than by patient welfare. We believe that the unregulated linking of an IPPS hospital and a hospital excluded from the IPPS could lead to two Medicare payments for what was essentially one episode of patient care.

In the September 1, 1994 IPPS final rule (59 FR 45389), we first discussed hospitals-within-hospitals, describing them as entities that were manipulating the conditions of participation (COPs) for hospitals under Medicare, set forth in regulations at 42 CFR Part 482, to permit them to receive exclusion from the prospective payment systems. Specifically, these hospitals have begun to organize what they themselves refer to as the ``hospital-within-a-hospital'' model. Under this model, an entity may operate in space leased from a hospital, and have most or all services furnished under arrangements by employees of the lessor hospital. The newly organized entity may be operated by a corporation formed and controlled by the lessor hospital, or by a third entity that controls both. In either case, the new entity seeks State licensure and Medicare participation as a hospital, demonstrates that it has an average length of stay of over 25 days, and obtains an exclusion from the IPPS. The effect of this process is to extend the long-term care hospital exclusion to what is, for all practical purposes, a ``long-term care unit.'' We noted that the averaging concept that underlies the IPPS recognizes that some patients will stay longer and consume more resources than expected, while others will have shorter, less costly stays. We envisioned that abuse of the PPSs could result if an acute care hospital under the IPPS ``diverted all long- stay cases to the excluded unit, leaving only shorter, less costly cases to be paid for under the IPPS. In such cases, hospitals would profit inappropriately from prospective payments.'' Further, we stated that we believed that the ``exclusion of long-term care `units' was inconsistent with the statutory scheme.'' Section 1886(d)(1)(B) of the Act clearly provides for an exclusion of LTCHs from the acute care IPPS. While the statute also provides for an exclusion for psychiatric units and rehabilitation units, it does not provide for an exclusion of long-term care units. (59 FR 45389)

In addition, in that September 1, 1994 final rule, we proceeded to establish ``separateness and control'' regulations at (then) Sec. 412.23(e) that required the two hospitals to have separate medical and administrative governance and decisionmaking and also ensured that each hospital operated as a separate facility. We believed at that time that such rules were sufficient solutions to our concerns about these new entities and, therefore, we did not preclude common ownership of the host and the LTCH at that time.

In the ensuing decade, we have revisited the issue of hospitals- within-hospitals several times (for example, 60 FR 45836, September 1, 1995; 62 FR 46012, August 29, 1997; 67 FR 56010, August 30, 2002; 67 FR 45463, August 1, 2003) during which we clarified and amplified the separateness and control requirements. In the August 29, 1997 IPPS final rule, we extended the application of these rules beyond LTCHs to include other classes of facilities that might seek exclusion from the IPPS as hospitals-within-hospitals, such as IRFs. In addition, in the August 29, 1997 final rule, we also established a ``grandfathering'' provision for hospitals-within-hospitals in existence prior to September 30, 1995, at Sec. 412.22(f), and in the August 1, 2003 IPPS final rule, we clarified and codified the requirements for ``grandfathered'' hospitals-within-hospitals (68 FR 45463).

As stated earlier, presently, a hospital-within-a-hospital must meet the separateness and control criteria set forth at Sec. 412.22(a). In order to be excluded from the IPPS, the hospital-within- a-hospital must have a separate governing body, a separate chief medical officer, a separate medical staff, and a separate chief executive officer. Regarding the performance of basic hospital functions (Sec. 412.22(e)(5)), currently, the hospital must meet at least one of the following criteria: (i) The hospital performs the basic functions through the use of employees or under contracts or other agreements with entities other than the hospital occupying space in the same building or on the same campus, or a third entity that controls both hospitals; (ii) for the same period of at least 6 months immediately preceding the first cost reporting period for which exclusion is sought, the cost of the services that the hospital obtained under contracts or other agreements with the hospital occupying space in the same building or on the same campus, or with a third entity that controls both hospitals, is no more than 15 percent of the hospital's total inpatient operating costs, as defined in Sec. 412.2(c) (that is, inpatient operating costs include operating costs for routine services, such as costs of room, board, and routine nursing services; operating costs for ancillary services such as laboratory or radiology; special care unit operating costs; malpractice insurance costs related to serving inpatients; and preadmission services); or (iii) for the same period of at least 6 months immediately preceding the first cost reporting period for which exclusion is sought, the hospital has an inpatient population of whom at least 75 percent were referred to the hospital from a source other than another hospital occupying space in the same building or on the same campus or with a third entity that controls both hospitals.

It is our experience that the vast majority of hospitals-within- hospitals have elected to meet the second of the three criteria at Sec. 412.22(e)(5), that is, the cost of the services that the hospital obtained from the co-located hospital or with a third entity that controls both hospitals is no more than 15 percent of its total inpatient operating costs. In establishing the 15-percent rule, we originally believed that we would be able to detect a true corporate identity and actual function and to guard against an arrangement that could undermine the statutory preclusion of long-term care units. We sought to distinguish admissions to independently operating facilities from what were, in effect, transfers of patients from one unit of the corporation to another unit of the corporation without a truly distinct and separate corporate identity. Our underlying policy rationale was that, if an entity could not be separately identified, it effectively would be functioning as a mere unit of the parent entity in violation of the statutory prohibition on long-term care units. We explained in the September 1, 1994 rule (59 FR 45390) that ``if an entity is effectively part of another hospital and the principles of the prospective payment system do apply well to the organization as a whole, then it would not be appropriate to exclude part of that organization from the prospective payment system.''

Although we have periodically revisited the phenomenon of hospitals-within-hospitals in our rules and we have revised or clarified some related

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issues, we have not proposed significant changes in our policies in this area for some time. This is despite the significant changes that have been made in the payment systems for Medicare-certified, excluded hospitals and units. Medicare payments to two types of IPPS-excluded hospitals, LTCHs and IRFs, are now made on a prospective basis. We believe that, in part, the new LTCH PPS is one of the reasons for the rapidly increasing number of LTCH hospitals-within-hospitals. In its June 2003 Report to the Congress, MedPAC identified hospitals-within- hospitals as the fastest growing type of LTCHs, and specified that the number had grown from 10 in 1993 to 114 in 2002, an average annual increase of approximately 30 percent (p. 85). In the August 30, 2002 final rule that implemented the PPS for LTCHs, we noted that ``* * * we remain extremely concerned about rapid growth in LTCH hospitals-within- hospitals and will be collecting data on the relationship among host hospitals, hospitals-within-hospitals, and parent corporations in order to determine the need for additional regulation'' (67 FR 56010). We indicated that if, as a consequence of these monitoring activities, we determine the need to revisit existing regulations dealing with ownership and control of hospitals-within-hospitals, we would follow the notice and comment rulemaking process (67 FR 56011).

The LTCH PPS was implemented for cost reporting periods beginning on or after October 1, 2002. We have gathered considerable anecdotal information from inquiries from the provider community, fiscal intermediaries, and, particularly, from the survey and certification divisions of our CMS Regional Offices.

We believe that existing policies regarding hospitals-within- hospitals do not sufficiently protect the Medicare program from the problems that we envisioned in the September 1, 1994 final rule. We also question the effectiveness of the ``separateness and control'' requirements alone because entities have used complex arrangements among corporate affiliates, and obtained services from those affiliates, thereby impairing or diluting the separateness of the corporate entity. While technically remaining within the parameters of the rule, these arrangements have intermingled corporate interests so that the corporate distinctness has been lost.

In corporate law, several standards are used to determine how much separateness is sufficient for a corporate autonomy to be recognized. The courts have applied a number of tests and considered a number of factors in determining when a parent corporate autonomy is liable for the acts of its subsidiary, including the parent corporate autonomy's exercise of control over the decisionmaking of the subsidiary; the subsidiary's actions as an alter ego of the parent corporate autonomy, such that recognition of a distinct corporate entity would lead to fraud or an injustice or would defeat public policy and the interrelatedness of operations. While we do not believe that it is necessary to apply any single test that might be used in the context of assigning liability, we believe that some of the same considerations apply when trying to determine whether there is functional separateness among related or affiliated organizations.

The requirement for separate governing bodies, separate medical boards, separate medical officers, and separate chief executive officers in co-located hospitals under the same ownership does not prevent, on a practical level, the establishment of admission, treatment, and discharge policies that maximize payments. Some of these co-located facilities are under common ownership, either nonprofit or for profit, and, therefore, the payments generated from care delivered at both settings affect their mutual interests.

Even when the hospital-within-a-hospital and the host hospital are separately owned, we believe that there may be incentives to prematurely discharge patients to a postacute care setting in spite of the fact that the acute care hospital could continue to provide the appropriate level of care. We find this situation even more troubling regarding LTCHs, in particular, because LTCHs are certified as acute care hospitals and the sole statutory and regulatory distinction between LTCHs and acute care hospitals is the greater than 25-day average length of stay criterion at Sec. 412.23(e)(2). In many parts of the country, there are no LTCHs and appropriate care for patients who could otherwise be treated in LTCHs is being delivered in acute care hospitals, often followed by postacute care at SNFs. Because a similar level of care is often available in either an acute care hospital or a LTCH, we believe that, when an acute care hospital and a LTCH are co-located, there are significant inducements for patients to be moved to the provider setting that generates the highest Medicare payments.

This movement of patients is facilitated by the fact of co-location because, rather than arranging for the patient to be admitted to another offsite facility and transporting the patient by ambulance to another hospital, all that may actually be required to ``discharge'' the patient from one hospital and admit the patient to another is wheeling the patient down the hall or on and off an elevator.

Although co-location of Medicare providers, at best, may embody the positive economic benefits of sharing expensive medical equipment and provide a measure of convenience for patient families, at worst, co- location and patient-shifting can serve to undermine the basic premise of the IPPS DRG classification system and generate inappropriate Medicare payments. This is the case because payment for specific diagnoses is determined by setting DRG weights that represent a national averaging of hospital costs for each diagnosis. In addition, the Federal standardized payment amount was based on the average cost of a patient across all hospitals. This assumes that, on average, both high-cost and low-cost patients are treated at a hospital. Although Medicare might pay a hospital less than was expended for a particular case, over a period of time, the hospital would also receive more than was expended for other cases. However, an acute care hospital that consistently discharges a higher cost patient to a postacute care setting for the purpose of lowering its costs undercuts the foundation of the IPPS DRG system, which is based on averages. In this circumstance, the hospital would recoup larger payments from the Medicare system than is intended under the DRG system because the course of acute treatment has not been completed. At the same time, the patient, still under active treatment for an acute illness, will be admitted to a LTCH, thereby generating a second admission and Medicare payment that would not have taken place but for the fact of co- location.

We believe that the 15-percent policy is being sidestepped through creative corporate reconfigurations. Therefore, if the LTCH is nominally complying with the 15-percent requirement, it has not been required to meet the basic hospital function requirements at existing Sec. 412.22(e)(5)(iii). Thus, it is free to accept even 100 percent of patients from the onsite host, and share the same basic hospital functions as the host. Reliance on meeting the 15-percent criterion has enabled the creation of LTCH hospitals-within-hospitals that rely upon affiliated entities both for their operations and for their patient referrals. This results in a situation very similar to the hospital- within-hospital serving as a LTCH unit of the acute care hospital, which is precluded by the statute.

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One of the reasons we are proposing revisions to the existing criteria for hospitals-within-hospital is because we believe that determining whether a hospital has complied with the 15-percent criterion is burdensome for a fiscal intermediary on an ongoing basis. Presently, review of corporate arrangements represents a snapshot in time that may assess a particular set of business transactions but does not provide relevant details to reveal the extent of the unity of interests between the parties over time. Further, the widespread existence of such complex configurations, as well as the ongoing creation of new business arrangements, convinces us that a hospital- within-a-hospital's compliance with Sec. 412.22(e)(5)(ii) may be fluid, unreliable, or, in some cases, nonexistent.

Another reason we are proposing revisions to the existing criteria for hospitals-within-hospitals because the concerns that we expressed in 1994 and 1995, when excluded hospitals were paid under the reasonable cost-based TEFRA system, are even more compelling with the implementation of PPSs for LTCHs and IRFs, because now one episode of care for a beneficiary could generate two full Medicare prospective payments, one under the IPPS, and another under the applicable excluded hospital PPS. In addition, the substantial increase in the number of hospitals-within-hospitals adds further urgency to reevaluation of the existing hospital-within-a-hospital policies. Therefore, it is incumbent upon us to revise our regulations in order to offer the greatest possible protection against potential abuses.

Accordingly, for qualification purposes, we are proposing to delete the 15-percent criterion at Sec. 412.22(e)(5)(i) and the rarely elected criterion at Sec. 412.22(e)(5)(i) that requires the hospital- within-a-hospital to perform basic hospital functions, which includes nursing services, medical records, pharmacy services, radiology, laboratory services, infection control, and discharge planning, through the use of employees or under contracts or other agreements with entities other than the host hospital or a third entity that controls them both. Because we believe that efficient use of excess space at a hospital and the sharing of medical facilities and services may represent the strongest argument for the existence of hospitals-within- hospitals, from the standpoint of efficiency and cost reduction, we do not believe that these criteria should be maintained.

We are proposing that all hospitals-within-hospitals would be required to comply only with the criterion set forth at the existing Sec. 412.22(e)(5)(iii), which requires that at least 75 percent of the admissions to the hospital-within-a-hospital be referred from a source other than the host hospital. We believe that this ``functional separateness'' test (62 FR 46014, August 29, 1997) directly addresses our concern that the excluded hospital not function either as a vehicle to generate more favorable Medicare reimbursement for each provider or as a de facto unit. Compliance with the 75-percent criterion is a requirement that we can verify without the involvement of corporate attorneys and a yearly reevaluation of corporate documents and transactions. The goal of the proposed provisions is to diminish the possibility that a hospital-within-a-hospital could actually be functioning as a unit of an acute care hospital and generating unwarranted payments under the much more costly LTCH PPS.

Therefore, under our proposed policy, a hospital must demonstrate that it has a separate governing body, a separate chief medical officer, and a separate chief executive officer, and that at least 75 percent of its admissions originate from a source other than its host hospital, in order to be totally excluded from the IPPS. Fiscal intermediaries would reevaluate compliance with these regulations annually. In implementing our belief that separation and control can best be objectively determined by limiting compliance to the 75-percent criterion as the single ``performance of hospital functions'' test, we are proposing several policy options that are detailed below that, if not met, notwithstanding compliance with the separate governance and control requirements under existing Sec. 412.22(e)(1) through (4), could result in the either total discontinuance of IPPS-exclusion payment status or Medicare payment adjustments for hospital-within-a- hospital patients from the host hospitals.

As noted above, DRG weights and hence payments under the IPPS are established annually based on the average concept that recognizes that, for patients with a particular diagnosis, some will stay longer and consume more hospital resources than expected, while others will have shorter, less costly stays. Under the IPPS, a full DRG payment is triggered on the first day of admission to the acute care hospital. Medicare adopted an IPPS transfer policy at Sec. 412.4(b) in order to pay appropriately for cases that were discharged to other IPPS hospitals prior to the hospitals delivering full treatment to a beneficiary. We also promulgated the postacute care transfer policy at Sec. Sec. 412.4(c) and (d) to discourage premature transfers or discharges from IPPS hospitals for particular DRGs to postacute care settings, including LTCHs (63 FR 40977, July 31, 1998, 68 FR 45469, August 1, 2003). The issues that we addressed in formulating the acute and postacute care transfer policies are similar to those we are raising as our present concerns: that the incentives of the IPPS could result in acute care hospitals shifting a portion of the cost of services that should reasonably be treated in that setting to other providers; that the acute care hospitals would still collect a full DRG payment under the IPPS for less than a full course of treatment; and that an additional and unnecessary Medicare payment would be made to the second provider. We believe that the potential for linking clinical decisions to the highest Medicare payments is even stronger when the acute care hospital and a postacute care provider are co-located and, even more so, if they are also under common ownership.

Therefore, we are also proposing to revise Sec. 412.22(e), effective October 1, 2004, to preclude common ownership (wholly or in part) of hospitals-within-hospitals and host hospitals (proposed new Sec. 412.22(e)(2)(ii)). However, we are also proposing to ``grandfather'' those hospitals-within-hospitals that were under common ownership with their host hospitals prior to June 30, 2004, and to continue to pay them as hospitals excluded from the IPPS, as long as they comply with the existing control criteria at Sec. 412.22(e)(1) through (4) (as set forth in proposed new Sec. 412.22(e)(2)(i)) and with the proposed mandatory 75-percent criterion (as set forth in proposed new Sec. 412.22(e)(2)(iii)).

In addition, in this proposed rule, we are presenting, for public comment, three payment options that we believe would diminish the possibility of a hospital-within-a-hospital actually functioning as a unit of an acute care hospital and at the same time generating unwarranted payments under the more costly LTCH PPS.

Option 1. Under the first option, as discussed earlier, in order for a hospital-within-a-hospital to receive payment as an IPPS-excluded hospital, we are proposing to retain as the only qualifying criterion that the hospital-within-a-hospital have at least 75 percent of its admissions from a source other than the host hospital (existing Sec. 412.22(e)(5)(iii)). The hospital-within-a-hospital would still be required to demonstrate that it meets the separateness and control criteria at Sec. 412.22(a). Under this option, a hospital-within- hospital that admitted

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more than 25 percent of its patients from the host hospital would not be paid as an IPPS-excluded hospital for any of its patients. The hospital or unit that does not meet the criteria under this option would receive payment as an acute care hospital for all of its patients.

As stated earlier, we believe that compliance with the 75-percent criterion under this option is a requirement that fiscal intermediaries would be able to evaluate annually in an efficient manner without the involvement of corporate attorneys and a yearly reevaluation of corporate documents and transactions. Further, we believe that this option would ensure increased protections to the Medicare program and greatly diminish opportunities for maximizing Medicare payments under the PPS.

Option 2. Under the second option, as proposed earlier, we would require the hospital to meet the existing qualifying 75-percent criterion under Sec. 412.22(e)(5)(iii). However, under this option, we would allow a hospital-within-a-hospital that failed to meet the 75- percent criterion to be excluded from the IPPS to be paid as a PPS- excluded hospital only for the patients admitted to the hospital- within-a-hospital from providers other than the host hospital. For example, no payments would be made to a LTCH for those patients that had been transferred to the LTCH from the host hospital because it failed to meet this criterion. Payments for patients referred from the host acute care hospital would only be paid to the host under the IPPS. We would treat services provided by the hospital-within-a-hospital as services furnished ``under arrangement.'' Therefore, in keeping with our existing policy at Sec. 411.15(m) that restricts separate Medicare payment to hospital services furnished under arrangements, we would make payment only to the acute care hospital from which the patients were referred for ``under arrangements'' furnished by the hospital- within-a-hospital.

Option 3. Under the third option, as proposed earlier, we would require that the hospital-within-a-hospital must meet the existing qualifying 75-percent criterion under Sec. 412.22(e)(iii). However, under this option, we would pay the hospital-within-a-hospital directly for services, even for services provided to patients admitted to the hospital-within-a-hospital from the co-located acute care hospital. However, the payment to the hospital-within-a-hospital for those patients would be the lesser of what would be paid under the IPPS for that DRG, or what would be paid to the hospital-within-a-hospital under the applicable excluded hospital payment system. Payments to the hospital-within-a-hospital for patients admitted to the hospital- within-a-hospital from another hospital that was not the co-located hospital would be made under the hospital-within-a-hospital payment system with no adjustment. Therefore, for example, a LTCH that was a hospital-within-a-hospital and failed to meet the 75-percent criterion would be paid the lesser of the IPPS payment or the LTCH PPS payment for its patients that were admitted from its host hospital. However, for patients admitted from other hospitals, the LTCH hospital-within-a- hospital would be paid under the LTCH PPS with no adjustment.

We believe that adoption of any of these three options is within the broad discretion conferred on the Secretary by section 123 of Public Law 106-113 (BBRA) and by section 307 of Public Law 106-554 (BIPA), which grant the Secretary the authority to develop a per discharge PPS for payment of inpatient hospital services by LTCHs and to provide for appropriate adjustments to the LTCH PPS.

We are proposing to revise the existing separateness and control regulations at Sec. 412.22(e) for hospitals-within-hospitals and to require that in order to be excluded from the IPPS, all hospitals- within-hospitals must admit no more than 25 percent of their patients from the onsite host hospital. We are also proposing to preclude common ownership of host hospitals and excluded hospitals, while grandfathering existing hospitals-within-hospitals and hosts that are under common ownership, as long as they comply with the proposed mandatory 75-percent criterion. We are further seeking comments on the options presented if the hospital-within-a-hospital fails to meet the 75-percent criterion that would either require that all of the hospital's Medicare payment would be made under the IPPS or, alternatively, to allow a hospital-within-a-hospital to still be paid as an excluded hospital for its admissions from onsite providers while applying specific payment adjustments for patients admitted from the host hospital.

We are soliciting comments on the three options presented and whether they provide sufficient protection against the phenomenon of inadequate separateness and control as described in this proposed rule. We want to emphasize that, under any of the options, nowhere is a change in physician clinical decisionmaking or a change in the manner in which a physician or hospital practices medicine intended. The policy options outlined in this proposed rule would simply address the appropriate level of payments once those decisions have been made.

Technical Change. In Sec. 412.22(e) of our regulations, we refer to a hospital-within-a-hospital as a hospital that ``occupies space in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital'' (emphasis added). The reference to ``entire'' buildings is incorrect. We should have referred to ``separate'' buildings. Therefore, we are proposing to correct this error.

C. Critical Access Hospitals (CAHs)

[If you choose to comment on issues in this section, please include the caption ``Critical Access Hospitals'' at the beginning of your comment.]

1. Background

Section 1820 of the Act provides for the establishment of Medicare Rural Hospital Flexibility Programs, under which individual States may designate certain facilities as critical access hospitals (CAHs). Facilities that are so designated and meet the CAH conditions of participation in 42 CFR Part 485, Subpart F, will be certified as CAHs by CMS. Regulations governing payments to CAHs for services to Medicare beneficiaries are located in 42 CFR Part 413. 2. Payment Amounts for Inpatient CAH Services (Section 405(a) of Public Law 108-173 and Sec. Sec. 413.70 and 413.114 of the Regulations)

Prior to the enactment of Public Law 108-173, section 1814(l) of the Act provides that the Medicare payment amount for inpatient services furnished by a CAH is the reasonable costs of the CAH in providing the services. Section 1834(g)(1) of the Act provides that the Medicare amount of payment for outpatient services furnished by a CAH is made on a reasonable cost basis, unless the CAH makes an election, under section 1834(g) of the Act, to receive a payment amount that is the sum of the reasonable cost of hospital outpatient facility services plus 115 percent of the amount otherwise paid for professional services. Section 1883(a)(3) of the Act provides for payment to a CAH for covered skilled nursing facility services furnished under an agreement entered into under section 1883 of the Act on the basis of the reasonable costs of such services. Regulations implementing these provisions are set forth in Sec. 413.70(a), for inpatient CAH services; in

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Sec. 413.70(b), for payment under the standard method for the reasonable costs of facility services, and outpatient CAH services; in Sec. 413.70(b)(3), for the optional method of payment for outpatient services (reasonable costs for facility services plus fee schedule for professional services); and in Sec. 413.114, for SNF services of a CAH with a swing-bed agreement.

Section 405(a) of Public Law 108-173 amended sections 1814(l), 1834(g)(1), and 1883(a)(3) of the Act to provide that, effective for services furnished during cost reporting periods beginning on or after January 1, 2004, the amount of the payment for inpatient, outpatient, and SNF services, respectively, furnished by a CAH is equal to 101 percent of the reasonable cost of the CAH in providing these services.

We are proposing to revise Sec. Sec. 413.70(a)(1), (b)(2), and (b)(3) and Sec. 413.114 of our regulations to incorporate the change in the payment percentage made by section 405(a) of Public Law 180-173. We also are proposing to make a technical correction to Sec. 413.70(b)(2)(i) to remove paragraphs (b)(2)(i)(C) and (D). We are proposing to delete these paragraphs to conform the regulations to provisions of the outpatient hospital PPS.

We note that in the IPPS final rule published in the Federal Register on August 1, 2001 (66 FR 39936), we added a new paragraph (a)(1)(iv) to Sec. 413.70. However, when the change was incorporated into the Code of Federal Regulations, paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) were inadvertently omitted. Our proposed revision of Sec. 413.70(a)(1) would correct the omission of these three paragraphs. 3. Condition for Application of Special Professional Service Payment Adjustment (Section 405(d) of Public Law 108-173 and Sec. 413.70(b) of the Regulations)

As stated earlier, section 1834(g) of the Act provides for two methods of payment for outpatient CAH services. Under the provisions of section 1834(g) of the Act, a CAH will be paid under a reasonable cost method unless it elects payment under an optional method. Under the reasonable cost payment method, facility services are paid on a reasonable cost payment basis by the fiscal intermediary to the CAH, and physician and other professional services to CAH outpatients are paid for under the physician fee schedule, with payments being made by the carrier. Under the optional method (frequently referred to as ``method 2''), CAHs submit bills for both facility and professional services to the fiscal intermediary. If a CAH elects the optional method of billing for outpatient services, Medicare payment for its facility services are made at the same level as would apply under the reasonable cost reimbursement method, but services of professionals to outpatients are paid for at 115 percent of the amounts that would otherwise be paid for under the physician fee schedule. To make the optional method election feasible and to help prevent possible duplicate billing, we require practitioners furnishing services to outpatients of a CAH to agree to reassign to the CAH their rights to bill the Medicare program for those services.

Existing regulations at Sec. 413.70(b) set forth these payment options and specify that an election of the optional method, once made for a cost reporting period, remains in effect for all of that period and applies to all services furnished to CAH outpatients during that period. This means that, under existing regulations, a CAH may elect the optional method payment only if all of its practitioners agree to reassign their billing rights for outpatient services to the CAH.

Section 405(d)(1) of Public Law 108-173 amended section 1834(g)(2) of the Act by adding a sentence after paragraph (B) to specify that the Secretary may not require, as a condition for a CAH to make an election of the optional method of payment, that each physician or other practitioner providing professional services in the CAH must assign billing rights with respect to the services. However, the optional payment method does not apply to those physicians and practitioners who have not assigned such billing rights. In other words, section 405(d) amended the Medicare law to authorize CAHs to elect the optional payment method even if some practitioners do not reassign to the CAH their rights to bill for professional services to CAH outpatients. However, it also specifies that the 15-percent increase in payment for those services is not available for professional services for which billing rights are not reassigned.

The provisions of section 405(d)(1) of Public Law 108-173 are effective for cost reporting periods beginning on or after July 1, 2004. However, section 405(d)(2)(B) also states, in a special rule of application, that in the case of a CAH that made an election before November 1, 2003, the provisions of section 405(d)(1) are effective for cost periods beginning on or after July 1, 2001.

Consistent with section 405(d)(2)(B), we do not intend to attempt recovery of certain amounts paid improperly in the past to CAHs for professional services that the CAHs billed under the optional payment method, even though the CAHs had not obtained reassignments of billing rights from all physicians and other practitioners furnishing professional services to their outpatients, as required by Sec. 413.70 as in effect at that time. However, we are proposing to clarify that the special rule of application in section 405(d)(2)(B) is not to be interpreted to permit a CAH to obtain payment under the optional payment method for any cost reporting period based on an election made for a prior period or on an optional payment method election that was withdrawn or revoked prior to the start of the cost reporting period for which it was made.

To illustrate the application of section 405(d)(2)(B), assume that on October 1, 2002, a CAH elected method 2 for its cost reporting period starting on January 1, 2003, but did not obtain reassignments from all physicians treating its outpatients, as required by regulations in effect at that time. Under section 405(d)(2)(B), CMS would not recover any amounts from the CAH for payments for services furnished during that cost reporting period (January 1, 2003, through December 31, 2004) that are attributable to that election, even though the election was inappropriate at the time it was made. Assume further that the same CAH recognized its error and did not make a method 2 election for its cost reporting period beginning January 1, 2004, thus receiving payment under method 1. The fact that the election of October 1, 2002, was made prior to November 1, 2003, is not material in this case and cannot be interpreted to justify method 2 payment for the cost reporting period beginning January 1, 2004, because that method 2 election related to an earlier cost reporting period and not to the cost reporting period beginning January 1, 2004. The same result would occur if the CAH had elected method 2 on October 1, 2003, but subsequently revoked that election on October 15, 2004.

We are proposing to revise Sec. Sec. 413.70(b)(3)(i) to reflect the changes made by section 405(d) of Public Law 108-173. We would specify in Sec. 413.70(b)(3)(i) that a CAH may elect to be paid for outpatient services in any cost reporting period beginning on or after July 1, 2004, under the method described in Sec. Sec. 413.70(b)(3)(ii) and (b)(3)(iii). In Sec. 413.70(b)(3)(i)(A), we would clarify that such an election is to be made at least 30 days before the start of the cost reporting period for which the election is made. In Sec. 413.70(b)(3)(i)(B), we would specify

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that the provision applies to all services furnished to outpatients during that cost reporting period by a physician or other practitioner who has reassigned his or her rights to bill for those services to the CAH in accordance with the reassignment regulations under 42 CFR part 424, Subpart F. In that paragraph, we also would specify that if a physician or other practitioner does not reassign his or her billing rights to the CAH in accordance with 42 CFR Part 424, Subpart F, payment for the physician's or practitioner's services to CAH outpatients will be made on a fee schedule or other applicable basis specified in 42 CFR Part 414, Subpart B. We would also add a new paragraph (C) to Sec. 413.70(b)(3)(i) to state that, in case of a CAH that made an election under Sec. 413.70(b)(3) before November 1, 2003, for a cost reporting period beginning before December 1, 2004, the rules in paragraph (b)(3)(i)(B) are effective for cost reporting periods beginning on or after July 1, 2001. We are also proposing in Sec. 413.70(b)(3)(i)(B) to clarify that an election effective only for any cost reporting period for which it was made for the optional method does not apply to an election that was withdrawn or revoked before the start of the cost reporting period for which it was made. 4. Coverage of Costs for Certain Emergency Room On-Call Providers (Section 405(b) of Public Law 108-173 and Sec. Sec. 413.70(b)(4) and 485.618 of the Regulations)

Under existing regulations at Sec. 413.70(b)(4), which implement section 1834(g)(5) of the Act, Medicare payments to a CAH may include the costs of compensation and related costs of on-call emergency room physicians who are not present on the premises of a CAH, are not otherwise furnishing services, and are not on-call at any other provider or facility when determining the reasonable cost of outpatient CAH services.

Section 405(b) of Public Law 108-173 amended section 1834(g)(5) of the Act to expand the reimbursement of on-call emergency room providers beyond physicians to include physician assistants, nurse practitioners, and clinical nurse specialists for the costs associated with covered Medicare services furnished on or after January 1, 2005.

We are proposing to revise Sec. 413.70(b)(4)(i) and (ii) to include the expanded list of emergency room on-call providers for whom reimbursement for reasonable compensation and related costs in a CAH would be available. We also are making a conforming change to Sec. 485.618(d) governing the standard for emergency room personnel who are on call under the CAH conditions of participation. 5. Authorization of Periodic Interim Payments for CAHs (Section 405(c) of Public Law 108-173 and Proposed Sec. 413.64(h)(2)(vi) and Sec. 413.70(d) of the Regulations)

Section 1815(e)(2) of the Act provides that payments may be made on a periodic interim payment (PIP) basis for specified covered Medicare services. Section 405(c)(1) of Public Law 108-173 amended section 1815(e)(2) by adding a new subsection (E) to provide for payments for inpatient services furnished by CAHs on a PIP basis, effective for payments made on or after July 1, 2004. Section 405(c)(2) of Public Law 108-173 directs the Secretary to develop alternative methods for the timing of the payments under the PIP method.

We have already established in existing regulations under Sec. 413.64(h) provisions for making payments under the PIP method to providers for certain Medicare covered services. The principles and rules of Sec. 413.64 have been incorporated into regulations governing payment on a PIP basis to acute care IPPS hospitals as well as to other providers, such as SNFs and LTCHs, that are paid on a prospective basis. We believe these principles and rules could be equally applied to CAHs. Therefore, in this proposed rule, to implement the provisions of section 405(c) of Public Law 108-173, we are proposing to add a new Sec. 413.64(h)(2)(vi) to specify inpatient services furnished by CAHs as an additional type of covered service for which PIP is available, effective for payments made on or after July 1, 2004.

It has been our longstanding policy under Sec. 413.64(h)(6) that payment will be made biweekly under the PIP method, unless the provider requests a longer fixed interval (not to exceed 1 month) between payments. We believe that this provision grants adequate flexibility for the timing of payments under the PIP method to all qualifying providers, including CAHs. Under our proposed policy for CAHs, if a CAH chooses to receive its payments less frequently than biweekly, it could inform its Medicare fiscal intermediary. Section 413.64(h)(6) does not provide for the payments to be made more frequently than biweekly to providers for which PIP is currently available. We believe this is equally appropriate for the payments for inpatient services furnished by CAHs.

In summary, we are proposing to apply the same rules and procedures for payments under the PIP method that we apply to acute care hospitals and certain other Medicare providers. Therefore, CAHs, in applying for and receiving payments for inpatient services under the PIP provision, would be operating under the same rules as other providers for which PIP is available under Sec. 413.64(h), including the flexibility discussed above of the timing of their payments as provided for under Sec. 413.64(h)(6). We also are proposing to establish a new paragraph (d) under Sec. 413.70 to provide that, for payments on or after July l, 2004, a CAH may elect to receive PIP for inpatient services furnished by CAHs, subject to the provisions of Sec. 413.64(h). The new Sec. 413.70(d) summarizes the application of the PIP provisions under Sec. 413.64(h)(6) for CAH inpatient services and notes the availability of accelerated payments for CAHs that are not receiving PIPs.

Technical Changes to Sec. 413.64. We are proposing to use this opportunity to remove Sec. Sec. 413.64(h)(3)(iv) and 413.64(h)(4), which contain an outdated requirement that a provider must repay any outstanding current financing payments before being permitted to be paid under the PIP method. Current financing payments have not been available since 1973. 6. Revision of the Bed Limit for CAHs (Section 405(e) of Public Law 108-173 and Sec. Sec. 485.620(a) and 485.645(a)(2) of the Regulations)

Prior to the enactment of Public Law 108-173, sections 1820(c)(2)(B)(iii) and 1820(f) of the Act restricted CAHs to 15 acute care beds and a total of 25 beds if the CAH had been granted swing-bed approval. The number of beds used at any time for acute care inpatient services could not exceed 15 beds.

Section 405(e) of Public Law 108-173 amended sections 1820(c)(2)(B)(iii) and 1820(f) of the Act to allow CAHs a maximum of 25 acute care beds for inpatient services, regardless of the swing-bed approval. This amendment is effective on January 1, 2004 and applies to CAHs designated before, on, or after this date. However, section 405(e)(3) of Public Law 108-173 also notes that any election made in accordance with the regulations promulgated to carry out the bed size amendments only applies prospectively.

We interpret this provision to mean that the increased bed size limitation is to be applied prospectively after April 1, 2004, regardless of when the CAH was designated. Accordingly, we implemented this provision via a survey and certification letter on January 1, 2004. (See Survey and Certification

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Letter No. 0414, issued December 11, 2003.) Therefore, effective January 1, 2004, this provision allows any currently participating CAH, or applicant for CAH approval, to maintain up to 25 inpatient beds. If swing-bed approval has been granted, all 25 beds can be used interchangeably for acute care or swing-bed services. However, no CAH will be considered to have had 25 acute care beds prior to January 1, 2004. We are proposing to amend our regulations at Sec. Sec. 485.620(a) and 485.645(a)(2) to reflect the increase in the number of beds permitted in a CAH, in accordance with the amendments made by section 405(e) of Public Law 108-173. 7. Authority To Establish Psychiatric and Rehabilitation Distinct Part Units of CAHs (Section 405(g)(1) of Public Law 108-173 and Proposed New Sec. 485.646 of the Regulations)

As stated earlier, sections 1820(c)(2)(B) and 1861(mm) of the Act set forth the criteria for designating a CAH. Under this authority, the Secretary has established in regulations the minimum requirements a CAH must meet to participate in Medicare (42 CFR Part 485, Subpart F). The CAH designation is targeted to small rural hospitals with a low patient census and short patient stays.

Under the law in effect prior to Public Law 108-173, CAHs are excluded from operating distinct part units (that is, separate sections of hospitals that are dedicated to providing inpatient rehabilitation or psychiatric care and are paid under payment methods different from those used for the acute care areas of the hospitals). The statute (section 1886(d)(l)(B) of the Act) and implementing regulations under 42 CFR Part 412, Subpart B require distinct part units to be units of ``subsection (d) hospitals,'' which are hospitals paid under the IPPS. Because CAHs are not ``subsection (d) hospitals'' paid under IPPS, but instead are paid for inpatient care on a reasonable cost basis under section 1814(l) of the Act, they are effectively prohibited from having distinct part units.

Section 405(g)(1) of Public Law 108-173 modified the statutory requirements for CAHs under section 1814(l) and section 1820(c)(2) of the Act to allow CAHs to establish distinct part rehabilitation and psychiatric units of up to 10 beds each, which will not be included in the revised total 25 CAH bed count under section 405(e) of Public Law 108-173 (discussed in detail in section VI.D.6. of this preamble. In addition, as explained more fully below, the average 96-hour stay does not apply to the 10 beds in the distinct part units and inpatient admissions; days of inpatient care in these distinct part units are not taken into account in determining the facility's compliance with the requirement for a facility-wide average length of stay that does not exceed 96 hours.

Section 405(g)(1) of Public Law 108-173 provides under section 1820(c)(2)(E)(i) of the Act that a distinct part rehabilitation or psychiatric unit of a CAH must meet the conditions of participation that would otherwise apply to the distinct part unit of a hospital if the distinct part unit were established by a subsection (d) hospital in accordance with the matter following clause (v) of section 1886(d)(1)(B) of the Act, including any applicable regulations adopted by the Secretary. CAHs will now be permitted to operate distinct-part psychiatric and rehabilitation units, and it is clear that the law, consistent with this change, requires the same level of health and safety protection for patients in distinct part units of a CAH that is currently required for patients in distinct part units operated by an acute care hospital.

The amendments to section 405(g)(1) are effective for the cost reporting periods beginning on or after October 1, 2004.

As CAHs were excluded from operating distinct part units prior to the enactment of section 405(g), the CAH conditions of participation did not address the necessary requirements and standards for operating such units. As noted previously, section 1820(c)(2)(E)(i) of the Act makes it clear that the requirements, including conditions of participation, for operating these units in a CAH are to be the same as is currently required for these units operated by an acute care hospital. Accordingly, we are proposing that, in accordance with the requirements of section 405(g), a rehabilitation or psychiatric distinct part unit of a CAH must meet all of the hospital conditions of participation at 42 CFR Part 482, Subparts A, B, C, and D and the criteria for exclusion from the IPPS at 42 CFR Part 412 as described below. These requirements will only apply to the services provided in the distinct part unit of a CAH and not the entire CAH.

Currently, psychiatric distinct part units of hospitals are subject to specific Medicare regulations established in 42 CFR 412.27 regarding the types of patients admitted, the scope of services furnished, and the qualifications of staff. For example, psychiatric distinct part units may admit only patients whose condition requires inpatient hospital care for a psychiatric principal diagnosis. The regulations at Sec. 412.27(b) further requires a hospital that wishes to establish a psychiatric distinct part unit to furnish, through the use of qualified personnel, psychological services, social work services, psychiatric nursing, and occupational and recreational therapy. The hospital must maintain medical records for the unit that permit determination of the degree and intensity of services to individuals treated in the unit. Inpatient psychiatric services must be under the supervision of a clinical director, service chief, or equivalent who is qualified to provide the leadership required for an intensive treatment program, and who is board certified in psychiatry (42 CFR 412.27(d)(2)). The distinct part unit must have a director of social services, a qualified director of psychiatric nursing services who is a registered nurse with a master's degree in psychiatric or mental health nursing, or its equivalent from an accredited school of nursing, or is qualified by education and experience in the care of individuals with mental illness. There must also be an adequate number of registered nurses to provide 24-hour coverage as well as licensed practical nurses and mental health workers. These and other applicable requirements are set forth in greater detail in Sec. 412.27.

Rehabilitation distinct part units of hospitals are currently subject to criteria in 42 CFR 412.29. This section specifies that such a unit must meet either the requirements for new units (Sec. 412.30(a)) or those for existing units (Sec. 412.30(c)). In addition, the units must furnish through qualified personnel rehabilitation nursing, physical and occupational therapy, and as needed, speech therapy and social services or psychological services, and orthotics and prosthetics. The unit must have a director of rehabilitation services who is trained or experienced in medical management of inpatients who require rehabilitation services and is a doctor of medicine or a doctor of osteopathy. Rehabilitation distinct part units may treat only patients likely to benefit significantly from an intensive inpatient program, utilizing services such as physical, occupational, or speech therapy. These and other applicable requirements are set forth in greater detail in Sec. Sec. 412.29 and 412.30.

To implement the requirements of section 1820(c)(2)(E)(i) of the Act, as added by section 405(g)(1) of Public Law 108-173, we are proposing to add a new Sec. 485.647 to 42 CFR Part 485, Subpart F. In proposed Sec. 485.647(a)(1), we would specify that if a CAH provides

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inpatient psychiatric services in a distinct part unit, the services provided in that unit must comply with the hospital requirements specified in Subparts A, B, C, and D of Part 482, with the common requirements for IPPS-excluded units in Sec. 412.25(a)(2) through (f), and with the additional requirements of Sec. 412.27 for psychiatric units excluded from the IPPS. In proposed Sec. 485.647(a)(2), we would specify that if a CAH provides inpatient rehabilitation services in a distinct part unit, the services provided in that unit must comply with the hospital requirements specified in Subparts A, B, C, and D of Part 482, with the common requirements for IPPS-excluded units in Sec. 412.25(a)(2) through (f), and with the additional requirements of Sec. Sec. 412.29 and 412.30, which relate specifically to rehabilitation units excluded from the IPPS. To provide for consistent application of section 405(g)(1) and avoid any confusion, we also are proposing to revise Sec. 412.22, which contains the common requirements for excluded hospital units, to state that, for purposes of 42 CFR Part 412, Subpart B, the term ``hospital'' includes a CAH.

As noted earlier, sections 1820(c)(2)(E)(ii) and (c)(2)(E)(iii) of the Act, as added by section 405(g)(1) of the MMA, provide that each distinct part unit of a CAH may have up to 10 beds and that, in determining the number of beds a CAH has for purposes of compliance with the 25-bed limit described earlier, the beds in a distinct part unit are not to be taken into account. We interpret the exclusion of these beds from consideration for purposes of the 25-bed limit as also indicating that the admissions and lengths of stay in distinct part unit beds are not to be considered in determining the facility-wide average length stay of a CAH for purposes of the 96-hour limitation on CAH's average length of inpatient stay. These rules would be codified in paragraphs (b)(1) through (b)(3) of proposed Sec. 485.647.

Section 1820(c)(2)(E)(iv) of the Act, as added by section 405(g)(1) of Public Law 108-173, imposes severe sanctions on CAHs that fail to operate their distinct part units in compliance with applicable requirements. That section states that if a psychiatric or rehabilitation unit of a CAH does not meet the requirements of section 1820(c)(2)(E)(i) with respect to a cost reporting period, no payment may be made to the CAH for services furnished in that unit for that period. Payment to the CAH for services in the unit may resume only after the unit has demonstrated to CMS that the unit meets the requirements of Sec. 485.645. We are proposing to codify this requirement by adding a new paragraph (g) to Sec. 412.25.70, which contains the common requirements for excluded units.

Section 405(g)(1) of Public Law 108-173 amended section 1814(l) of the Act by adding a new paragraph (2) to that provision. New section 1814(l)(2) states that, in the case of a distinct-part psychiatric or rehabilitation unit of a CAH, the amount of payment for inpatient CAH services of such a unit is to equal the amount that would be paid if these services were inpatient hospital services of a psychiatric or rehabilitation unit, respectively, of the kind described in the matter following clause (v) of section 1886(d)(1)(B) of the Act. To implement the requirements of section 1814(1)(2) of the Act, we are proposing that, for CAHs that establish rehabilitation or psychiatric distinct part units, or both, in their facility, Medicare payment for inpatient services provided in those units would be made under the applicable existing payment methodology described below for IRFs and IPFs.

Presently, IRFs are paid under a per discharge PPS that became effective for cost reporting periods beginning on or after January 1, 2002. The regulations governing the IRF PPS are located under 42 CFR Part 412, Subpart P (Sec. Sec. 412.600 through 412.632).

At this time psychiatric hospitals and units that are excluded from the IPPS are paid for their inpatient operating costs on a reasonable cost basis, subject to a hospital-specific limit. However, as required by statute, a per diem PPS for Medicare payments for inpatient hospital services furnished in psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)) was proposed in the Federal Register on November 28, 2003 (68 FR 66920). We are in the process of developing the final rule for this proposed rule. When finalized, the IPF PPS will replace the reasonable cost based payment system currently in effect.

To clarify the requirements of section 1814(1)(2) of the Act regarding payment for inpatient CAH services of a distinct part psychiatric or rehabilitation unit of a CAH, we are proposing to revise the title and first sentence of paragraph (a)(1) of Sec. 413.70, and to add a new paragraph (a)(4) to that section, to clarify that payment for inpatient services of a CAH distinct part unit is not made in accordance with the otherwise applicable rules for payment for inpatient CAH services, but under other rules described in new Sec. 413.70(e). We propose also in new paragraph Sec. 413,70(e), that payment for inpatient services of distinct part rehabilitation units of CAHs is made in accordance with regulations governing the IRF PPS at 42 CFR Part 412, Subpart F (Sec. Sec. 412.600 through 412.632). We also would state that payment for inpatient services of distinct part psychiatric units of CAHs is made in accordance with regulations governing IPPS-excluded psychiatric units of hospitals at 42 CFR 413.40. 8. Waiver Authority for Designation of a CAH as a Necessary Provider

Section 405(h) of Public Law 108-173 amended section 1820(c)(B)(i)(II) of the Act by adding language that terminates a State's authority to waive the location requirement for a CAH by designating the CAH as a necessary provider, effective January 1, 2006. Currently, a CAH is required to be located more than a 35-mile drive (or in the case of mountainous terrain or secondary roads, a 15-mile drive) from a hospital or another CAH, unless the CAH is certified by the State as a necessary provider of health care services to residents in the area. Under this provision, after January 1, 2006, States will no longer be able to designate a CAH based upon a determination it is a necessary provider of health care.

In addition, section 405(h) of Public Law 108-173 amended section 1820(h) of the Act to include a grandfathering provision for CAHs that are certified as necessary providers prior to January 1, 2006. Under this provision, any CAH that is designated as a necessary provider in its State's rural health plan prior to January 1, 2006, will be permitted to maintain its necessary provider designation.

In this proposed rule, we are proposing to revise our regulations at Sec. 485.610(c) to incorporate the amendments made by section 405(h) of Public Law 108-173. 9. Payment for Clinical Diagnostic Laboratory Tests

Medicare payment for clinical diagnostic laboratory tests provided to the outpatients of CAHs was established through the regulatory process and published in the Federal Register as part of the FY 2004 IPPS final rule (68 FR 45346, August 1, 2003). Payment to a CAH for clinical diagnostic laboratory tests for outpatients is made on a reasonable cost basis only if the individuals for whom the tests are performed are outpatients of the CAH and are physically present at the CAH at the time specimens are collected. Otherwise, payment for these tests is made on a fee schedule basis.

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We published this final rule to clarify our policy in this area and ensure that all relevant issues were publicly noted. For reasons which are set forth in detail in the FY 2004 IPPS final rule, we do not agree that providing reasonable cost payment to individuals who are not present at the CAH when the specimen is collected is appropriate. We believe that extending reasonable cost payment in these instances is inconsistent with Medicare law and regulations and duplicates existing coverage. It also creates confusion for beneficiaries and others by blurring the distinction between CAHs and other types of providers (for example, SNFs and HHAs) and increases the costs of providing care to Medicare patients without enhancing either the quality or the availability of that care.

Following publication of the FY 2004 IPPS final rule, we received a number of letters and statements in Open Door Calls indicating that some commenters continue to believe that this policy will impose a hardship on Medicare beneficiaries in rural areas. Several of these commenters argued that it might cause frail elderly nursing home patients to have to be moved to a CAH to have blood drawn or other specimen collection performed instead of sending a laboratory technician to the patient's bedside for the same purpose. We agree with the commenters that this would not be an appropriate result. However, we would note that there are also alternative ways in which specimen collection and travel are payable under Medicare (for example, the laboratory benefit under Part B or HAAs that have laboratory provider numbers). Therefore, we do not expect beneficiaries to face reduced access to services under this policy.

In response to continuing claims of potential access problems, we invited commenters to submit further, more specific comments that provide specific information on actual, rather than merely potential or anticipated access problems. In response, we received many communications asserting that these problems would occur, but no credible documentation that they actually are occurring. As a result of these responses, we are not proposing any further change in policy on this issue at this time. We would like to renew our request for specific, verifiable documentation as to any actual access problems being generated by this policy, and will review carefully any such documentation we receive to determine whether current policy should be reconsidered. 10. Proposed Technical Changes in Part 489

In several sections of Part 489, we have discovered a need to update cross-references to conform them to the redesignation of the Medicare transfer rules from Sec. 489.24(d) to Sec. 489.24(d). Specifically, we are proposing to correct the cross-reference to ``Sec. 489.24(d)'' in Sec. Sec. 489.20(m) and 489.53(b)(2) to read ``Sec. 489.24(e)''.

VII. Proposed Changes to the Disclosure of Information Requirements for Quality Improvement Organizations (QIOs)

[If you choose to comment on issues in this section, please include the caption ``Quality Improvement Organizations'' at the beginning of your comment.]

A. Background

Section 1152 of the Act defines a utilization and quality control peer review organization (now referred to as a quality improvement organization (QIO)). Section 1153 provides for contracts with such organizations to review items and services furnished by physicians, other practitioners, and providers to Medicare patients to verify that the items and services are reasonable, medically necessary, and allowable under the Act; meet professionally recognized standards of health care; and are furnished in the appropriate setting. Section 1154 of the Act outlines the functions of a QIO, which include responsibility for: (1) Collecting and maintaining information necessary to carry out its responsibilities; (2) examining pertinent records maintained by the practitioner or provider verifying the medical necessity and quality of services provided by any practitioner or provider of health care services to Medicare patients; (3) ensuring that health care practitioners and providers maintain evidence of medical necessity and quality of health care services provided to Medicare patients; and (4) exchanging information with intermediaries, carriers, and other public or private review organizations as appropriate. Section 1160 of the Act provides that information acquired by QIOs in the exercise of their duties and functions must be held in confidence. Information cannot be disclosed except as allowed under section 1160 of the Act and the existing regulations governing the release of QIO peer review information in 42 CFR Part 480. Specifically, Part 480 sets forth the policies and procedures for disclosure of information collected, acquired, or generated by a QIO (or the review component of a QIO subcontractor) in the performance of its responsibilities under the Act and the Medicare regulations, as well as the acquisition and maintenance of information needed by a QIO to comply with its responsibilities under the Act.

QIOs assist institutions and practitioners seeking to improve the quality of care given to Medicare beneficiaries. CMS aims to ensure that adequate protections of information collected by QIOs are in place and, at the same time, to ensure that the quality improvement activities of these institutions and practitioners are not unnecessarily hindered by regulations. It has come to our attention that the existing regulations omit information disclosure procedures that would allow for the effective and efficient exchange of information that is an essential part of quality improvement activities. In addition, it has come to our attention that, although the QIO does not need the consent of the institution to release nonconfidential information, the existing 30-day advance notice requirement to an institution prior to releasing public information or any other nonconfidential information that identifies an institution, when an institution consents to or requests the release of information, impedes the ability of QIOs to conduct quality improvement work. If the institution requests or consents to the release of the information, the institution is already aware of the QIO's intention to disclose the nonconfidential information. Therefore, we see no reason to require the additional 30-day advance notice. Likewise, there is no reason to require a 30-day notice for practitioners who request the release of information for quality improvement activities or other permissible releases under the regulations.

B. Provisions of the Proposed Regulations

We are proposing to make several changes in the regulations in Part 480 to expedite the exchange of information and minimize delays and expenditures currently required of QIOs, institutions, and practitioners as discussed below.

Existing Sec. 480.105(a) requires that a QIO must notify an identified institution of its intent to disclose nonconfidential information about the institution and provide a copy of the information at least 30 calendar days before the disclosure. Section 480.105 also includes certain notice requirements a QIO must meet before disclosing confidential information that identifies practitioners and physicians. Section 480.106 presently includes several exceptions to these notice

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requirements. We are proposing to revise Sec. 480.106 to establish additional exceptions to the notice requirements in Sec. 480.105(a) and (b)(2). We are proposing to specify that the notice requirements in Sec. 480.105(a) and (b)(2) would not apply if (1) the institution or practitioner has requested, in writing, that the QIO make the disclosure; (2) the institution or practitioner has provided written consent for the disclosure; or (3) the information is public information as defined in Sec. 480.101 and specified in Sec. 480.120.

Existing Sec. 480.133(a)(2)(iii) specifies that a QIO may disclose to any person, agency, or organization confidential information on a particular practitioner or reviewer with the consent of that practitioner or reviewer, provided that the information does not identify other individuals. We are proposing to revise Sec. 480.133(a)(2)(iii) to allow for the release of information at the written request of the practitioner or reviewer, in addition to information releasable with the consent of the practitioner or reviewer under the existing provision. Specifically, the proposed revised Sec. 480.133(a)(2)(iii) would provide that a QIO may disclose confidential information about a particular practitioner or reviewer at the written request of, or with the written consent of that practitioner or reviewer. The recipient of the information would have the same redisclosure rights and responsibilities as the requesting or consenting practitioner or reviewer would, under the authority of Subpart B of Part 480. We are proposing a similar revision to Sec. 480.140 relating to the release of quality review study information. Specifically, we are proposing to revise Sec. 480.140 by adding a new paragraph (d) (the existing paragraphs (d) and (e) would be redesignated as paragraphs (e) and (f), respectively) to provide that a QIO may disclose quality review study information with identifiers of particular practitioners or institutions at the written request of, or with the written consent of, the identified practitioner(s) or institution(s). The recipient of the information would have the same redisclosure rights and responsibilities as the requesting or consenting practitioner or reviewer would, under the authority of Subpart B of Part 480. We believe that these proposed revisions would reduce the existing burden on practitioners, institutions, and QIOs and, at the same time, ensure that necessary protections on information remain in place. These proposed revisions would allow QIOs, institutions, and practitioners to share vital information in an effective manner and further our efforts to ensure the highest quality of care possible for Medicare beneficiaries.

C. Technical Changes

We are proposing to revise the title of Part 480 under Subchapter F of Chapter IV of 42 CFR to conform it to a previous regulatory change in the name of the organization conducting medical reviews under Medicare from a peer review organization to a quality improvement organization. The proposed new title is ``Part 480--Acquisition, Protection, and Disclosure of Quality Improvement Organization Information''.

In a final rule published in the Federal Register on November 24, 1999 (64 FR 66279), we redesignated Part 476 as Part 480. However, as part of the redesignation process, we inadvertently failed to make appropriate changes to the cross-references in various sections under the redesignated Part 480. In this proposed rule, we are proposing to correct those cross-references.

VIII. Proposed Policy Changes Relating to Medicare Provider Agreements for Compliance With Bloodborne Pathogens Standards, Hospital Conditions of Participation, and Fire Safety Requirements for Certain Health Care Facilities

A. Conditions of Participation for Discharge Planning

[If you choose to comment on issues in this section, please include the caption ``Discharge Planning'' at the beginning of your comment.]

1. Background

As part of the definition of ``hospital,'' sections 1861(e)(1) through (e)(8) of the Act set forth specific requirements that a hospital must meet to participate in the Medicare program. Section 1861(e)(9) of the Act specifies that a hospital also must meet other requirements as the Secretary finds necessary in the interest of the health and safety of individuals who are furnished services in hospitals. Implementing regulations for section 1861(c) of the Act, setting forth the conditions of participation (CoPs) that a hospital must meet to participate in the Medicare program, are located in 42 CFR Part 482.

The purposes of these CoPs are to protect patient health and safety and to ensure that high quality care is furnished to all patients in Medicare-participating hospitals. In accordance with section 1864 of the Act, State survey agencies conduct surveys of hospitals to determine compliance with the Medicare CoPs, using interpretive guidelines and survey procedures found in the State Operations Manual (SOM), CMS Publication No. 7. In accordance with section 1865 of the Act and the implementing regulations at 42 CFR 488.5 and 488.6, hospitals accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the American Osteopathic Association (AOA), or other national accreditation organizations are not routinely surveyed by States for compliance with the CoPs, but are deemed to meet most of the hospital CoPs based on their accreditation. However, all hospitals that participate in the Medicare program are required to be in compliance with the CoPs, regardless of their accreditation status. Under section 1905(a) of the Act, the hospital CoPs also apply to hospitals participating in Medicaid (Sec. 440.10(a)(3)(iii) and Sec. 482.1(a)(5)).

Under Sec. 489.10(d), a Medicare provider agreement is subject to the State survey agency's determination of whether a hospital meets the CoPs. The State survey agency makes corresponding recommendations to CMS about the hospital's certification; that is, whether the hospital has met the standards or requirements necessary to provide Medicare and Medicaid services and receives Federal and State reimbursement.

Section 4321(a) of Public Law 105-33 (BBA) amended section 1861(ee)(2) of the Act to require that Medicare-participating hospitals, as part of the discharge planning process, share with each patient, as appropriate, a list of available home health services through individuals and entities, including Medicare-certified home health agencies (HHAs) that participate in Medicare, serve the geographic area in which the patient resides, and request to be listed by the hospital as available. In addition, section 4321(a) prohibits hospitals from limiting or steering patients to any specific HHA or qualified provider that may provide posthospital home health services and requires hospitals to identify (in a form and manner specified by the Secretary) any HHA or other entity to whom the individual is referred in which the hospital has a disclosable financial interest consistent with section 1866(a)(1)(S) of the Act or which has a financial interest in the hospital if the patient is referred to that entity.

Congress enacted section 4321 of Public Law 105-33 to protect patient choice and enable Medicare beneficiaries to make more informed choices about the providers from which

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they receive certain Medicare services. We believe that this provision was intended to address concerns that some hospitals were referring patients only to HHAs in which they had a financial interest, and that shared financial relationships were influencing referrals to other entities. Hospitals essentially have a captive patient population and, through the discharge planning process, can influence a patient's choice regarding who provides posthospitalization services.

Congress also enacted section 926 of Public Law 108-173 (MMA) to improve the administration of the Medicare program by protecting patient choice and enabling Medicare beneficiaries to make more informed choices about the providers from which they receive Medicare services. Section 926(a) of Public Law 108-173 requires the Secretary to publicly provide information that enables hospital discharge planners, Medicare beneficiaries, and the public to identify SNFs that are participating in the Medicare program. Section 926(b) of Public Law 108-173 amended section 1861(ee)(2)(D) of the Act to require Medicare- participating hospitals, as part of the discharge planning process, to include a discharge planning evaluation of a patient's likely need for posthospital extended care services and the availability of these services through facilities that participate in the Medicare program and that serve the geographic area in which the patient resides. The amendments to the Act made by section 926(b) of Public Law 108-173 apply to discharge plans made on or after a date specified by the Secretary, which may be no later than 6 months after the Secretary provides for the availability of information required by section 926(a) of Public Law 108-173. 2. Implementation

We implemented the requirements of section 4321(a) of Public Law 105-33 relating to information on HHAs through a HCFA (now CMS) directive that was issued to the Regional Offices and State survey agencies on October 31, 1997. Enforcement has been carried out through the State agency survey and certification process. We note that even though it was not a requirement under section 4321(a) to provide currently available information on HHAs to the public (as now required under section 1861(ee)(2)(D) of the Act, as amended), we have established a ``Home Health Compare'' link on the CMS Web site, http://www.medicare.gov, that identifies HHAs that are currently participating

in the Medicare or Medicaid program.

We are now proposing to incorporate in our regulations under Sec. 482.43 the requirements of section 4321(a) of Public Law 105-53 relating to providing information on HHAs to hospital patients as part of the discharge planning process. We note that we had previously issued a proposed rule on December 19, 1997 (62 FR 66726) to implement the provisions of section 4321(a) of Public Law 105-33. However, section 902 of Public Law 108-173 now requires us to finalize rules within 3 years after publication of the proposed rule, except under ``exceptional circumstances.'' While it is not clear whether Congress intended this policy to apply retroactively, out of an abundance of caution, we are issuing a new proposed rule because of the length of time that has elapsed since the issuance of the 1997 proposed rule. Moreover, the provisions of Public Law 108-173 contain information requirements for SNFs substantially similar to the ones required for HHAs. In developing this second proposed rule, we have taken into consideration the issues raised in the public comments we received on the December 19, 1997 proposed rule relating to HHAs.

Information on SNFs related to the requirement imposed by section 926(a) of Public Law 108-173 is currently available to the public and can be accessed at the CMS Web site, http://www.medicare.gov, by clicking on

the ``Nursing Home Compare'' link or by calling 1-800-MEDICARE (800- 633-4227). Nursing Home Compare, launched in November 2002, meets the statutory requirement of section 926(a) by enabling hospital discharge planners, Medicare beneficiaries, and the public to identify the 17,000 nursing homes that participate in the Medicare or Medicaid program. Nursing Home Compare can be used to locate a nursing home by State and county, by proximity (city or zip code), or by name. In addition, Nursing Home Compare provides detailed information about the past performance of every Medicare-certified and Medicaid-certified nursing home in the country. The data on this Web site describe nursing home characteristics, quality measures, inspection results, and nursing staff information. The Nursing Home Compare tool received 9.3 million page views in 2003 and was the most popular tool on http://www.medicare.gov.

If an interested individual does not have access to the Internet, the individual can call 1-800-MEDICARE (800-633-4227) and request a printout of the nursing homes in a designated area.

We are proposing to amend the regulations at Sec. 482.43 to incorporate the provisions of section 4321(a) of Public Law 105-33 and section 926(b) of Public Law 108-173 into the hospital CoPs. Specifically, we are proposing to add new paragraphs (c)(6), (c)(7), and (c)(8) to include the requirement for hospitals to provide lists of Medicare-certified HHAs and SNFs as part of the discharge planning process. The discharge planning evaluation would be required to include a list of Medicare-certified HHAs that have requested to be placed on the list as available to the patient and that serve the geographic area in which the patient resides. We are proposing to require the SNF list to include Medicare-certified SNFs located in the geographic area in which the patient requests. We are not requiring that the list of Medicare-certified SNFs contain those SNFs that are just located in the area in which the patient resides. Because many available Medicare- certified SNFs are not located in proximity to where the patient resides, especially in rural areas, we believe that a requirement that restricts a patient to SNFs in areas where the patient resides is too restrictive and would limit the availability of posthospital extended care services to Medicare beneficiaries.

Section 4321(a) of Public Law 105-33 requires listing the availability of home health services through individuals and entities. We have received inquiries regarding the identity of those individuals and entities. We are proposing that, because section 1861(m) of the Act identifies home health services as ``specific items or services furnished to an individual, who is under the care of a physician, by an HHA, or by others under arrangements with an HHA,'' section 4321(a) is referring to Medicare-participating HHAs.

We are proposing that the hospital present the list of HHAs or SNFs only to patients for whom home health care or posthospital extended care services are indicated as appropriate, as determined by the discharge planning evaluation. We do not expect that patients without a need for home health care or posthospital extended care services would receive the list. In addition, we are proposing to require the hospital to document in the patient's medical record that a list of HHAs or SNFs was presented to the patient or an individual acting on the patient's behalf. Hospitals would not have to duplicate the list in the patient's medical record. The information in the medical record would serve as documentation that the requirement was met. The hospital would have the flexibility to determine

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exactly how and where in the patient's medical record this information would be documented.

We are proposing that a hospital have the flexibility to implement the requirement to present the lists in a manner that is most efficient and least burdensome in its particular setting. A hospital can simply print a list from the Home Health Compare or Nursing Home Compare site on the CMS Web site, http://www.medicare.gov or develop and maintain its own

list of HHAs and SNFs. When the patient requires home health services, the CMS Web site list would be printed based on the geographic area in which the patient resides. When the patient requires posthospital extended care services, the CMS Web site list would be printed based on the geographic area requested by the patient. Or, in the rare instance when a hospital does not have Internet access, the hospital can call 1- 800-MEDICARE (1-800-633-4227) to request a printout of a list of HHAs or SNFs in the desired geographic area. Information on this Web site should not be construed as an endorsement or advertisement for any particular HHA or SNF.

If a hospital chooses to develop its own list of HHAs or SNFs, the hospital would have the flexibility of designing the format of the list. However, the list should be utilized neither as a recommendation nor endorsement by the hospital of the quality of care of any particular HHA or SNF. If a HHA or SNF does not meet all of the criteria, (Medicare-certified and is located in the geographic area in which the patient resides or in the geographic area requested by the patient) for inclusion on the list, we are not proposing to require the hospital to place that HHA or SNF on the list. In addition, in accordance with the provisions of the Act, we are proposing that HHAs must request to be listed by the hospital as available. Also, we are proposing that the list must be legible and current (updated at least annually), and that the listed information be shared with the patient or an individual acting on the patient's behalf at least once during the discharge planning process. However, we would specify that information regarding the availability of HHAs or SNFs may need to be presented more than once during the discharge planning process to meet the patient's need for additional information or as the patient's needs and condition change.

We are proposing to require that, as part of the discharge planning process, the hospital must inform the patient or the patient's family of their freedom to choose among participating Medicare providers of posthospital services and must, when possible, respect patient and family preferences when they are expressed (proposed Sec. 482.43(c)(7)). In addition, the hospital may not use the discharge plan to specify or otherwise limit the patient's choice of qualified providers that may provide home health care or posthospital extended care services. The intent of this proposed provision is to provide the patient with the freedom of choice to determine which HHA or SNF will provide care in accordance with section 1802 of the Act, which states that beneficiaries may obtain health services from any Medicare- participating provider.

Finally, we are proposing to require the hospital to identify in each discharge plan those HHAs or SNFs to which the patient is referred that the hospital has a disclosable financial interest or HHAs or SNFs that have a financial interest in the hospital (proposed Sec. 482.43(c)(8)). For the purposes of implementing section 4321(a) of Public Law 105-33, we are proposing to define a disclosable ``financial interest'' as any financial interest that a hospital is required to report according to the provider enrollment process, which is governed by section 1124 of the Act and implementing regulations located in 42 CFR Part 420, Subpart C, and manual provisions. If a hospital refers patients about to be discharged and in need of posthospital services only to entities it owns or controls, the hospital would be infringing on the rights of the patient to choose the facility he or she would like to go to for services. The proposed disclosable financial interest requirement is an effort to increase the beneficiary's awareness of the actual or potential financial incentives for a hospital as a result of the referral. To allow hospitals the flexibility of determining how these financial interests are disclosed to the patient, we are not requiring a specific form or manner in which the hospital must disclose financial interest. The hospital could simply highlight or otherwise identify those entities in which a financial interest exists directly on the HHA and SNF lists. Or, the hospital could choose to maintain a separate list of those entities in which a financial interest exists.

Hospitals and managed care organizations (MCOs) have expressed concern as to whether the change made by section 4321(a) of Public Law 105-33 was intended to apply to patients in managed care plans. MCO members are limited as to what services they may obtain from sources other than through the MCO. We believe that providing MCO members with a standardized list of all HHAs or SNFs in the requested geographic area could be misleading and potentially financially harmful because MCO enrollees may be liable for services that they obtain from providers other than the MCO, and patients may interpret a list of HHAs or SNFs that are not available to them under their health plan to mean that they are authorized by the MCO. This does not mean that Medicare MCO members in particular are denied the freedom of choice they are entitled to under section 1802 of the Act. Medicare beneficiaries exercise their freedom of choice when they voluntarily enroll in the MCO and agree to adhere to the plan's coverage provisions.

The list provided to MCO patients should include available and accessible HHAs or SNFs in a network of the patient's MCO. Hospitals also have the option, in the course of discussing discharge planning with patients, to determine whether the beneficiary has agreed to excluded services or benefits or coverage limitations through enrollment in a MCO. If this is the case, the hospital could inform the patient of the potential consequences of going outside the plan for services.

We also have received many inquiries about how the requirements contained in section 4321(a) of Public Law 105-33 are monitored and enforced. Once codified in the hospital CoPs, a hospital's obligations under both section 4321(a) of Public Law 105-33 and section 926(b) of Public Law 108-173 would be monitored as part of the hospital survey and certification process. Anyone aware of instances in which patients are inappropriately influenced or steered toward a particular HHA or SNF in a way that violated the regulation would have the opportunity to file a complaint with the State survey agency. The State survey agency would then investigate and follow up with the complainant. Noncompliance with the hospital CoPs may result in a hospital losing its ability to participate in the Medicare program.

Requiring hospitals to provide a list of Medicare-certified HHAs or SNFs would provide patients with more options and assist them in making informed decisions about the providers from which they receive Medicare services. Specifically, the intent of the proposed modifications to the discharge planning CoPs is to provide the patient with the freedom of choice to determine which HHA or SNF available in the geographic area in which the patient resides or the geographic area requested by the patient, would provide them care in accordance with section 1802 of the Act,

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which states that beneficiaries may obtain health services from any Medicare participating provider.

B. Compliance With Bloodborne Pathogens Standards

[If you choose to comment on issues in this section, please include the caption ``Bloodborne Pathogens Standards'' at the beginning of your comment.]

Section 1866(a)(1) of the Act sets forth provider agreement requirements that Medicare-participating hospitals must meet. Implementing regulations for these requirements are set forth at 42 CFR 489.20.

Section 947 of Public Law 108-173 amended section 1866(a)(1) of the Act to require that, by July 1, 2004, hospitals not otherwise subject to the Occupational Safety and Health Act (OSHA) (or a State occupational safety and health plan that is approved under section 18(b) of that Act) must comply with the OSHA bloodborne pathogens (BBP) standards at 29 CFR 1910.1030 as part of their Medicare provider agreements. These OSHA standards can be found on OSHA's Web site at http://www.osha.gov/SLTC/bloodbornepathogens/. Section 947, which

applies to hospitals participating in Medicare as of July 1, 2004, was enacted to ensure that all hospital employees who may come into contact with human blood or other potentially infectious materials in the course of their duties are provided proper protection from bloodborne pathogens. Section 947 further provides that a hospital that fails to comply with OSHA's BBP standards may be subject to a civil money penalty. The civil money penalty will be imposed and collected in the same manner that civil money penalties are imposed and collected under section 1128A(a) of the Act. However, failure to comply with the BBP standards will not lead to termination of a hospital's provider agreement.

Currently, most hospitals are subject either to the OSHA BBP standards or to other BBP standards (generally, State standards) that meet or exceed the OSHA standards. However, non-Federal public hospitals located in States that do not have their own BBP standards are not subject to OSHA standards, including the OSHA BBP standards. Twenty-six States and the District of Columbia, and Guam do not have their own BBP standards under an OSHA-approved State plan. Therefore, an estimated 600,000 employees of hospitals located in those 26 States, the District of Columbia, and Guam are not afforded the same protections from BBPs as employees of all other hospitals in the United States. The States and territories that would be affected by the change made by section 947 of Public Law 108-173 are Alabama, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Maine, Massachusetts, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Texas, West Virginia, Wisconsin, District of Columbia, and Guam.

We are proposing to incorporate the provisions of Public Law 108- 173 in Sec. 489.20 of the Medicare regulations governing provider agreements by adding a new paragraph (t). Paragraph (t) would specify that hospitals not otherwise subject to the OSHA BBP standards must comply with the OSHA BBP standards at 29 CFR 1910.1030 as part of their Medicare provider agreement. The proposed regulations would further specify that if a hospital fails to comply with OSHA's BBP standards, the hospital may be subject to a civil money penalty. The civil money penalty would be imposed and collected in the same manner that civil money penalties are imposed and collected under section 1128A(a) of the Act. However, failure to comply with the BBP standards would not lead to termination of a hospital's provider agreement. The proposed regulations would also refer to the Federal Civil Penalties Inflation Adjustment Act. This reference is intended to alert the reader that the civil money penalty amounts under section 1128A(a) of the Act may, under the Federal Civil Penalties Inflation Adjustment Act, be increased to adjust for inflation.

C. Fire Safety Requirements for Certain Health Care Facilities

[If you choose to comment on issues in this section, please include the caption ``Life Safety Code'' at the beginning of your comment.]

1. Background

On January 10, 2003, we published a final rule in the Federal Register (68 FR 1374) that adopted the 2000 edition of the Life Safety Code (LSC) published by the National Fire Protection Association (NFPA) as the fire safety requirements (with specified exceptions) that we are applying to the following types of providers participating in the Medicare and Medicaid programs: long-term care facilities, hospitals, intermediate care facilities for the mentally retarded (ICF/MRs), ambulatory surgical centers (ASCs), hospices that provide inpatient services, religious nonmedical health care institutions, CAHs, and Programs of All-Inclusive Care for the Elderly (PACE).

In addition to adopting the 2000 edition of the LSC, we stated our intent to delete references to all previous editions of the LSC. However, as a result of a technical error, the reference to previous editions of the LSC in Sec. 483.70(a)(1) of the regulations for long- term care facilities was not deleted. Allowing long-term care facilities to comply with the 1967, 1973, and 1981 editions of the LSC would not adequately protect long-term care facility patients from the threat of fire and other emergencies. These editions do not recognize newer technology, nor the advances in fire safety that have been developed in the ensuing years. In addition, the existing conflicting regulatory language is confusing and contrary to the best interests of long-term care facilities and their patients. Therefore, in this proposed rule, we are proposing to correct this technical error. We are not proposing to make any substantive policy change.

In the January 10, 2003 final rule, we also specified that we were not adopting the provisions of Chapter 19.3.6.3.2, exception number 2 of the LSC regarding the use of roller latches for application to religious nonmedical health care institutions, hospices, hospitals, long-term care facilities, PACE programs, ICF/MRs and CAHs. We prohibit the use of roller latches in existing and new buildings, except for ASCs under Chapter 20 and Chapter 21 of the LSC, and provide for the replacement of existing roller latches, phased in over a 3-year period beginning March 11, 2003. We indicated that allowing health care facilities to continue using roller latches would not adequately protect patients in those facilities. Through fire investigations, roller latches have proven to be an unreliable door latching mechanism requiring extensive on-going maintenance to operate properly. Many roller latches in fire situations failed to provide adequate protection to patients in their room during an emergency. Roller latches that are not maintained pose a threat to the health and safety of patients and staff. We added that we had found through our online survey, certification, and reporting (OSCAR) system data that doors that include roller latches are consistently one of our most cited deficiencies. In fact, in SNFs, roller latches in corridor doors are consistently the number one cited deficiency under the life safety requirements.

We have learned that the language regarding the date when these facilities must be in compliance with the

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prohibition on the use of roller latch may be misinterpreted and needs to be clarified. In this proposed rule, we are proposing to clarify our intent by revising the regulations as discussed under section VIII.C.2. of this preamble. We are not proposing to make any substantive policy changes.

The flexibility of the January 10, 2003 final rule would remain the same. The Secretary has broad authority to grant waivers to facilities under section 1819(d)(2)(B) and section 1919(d)(2)(B) of the Act. The proposed amendments in this proposed rule would continue to allow the Secretary to grant waivers on a case-by-case basis if the safety of the patients would not be compromised and if specific provisions of the LSC would result in unreasonable hardship on the provider. The Secretary also may accept a State's fire and safety code instead of the LSC if the State's fire and safety code adequately protects patients. Further, the NFPA's Fire Safety Evaluation System (FSES), an equivalency system, provides alternatives to meeting various provisions of the LSC, thereby achieving the same level of fire protection as the LSC. 2. Proposed Changes to the Regulations

We are proposing to revise Sec. 483.70(a) to delete references to the 1967, 1973, and 1981 editions of the LSC.

We are proposing to revise the following regulations applicable to the specified facilities to clarify that the facility must be in compliance with Chapter 19.2.9, Emergency Lighting, beginning March 13, 2006. In addition, we would also specify that, beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 2 (concerning roller latches), does not apply to the facility.

a. For religious nonmedical health care institutions: Sec. 403.744(a) and (c).

b. For hospices, Sec. 418.100(d)(1), (d)(4), and new (d)(5).

c. For PACE programs, Sec. 460.72(b)(1)(i), (b)(3), and new (b)(4).

d. For hospitals, Sec. 482.41(b).

e. For long-term care facilities, Sec. 483.70(a).

f. For ICF/MRs, Sec. 483.470(j).

g. For CAHs, Sec. 485.623(d)(1), (d)(5), and new (d)(6).

IX. MedPAC Recommendations

[If you choose to comment on issues in this section, please include the caption ``MedPAC Recommendations'' at the beginning of your comment.]

We are required by section 1886(e)(4)(B) of the Act to respond to MedPAC's IPPS recommendations in our annual proposed IPPS rule. We have reviewed MedPAC's March 1, 2004 ``Report to the Congress: Medicare Payment Policy'' and have given it careful consideration in conjunction with the proposals set forth in this document. For further information relating specifically to the MedPAC report or to obtain a copy of the report, contact MedPAC at (202) 653-7220, or visit MedPAC's Web site at: http://www.medpac.gov.

We note that MedPAC's recommendations in its March 1, 2004 report included only one recommendation concerning Medicare inpatient hospital payment policies. MedPAC's Recommendation 3A-1 states that Congress should increase payment rates for the IPPS by the projected rate of increase in the hospital market basket for FY 2005. We note that section 501(a)(3) of Public Law 108-173 requires that the payment rates for the IPPS be increased by the market basket percentage increase for all hospitals during FYs 2005, 2006, and 2007, except that it also provides for reducing the update by 0.4 percentage points for any hospital that fails to submit data on a list of 10 quality indicators. We discuss this recommendation further in Appendix B of this proposed rule in the context of our recommendation concerning the update factor for inpatient hospital operating costs and for hospitals and hospital distinct-part units excluded from the IPPS.

X. Other Required Information

A. Requests for Data From the Public

In order to respond promptly to public requests for data related to the prospective payment system, we have established a process under which commenters can gain access to raw data on an expedited basis. Generally, the data are available in computer tape or cartridge format; however, some files are available on diskette as well as on the Internet at http://www.hcfa.gov/stats/pufiles.htm. Data files and the

cost for each file, if applicable, are listed below. Anyone wishing to purchase data tapes, cartridges, or diskettes should submit a written request along with a company check or money order (payable to CMS-PUF) to cover the cost to the following address: Centers for Medicare & Medicaid Services, Public Use Files, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520, (410) 786-3691. Files on the Internet may be downloaded without charge. 1. CMS Wage Data

This file contains the hospital hours and salaries for FY 2001 used to create the proposed FY 2005 prospective payment system wage index. The file will be available by the beginning of February for the NPRM and the beginning of May for the final rule.

Wage PPS Processing year

data fiscal year year

2004

2001 2005 2003

2000 2004 2002

1999 2003 2001

1998 2002 2000

1997 2001 1999

1996 2000 1998

1995 1999 1997

1994 1998 1996

1993 1997 1995

1992 1996 1994

1991 1995 1993

1990 1994 1992

1989 1993 1991

1988 1992

These files support the following:

NPRM published in the Federal Register.

Final Rule published in the Federal Register.

Media: Diskette/most recent year on the Internet.

File Cost: $165.00 per year.

Periods Available: FY 2005 PPS Update. 2. CMS Hospital Wages Indices (Formerly: Urban and Rural Wage Index Values Only)

This file contains a history of all wage indices since October 1, 1983.

Media: Diskette/most recent year on the Internet.

File Cost: $165.00 per year.

Periods Available: FY 2005 PPS Update. 3. PPS SSA/FIPS MSA State and County Crosswalk

This file contains a crosswalk of State and county codes used by the Social Security Administration (SSA) and the Federal Information Processing Standards (FIPS), county name, and a historical list of Metropolitan Statistical Areas (MSAs).

Media: Diskette/Internet.

File Cost: $165.00 per year.

Periods Available: FY 2005 PPS Update. 4. Reclassified Hospitals New Wage Index (Formerly: Reclassified Hospitals by Provider Only)

This file contains a list of hospitals that were reclassified for the purpose of assigning a new wage index. Two versions of these files are created each year. They support the following:

NPRM published in the Federal Register.

Final Rule published in the Federal Register.

Media: Diskette/Internet.

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File Cost: $165.00 per year.

Periods Available: FY 2005 PPS Update. 5. PPS-IV to PPS-XII Minimum Data Set

The Minimum Data Set contains cost, statistical, financial, and other information from Medicare hospital cost reports. The data set includes only the most current cost report (as submitted, final settled, or reopened) submitted for a Medicare participating hospital by the Medicare fiscal intermediary to CMS. This data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Tape/Cartridge.

File Cost: $770.00 per year.

Periods beginning and before on or after

PPS-IV........................................ 10/01/86 10/01/87 PPS-V......................................... 10/01/87 10/01/88 PPS-VI........................................ 10/01/88 10/01/89 PPS-VII....................................... 10/01/89 10/01/90 PPS-VIII...................................... 10/01/90 10/01/91 PPS-IX........................................ 10/01/91 10/01/92 PPS-X......................................... 10/01/92 10/01/93 PPS-XI........................................ 10/01/93 10/01/94 PPS-XII....................................... 10/01/94 10/01/95

(Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Minimum Data Sets are part of the PPS-XIII, PPS-XIV, PPS- XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Hospital Data Set Files (refer to item 7 below).) 6. PPS-IX to PPS-XII Capital Data Set

The Capital Data Set contains selected data for capital-related costs, interest expense and related information and complete balance sheet data from the Medicare hospital cost report. The data set includes only the most current cost report (as submitted, final settled or reopened) submitted for a Medicare certified hospital by the Medicare fiscal intermediary to CMS. This data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Tape/Cartridge.

File Cost: $770.00 per year.

Periods beginning and before. on or after

PPS-IX........................................ 10/01/91 10/01/92. PPS-X......................................... 10/01/92 10/01/93. PPS-XI........................................ 10/01/93 10/01/94. PPS-XII....................................... 10/01/94 10/01/95

(Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Capital Data Sets are part of the PPS-XIII, PPS-XIV, PPS- XV, PPS-XVI, PPS-XVII, PPS-XVIII, and PPS-XIX Hospital Data Set Files (refer to item 7 below).) 7. PPS-XIII to PPS-XIX Hospital Data Set

The file contains cost, statistical, financial, and other data from the Medicare Hospital Cost Report. The data set includes only the most current cost report (as submitted, final settled, or reopened) submitted for a Medicare-certified hospital by the Medicare fiscal intermediary to CMS. The data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Diskette/Internet.

File Cost: $2,500.00.

Periods beginning and before. on or after

PPS-XIII...................................... 10/01/95 10/01/96. PPS-XIV....................................... 10/01/96 10/01/97. PPS-XV........................................ 10/01/97 10/01/98. PPS-XVI....................................... 10/01/98 10/01/99. PPS-XVII...................................... 10/01/99 10/01/00. PPS-XVIII..................................... 10/01/00 10/01/01. PPS-XIX....................................... 10/01/01 10/01/02

8. Provider-Specific File

This file is a component of the PRICER program used in the fiscal intermediary's system to compute DRG payments for individual bills. The file contains records for all prospective payment system eligible hospitals, including hospitals in waiver States, and data elements used in the prospective payment system recalibration processes and related activities. Beginning with December 1988, the individual records were enlarged to include pass-through per diems and other elements.

Media: Diskette/Internet.

File Cost: $265.00.

Periods Available: FY 2005 PPS Update. 9. CMS Medicare Case-Mix Index File

This file contains the Medicare case-mix index by provider number as published in each year's update of the Medicare hospital inpatient prospective payment system. The case-mix index is a measure of the costliness of cases treated by a hospital relative to the cost of the national average of all Medicare hospital cases, using DRG weights as a measure of relative costliness of cases. Two versions of this file are created each year. They support the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Diskette/most recent year on Internet.

Price: $165.00 per year/per file.

Periods Available: FY 1985 through FY 2005. 10. DRG Relative Weights (Formerly Table 5 DRG)

This file contains a listing of DRGs, DRG narrative descriptions, relative weights, and geometric and arithmetic mean lengths of stay as published in the Federal Register. The hard copy image has been copied to diskette. There are two versions of this file as published in the Federal Register:

NPRM.

Final rule.

Media: Diskette/Internet.

File Cost: $165.00.

Periods Available: FY 2005 PPS Update. 11. PPS Payment Impact File

This file contains data used to estimate payments under Medicare's hospital inpatient prospective payment systems for operating and capital-related costs. The data are taken from various sources, including the Provider-Specific File, Minimum Data Sets, and prior impact files. The data set is abstracted from an internal file used for the impact analysis of the changes to the prospective payment systems published in the Federal Register. This file is available for release 1 month after the proposed and final rules are published in the Federal Register.

Media: Diskette/Internet.

File Cost: $165.00.

Periods Available: FY 2005 PPS Update. 12. AOR/BOR Tables

This file contains data used to develop the DRG relative weights. It contains mean, maximum, minimum, standard deviation, and coefficient of variation statistics by DRG for length of stay and standardized charges. The BOR tables are ``Before Outliers Removed'' and the AOR is ``After Outliers Removed.'' (Outliers refers to statistical outliers, not payment outliers.)

Two versions of this file are created each year. They support the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Diskette/Internet.

File Cost: $165.00.

Periods Available: FY 2005 PPS Update. 13. Prospective Payment System (PPS) Standardizing File

This file contains information that standardizes the charges used to

[[Page 28339]]

calculate relative weights to determine payments under the prospective payment system. Variables include wage index, cost-of-living adjustment (COLA), case-mix index, disproportionate share, and the Metropolitan Statistical Areas (MSAs). The file supports the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Internet.

File Cost: No charge.

Periods Available: FY 2005 PPS Update.

For further information concerning these data tapes, contact the CMS Public Use Files Hotline at (410) 786-3691.

Commenters interested in obtaining or discussing any other data used in constructing this rule should contact James Hart at (410) 786- 9520.

B. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995 (PRA), we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to evaluate fairly whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

The need for the information collection and its usefulness in carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection burden.

The quality, utility, and clarity of the information to be collected.

Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

Therefore, we are soliciting public comments on each of these issues for the information collection requirements discussed below.

The following information collection requirements in this proposed rule and the associated burdens are subject to the PRA.

Section 412.22 Excluded Hospitals and Hospital Units: General Rules

In summary, this section outlines the requirements for excluded hospitals and hospital units. This section states that a LTCH that occupies space in a building used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital must notify its fiscal intermediary and CMS in writing of its co-location.

The collection requirement has not changed. While this requirement is subject to the PRA, this requirement is currently approved in OMB No. 0938-0897, with a current expiration date of July 31, 2006.

Section 412.25 Excluded Hospital Units: Common Requirements

In summary, this section proposes to apply the excluded hospital unit requirements to psychiatric or rehabilitation CAH units that are now permitted under the provisions of Public Law 108-173. This section states that if a psychiatric rehabilitation unit of a CAH does not meet the applicable requirements, payment will not be made and will resume only after the unit has demonstrated to CMS that it meets the applicable requirements.

We believe the collection requirements are exempt as defined in 5 CFR 1320.4, information collections conducted or sponsored during the conduct of a criminal or civil action, or during the conduct of an administrative action or investigation, or audit. We also believe the collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) because we believe this would affect less than 10 persons.

Section 412.64 Federal Rates for Inpatient Operating Costs for Federal Fiscal Years 2005 and Subsequent Fiscal Years

In summary, this section outlines the proposed requirements and process for determining the adjustment of the wage index to account for the commuting patterns of hospital workers. This section states that a hospital may waive the application of the wage index adjustment by notifying CMS in writing within 45 days after the publication of the annual notice of proposed rulemaking for the IPPS.

The burden associated with this requirement is the time and effort for the hospital to prepare a written notice asking to waive the application of the wage index adjustment and send the notice to CMS.

The burden associated with this requirement is estimated to be 30 minutes per hospital. Therefore, we estimate it would take 5 total annual hours (30 minutes x 10 hospitals seeking a waiver).

Section 412.103 Special Treatment: Hospitals Located in Urban Areas and That Apply for Reclassification as Rural

In summary, this section outlines the requirements and process for a rural hospital to become reclassified. This section states that a prospective payment hospital that is located in an urban area may be reclassified as a rural hospital if it submits an application in accordance with this section.

We are proposing to revise this section; however, the collection requirement remains the same. While this requirement is subject to the PRA, this requirement is currently approved in OMB No. 0938-0573, with a current expiration date of October 31, 2005.

Section 412.101 Special Treatment: Inpatient Hospital Payment Adjustment for Low-Volume Hospitals

In summary, this section outlines the proposed requirements for determining a payment adjustment for low-volume hospitals. This section states that in order to qualify for the higher incremental costs adjustment, the hospital must provide its fiscal intermediary with evidence that it meets the distance requirement to make a determination that the hospital meets the distance requirement specified in this section.

The burden associated with this requirement is the time and effort for the hospital to provide the fiscal intermediary with evidence that it meets the specified distance requirement.

The burden associated with this requirement is estimated to be 1 hour per hospital. Therefore, we estimate it would take 500 total annual hours (1 hour x 500 hospitals seeking the incremental costs adjustment).

Section 412.211 Puerto Rico Rates for Federal Fiscal Year 2004 and Subsequent Fiscal Years

In summary, this section outlines the requirements and process for determining the adjusted prospective payment rate for inpatient hospital services in Puerto Rico. This section states that a hospital may waive the application of the proposed wage index adjustment for commuting hospital employees by notifying CMS in writing within 45 days after the publication of the annual notice of proposed rulemaking for the inpatient prospective payment system.

The burden associated with this requirement is the time and effort for the hospital to prepare a written notice asking to waive the application of the wage index adjustment and send the notice to CMS.

The burden associated with this requirement is estimated to be 30 minutes per hospital. Therefore, we estimate it would take 5 total annual hours (30 minutes x 10 hospitals seeking a waiver).

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Section 412.234 Criteria for All Hospitals in an Urban County Seeking Redesignation to Another Urban Area

In summary, this section outlines the requirements for determining an urban hospital's redesignation to another urban area. This section states that hospitals must submit appropriate wage data to the fiscal intermediary as outlined.

We are proposing to revise this section. However, the collection requirement remains the same. While this requirement is subject to the PRA, this requirement is currently approved in OMB No.0938-0907, with a current expiration date of December 31, 2005.

Section 413.70 Payment for Services of a CAH

In summary, this section outlines the requirements for a CAH to make an election to be paid for outpatient facility services plus the fee schedule for professional services under an optional single payment method. This section states that a CAH may make this election in any cost reporting period. This election must be made in writing, made on an annual basis, and delivered to the fiscal intermediary servicing the CAH at least 30 days before the start of each affected cost reporting period.

We are proposing to revise this section. However, the collection requirement remains the same. While this requirement is subject to the PRA, this requirement is currently approved in OMB No. 0938-0050, with a current expiration date of November 30, 2005.

Section 413.78 Direct GME Payments: Determinations of the Total Number of FTE Residents

In summary, this section outlines the requirements for the determination of the total number of FTE residents in determining direct GME payments to hospitals. Currently, this section states that, for residents who spend time in nonprovider settings, there must be a written agreement between the hospital and the outside entity that states that the resident's compensation for training time spent outside of the hospital setting is to be paid by the hospital. This section proposes to remove the written agreement requirement.

This requirement is exempt from the PRA in accordance with Public Law 99-272 or Public Law 108-173, or both.

Section 413.79 Direct GME Payments: Determination of the Weighted Number of FTE Residents

In summary, this section outlines the requirements for the determination of the weighted number of FTE residents for direct GME payments to hospitals. This section proposes that a hospital seeking an adjustment to the limit on its unweighted resident count under section 422 of Public Law 108-173 must provide documentation justifying the adjustment. In addition, the section states that a hospital wishing to receive a temporary adjustment to its FTE resident cap because it is participating in a Medicare GME affiliated group must submit the Medicare GME affiliation agreement to the CMS fiscal intermediary and to CMS's Central Office. This section specifies the information that a request must contain.

These requirements are exempt from the PRA in accordance with Public Law 99-272 or Public Law 108-173, or both.

Section 413.80 Determination of Weighting Factors for Foreign Medical Graduates

In summary, this section specifies the information that a hospital must submit to the fiscal intermediary to include foreign medical graduates in its FTE count for a particular cost reporting period.

This requirement is exempt from the PRA in accordance with Public Law 99-272 or Public Law 108-173, or both.

Section 413.83 Adjustment of a Hospital's Target Amount or Prospective Payment Hospital-Specific Rate

In summary, this section outlines the requirements for seeking an adjustment to the hospital's target amount or hospital-specific rate. This section states that a hospital may request that the intermediary review the classification of operating costs that were previously misclassified for purposes of adjusting the hospital's target amount or hospital-specific rate. A hospital's request for review must include sufficient documentation demonstrating that an adjustment is warranted. This section also specifies the terms in which the information should be provided.

This requirement is exempt from the PRA in accordance with Public Law 99-272 or Public Law 108-173, or both.

Section 480.106 Exceptions to QIO Notice Requirements

In summary, we are proposing to revise this section to add exceptions to the notice requirements for disclosure of QIO information to any person, agency, or organization. The notice requirements would not apply if the institution or practitioner has requested, in writing, that the QIO make the disclosure; the institution or practitioner has provided, in writing, consent for the disclosure; or the information is public information.

The burden associated with these requirements is the time and effort for the institution or practitioner to provide a written request that the QIO make the disclosure or consent to the disclosure.

We believe the collection requirements are exempt as defined in 5 CFR 1320.4, information collections conducted or sponsored during the conduct of a criminal or civil action, or during the conduct of an administrative action or investigation, or audit. We also believe the collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) because we believe this would affect less than 10 persons.

Section 480.133 Disclosure of Information about Practitioners, Reviewers and Institutions

In summary, this section outlines the requirements concerning the disclosure of QIO information about practitioners, reviewers, and institutions. This section states that a QIO may disclose information on a particular practitioner or reviewer at the written request of or with the written consent of that practitioner or reviewer, with the recipient subject to the same rights and responsibilities on redisclosure as the requesting or consenting practitioner or reviewer.

We believe the collection requirements are exempt as defined in 5 CFR 1320.4, information collections conducted or sponsored during the conduct of a criminal or civil action, or during the conduct of an administrative action or investigation, or audit. We also believe the collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) because we believe this would affect less than 10 persons.

Section 480.140 Disclosure of Quality Review Study Information

In summary, this section outlines the requirements concerning the disclosure of quality review study information. This section states that a QIO may disclose quality review study information with identifiers of particular practitioners or institutions, or both, at the written request of, or with the written consent of, the identified practitioner(s) or institution(s). The consent or request must specify the information that is to be disclosed and the intended recipient of the information. The recipient would be subject to the same rights and responsibilities on redisclosure as the requesting or consenting practitioner or institution.

We believe the collection requirements are exempt as defined in 5 CFR 1320.4, information collections conducted or sponsored during the

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conduct of a criminal or civil action, or during the conduct of an administrative action or investigation, or audit. We also believe the collection requirements to be exempt as defined in 5 CFR 1320.3(c)(4) because we believe this would affect less than 10 persons.

Section 482.43 Condition of Participation: Discharge Planning

In summary, this section outlines the requirements of the discharge planning process. This section states that the hospital must include in the discharge plan, a list of HHAs or SNFs that are available to the patient, that participate in the Medicare program, that serve the geographic area, and that request to be listed by the hospital as available and to maintain documentation. This section also specifies other information that the discharge plan must contain.

The burden associated with these requirements is the time and effort for the hospital to provide a list to beneficiaries, for whom home health care or posthospital extended care services are necessary, and document the patient's medical record.

The burden associated with these requirements is estimated to be 5 minutes per hospital per discharge. Therefore, we estimate the total national burden to be 327,684 hours annually to comply with these requirements (652 discharges per hospital per year x 6,031 hospitals x 5 minutes each).

We have submitted a copy of this proposed rule to OMB for its review of the information collection requirements described above. These requirements are not effective until they have been approved by OMB.

If you comment on any of these information collection and record keeping requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Regulations Development and Issuances Group, Attn: Dawn Willinghan, CMS-1428-P, Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850; and Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Brenda Aguilar, CMS Desk Officer.

Comments submitted to OMB may also be e-mailed to the following address: e-mail: baguilar@omb.eop.gov, or faxed to OMB at (202) 395- 6974.

C. Public Comments

Because of the large number of items of correspondence we normally receive on a proposed rule, we are not able to acknowledge or respond to them individually. However, in preparing the final rule, we will consider all comments concerning the provisions of this proposed rule that we receive by the date and time specified in the DATES section of this preamble and respond to those comments in the preamble to that rule.

Crosswalk of Contents of Sec. 413.86

Existing section

Proposed new section.

Sec. 413.86(a)................... Sec. 413.75(a). Sec. 413.86(a)(1)................ Sec. 413.75(a)(1). Sec. 413.86(a)(2)................ Sec. 413.75(a)(2). Sec. 413.86(b)................... Sec. 413.75(b). Sec. 413.86(c)................... Sec. 413.75(c). Sec. 413.86(d)................... Sec. 413.76. Sec. 413.86(d), introductory text Sec. 413.76, introductory text. Sec. 413.86(d)(1)................ Sec. 413.76(a). Sec. 413.86(d)(2)................ Sec. 413.76(b). Sec. 413.86(d)(3)................ Sec. 413.76(c). Sec. 413.86(d)(3)(i)............. Sec. 413.76(c)(1). Sec. 413.86(d)(3)(ii)............ Sec. 413.76(c)(2). Sec. 413.86(d)(3)(iii)........... Sec. 413.76(c)(3). Sec. 413.86(d)(3)(iv)............ Sec. 413.76(c)(4). Sec. 413.86(d)(3)(v)............. Sec. 413.76(c)(5). Sec. 413.86(d)(4)................ Sec. 413.76(d). Sec. 413.86(d)(5)................ Sec. 413.76(e). Sec. 413.86(d)(5)(i)............. Sec. 413.76(e)(1). Sec. 413.86(d)(5)(ii)............ Sec. 413.76(e)(2). Sec. 413.86(d)(6)................ Sec. 413.76(f). Sec. 413.86(e)................... Sec. 413.77. Sec. 413.86(e)(1)................ Sec. 413.77(a). Sec. 413.86(e)(1)(i)............. Sec. 413.77(a)(1). Sec. 413.86(e)(1)(i)(A).......... Sec. 413.77(a)(1)(i). Sec. 413.86(e)(1)(i)(B).......... Sec. 413.77(a)(1)(ii). Sec. 413.86(e)(1)(ii)............ Sec. 413.77(a)(2). Sec. 413.86(e)(1)(ii)(A)......... Sec. 413.77(a)(2)(i). Sec. 413.86(e)(1)(ii)(B)......... Sec. 413.77(a)(2)(ii). Sec. 413.86(e)(1)(ii)(C)......... Sec. 413.77(a)(2)(iii). Sec. 413.86(e)(1)(iii)........... Sec. 413.77(a)(3). Sec. 413.86(e)(1)(iv)............ Sec. 413.77(a)(4). Sec. 413.86(e)(1)(v)............. Sec. 413.77(a)(5). Sec. 413.86(e)(2), introductory Sec. 413.77(b), introductory text.

text. Sec. 413.86(e)(2)(i)............. Sec. 413.77(b)(1). Sec. 413.86(e)(2)(ii)............ Sec. 413.77(b)(2). Sec. 413.86(e)(3), introductory Sec. 413.77(c), introductory text.

text. Sec. 413.86(e)(3)(i)............. Sec. 413.77(c)(1). Sec. 413.86(e)(3)(ii)............ Sec. 413.77(c)(2). Sec. 413.86(e)(4), introductory Sec. 413.77(d), introductory text.

text--NEW. Sec. 413.86(e)(4)(i),

Sec. 413.77(d)(1), introductory introductory text.

text. Sec. 413.86(e)(4)(i)(A),

Sec. 413.77(d)(1)(i), introductory text.

introductory text. Sec. 413.86(e)(4)(i)(A)(1)....... Sec. 413.77(d)(1)(i)(A).

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Sec. 413.86(e)(4)(i)(A)(2)....... Sec. 413.77(d)(1)(i)(B). Sec. 413.86(e)(4)(i)(A)(3)....... Sec. 413.77(d)(1)(i)(C). Sec. 413.86(e)(4)(i)(B).......... Sec. 413.77(d)(1)(ii). Sec. 413.86(e)(4)(ii),

Sec. 413.77(d)(2), introductory introductory text.

text--NEW. Sec. 413.86(e)(4)(ii)(A)......... Sec. 413.77(d)(2)(i). Sec. 413.86(e)(4)(ii)(B)......... Sec. 413.77(d)(2)(ii). Sec. 413.86(e)(4)(ii)(C),

Sec. 413.77(d)(2)(iii), introductory text.

introductory text. Sec. 413.86(e)(4)(ii)(C)(1)...... Sec. 413.77(d)(2)(iii)(A). Sec. 413.86(e)(4)(ii)(C)(1)(i)... Sec. 413.77(d)(2)(iii)(A)(1). Sec. 413.86(e)(4)(ii)(C)(1)(ii).. Sec. 413.77(d)(2)(iii)(A)(2). Sec. 413.86(e)(4)(ii)(C)(1)(iii). Sec. 413.77(d)(2)(iii)(A)(3). Sec. 413.86(e)(4)(ii)(C)(2), Sec. 413.77(d)(2)(iii)(B), introductory text.

introductory text--NEW. Sec. 413.86(e)(4)(ii)(C)(2)(i)... Sec. 413.77(d)(2)(iii)(B)(1). Sec. 413.86(e)(4)(ii)(C)(2)(ii).. Sec. 413.77(d)(2)(iii)(B)(2). Sec. 413.86(e)(4)(ii)(C)(2)(iii). Sec. 413.77(d)(2)(iii)(B)(3)-- NEW. Sec. 413.86(e)(4)(ii)(C)(2)(iv).. Sec. 413.77(d)(2)(iii)(B)(4)-- NEW. Sec. 413.77(d)(2)(iiii)(B)(5)-- NEW. Sec. 413.86(e)(4)(ii)(C)(3)...... Sec. 413.77(d)(2)(iii)(C)--NEW. Sec. 413.86(e)(5)................ Sec. 413.77(e). Sec. 413.86(e)(5)(i)............. Sec. 413.77(e)(1). Sec. 413.86(e)(5)(i)(A).......... Sec. 413.77(e)(1)(i). Sec. 413.86(e)(5)(i)(B),

Sec. 413.77(e)(1)(ii), introductory text.

introductory text. Sec. 413.86(e)(5)(i)(B)(1)....... Sec. 413.77(e)(1)(ii)(A). Sec. 413.86(e)(5)(i)(B)(2)....... Sec. 413.77(e)(1)(ii)(B). Sec. 413.86(e)(5)(i)(C).......... Sec. 413.77(e)(1)(iii). Sec. 413.86(e)(5)(ii)............ Sec. 413.77(e)(2). Sec. 413.86(e)(5)(iii)........... Sec. 413.77(e)(3). Sec. 413.77(f)--NEW. Sec. 413.86(f)................... Sec. 413.78. Sec. 413.86(f), introductory text Sec. 413.78, introductory text. Sec. 413.86(f)(1)................ Sec. 413.78(a). Sec. 413.86(f)(2)................ Sec. 413.78(b). Sec. 413.86(f)(3), introductory Sec. 413.78(c), introductory text.

text. Sec. 413.86(f)(3)(i)............. Sec. 413.78(c)(1). Sec. 413.86(f)(3)(ii)............ Sec. 413.78(c)(2). Sec. 413.86(f)(4), introductory Sec. 413.78(d), introductory text.

text. Sec. 413.86(f)(4)(i)............. Sec. 413.78(d)(1). Sec. 413.86(f)(4)(ii)............ Sec. 413.78(d)(2). Sec. 413.86(f)(4)(iii)........... Sec. 413.78(d)(3). Sec. 413.86(f)(4)(iv)............ Sec. 413.78(d)(4). Sec. 413.78(e), introductory text--NEW. Sec. 413.78(e)(1)--NEW. Sec. 413.78(e)(2)--NEW. Sec. 413.78(e)(3)--NEW. Sec. 413.86(g), introductory text Sec. 413.79. Sec. 413.86(g), introductory text Sec. 413.79, introductory text. Sec. 413.86(g)(1)................ Sec. 413.79(a). Sec. 413.86(g)(1)................ Sec. 413.79(a) introductory text-- NEW. Sec. 413.86(g)(1)................ Sec. 413.79(a)(1)--NEW. Sec. 413.86(g)(1)................ Sec. 413.79(a)(2)--NEW. Sec. 413.86(g)(1)................ Sec. 413.79(a)(3)--NEW. Sec. 413.86(g)(1)................ Sec. 413.79(a)(4)--NEW. Sec. 413.86(g)(1)................ Sec. 413.79(a)(5)--NEW. Sec. 413.86(g)(1)(i)............. Sec. 413.79(a)(6). Sec. 413.86(g)(1)(ii)............ Sec. 413.79(a)(7). Sec. 413.86(g)(1)(iii),

Sec. 413.79(a)(8), introductory introductory text.

text. Sec. 413.86(g)(1)(iii)(A)........ Sec. 413.79(a)(8)(i). Sec. 413.86(g)(1)(iii)(B)........ Sec. 413.79(a)(8)(ii). Sec. 413.86(g)(1)(iv)............ Sec. 413.79(a)(9). Sec. 413.86(g)(2)................ Sec. 413.79(b)(1). Sec. 413.86(g)(3)................ Sec. 413.79(b)(2). Sec. 413.79(c)(1), introductory text--NEW. Sec. 413.79(c)(1)(i) through (iii)--NEW. Sec. 413.86(g)(4), introductory Sec. 413.79(c)(2), introductory text.

text. Sec. 413.86(g)(4)(i)............. Sec. 413.79(c)(2)(i). Sec. 413.86(g)(4)(ii)............ Sec. 413.79(c)(2)(ii). Sec. 413.86(g)(4)(iii)........... Sec. 413.79(c)(2)(iii). Sec. 413.86(g)(4)(iv)............ Sec. 413.79(c)(2)(iv). Sec. 413.86(g)(4)(v)............. Sec. 413.79(c)(2)(v). Sec. 413.79(c)(3)(i) through (ii)--NEW. Sec. 413.79(c)(4)--NEW. Sec. 413.79(c)(5)--NEW.

[[Page 28343]]

Sec. 413.86(g)(5), introductory Sec. 413.79(d), introductory text.

text. Sec. 413.86(g)(5)(i)............. Sec. 413.79(d)(1). Sec. 413.86(g)(5)(ii)............ Sec. 413.79(d)(2). Sec. 413.86(g)(5)(iii)........... Sec. 413.79(d)(3). Sec. 413.86(g)(5)(iv)............ Sec. 413.79(d)(4). Sec. 413.86(g)(5)(v)............. Sec. 413.79(d)(5). Sec. 413.86(g)(5)(vi)............ Sec. 413.79(d)(6). Sec. 413.86(g)(5)(vii)........... Sec. 413.79(d)(7). Sec. 413.86(g)(6), introductory Sec. 413.79(e), introductory text.

text. Sec. 413.86(g)(6)(i)............. Sec. 413.79(e)(1). Sec. 413.86(g)(6)(i)(A).......... Sec. 413.79(e)(1)(i). Sec. 413.86(g)(6)(i)(B).......... Sec. 413.79(e)(1)(ii). Sec. 413.86(g)(6)(i)(C).......... Sec. 413.79(e)(1)(iii). Sec. 413.86(g)(6)(i)(D).......... Sec. 413.79(e)(1)(iv). Sec. 413.86(g)(6)(i)(E).......... Sec. 413.79(e)(1)(v). Sec. 413.86(g)(6)(ii),

Sec. 413.79(e)(2), introductory introductory text.

text. Sec. 413.86(g)(6)(ii)(A)......... Sec. 413.79(e)(2)(i). Sec. 413.86(g)(6)(ii)(B)......... Sec. 413.79(e)(2)(ii). Sec. 413.86(g)(6)(iii)........... Sec. 413.79(e)(3). Sec. 413.86(g)(6)(iv)............ Sec. 413.79(e)(4). Sec. 413.86(g)(7)................ Sec. 413.79(f). Sec. 413.86(g)(7)(i)............. Sec. 413.79(f)(1). Sec. 413.86(g)(7)(ii)............ Sec. 413.79(f)(2). Sec. 413.86(g)(7)(iii)........... Sec. 413.79(f)(3). Sec. 413.86(g)(7)(iv)............ Sec. 413.79(f)(4). Sec. 413.86(g)(7)(v)............. Sec. 413.79(f)(5). Sec. 413.86(g)(8), introductory Sec. 413.79(g), introductory text.

text. Sec. 413.86(g)(8)(i),

Sec. 413.79(g)(1), introductory introductory text.

text. Sec. 413.86(g)(8)(i)(A).......... Sec. 413.79(g)(1)(i). Sec. 413.86(g)(8)(i)(B).......... Sec. 413.79(g)(1)(ii). Sec. 413.86(g)(8)(ii)............ Sec. 413.79(g)(2). Sec. 413.86(g)(8)(iii)........... Sec. 413.79(g)(3). Sec. 413.86(g)(8)(iv)............ Sec. 413.79(g)(4). Sec. 413.86(g)(8)(v)............. Sec. 413.79(g)(5). Sec. 413.86(g)(9)................ Sec. 413.79(h). Sec. 413.86(g)(9)(i),

Sec. 413.79(h)(1), introductory introductory text.

text. Sec. 413.86(g)(9)(i)(A).......... Sec. 413.79(h)(1)(i). Sec. 413.86(g)(9)(i)(B).......... Sec. 413.79(h)(1)(ii). Sec. 413.86(g)(9)(ii),

Sec. 413.79(h)(2), introductory introductory text.

text. Sec. 413.86(g)(9)(ii)(A)......... Sec. 413.79(h)(2)(i). Sec. 413.86(g)(9)(ii)(B)......... Sec. 413.79(h)(2)(ii). Sec. 413.86(g)(9)(iii),

Sec. 413.79(h)(3), introductory introductory text.

text. Sec. 413.86(g)(9)(iii)(A),

Sec. 413.79(h)(3)(i), introductory text.

introductory text. Sec. 413.86(g)(9)(iii)(A)(1)..... Sec. 413.79(h)(3)(i)(A). Sec. 413.86(g)(9)(iii)(A)(2)..... Sec. 413.79(h)(3)(i)(B). Sec. 413.86(g)(9)(iii)(B),

Sec. 413.79(h)(3)(ii), introductory text.

introductory text. Sec. 413.86(g)(9)(iii)(B)(1)..... Sec. 413.79(h)(3)(ii)(A). Sec. 413.86(g)(9)(iii)(B)(2)..... Sec. 413.79(h)(3)(ii)(B). Sec. 413.86(g)(10), introductory Sec. 413.79(i), introductory text.

text. Sec. 413.86(g)(10)(i)............ Sec. 413.79(i)(1). Sec. 413.86(g)(10)(ii)........... Sec. 413.79(i)(2). Sec. 413.86(g)(10)(iii).......... Sec. 413.79(i)(3). Sec. 413.86(g)(11), introductory Sec. 413.79(j), introductory text.

text. Sec. 413.86(g)(11)(i)............ Sec. 413.79(j)(1). Sec. 413.86(g)(11)(ii)........... Sec. 413.79(j)(2). Sec. 413.86(g)(11)(iii).......... Sec. 413.79(j)(3). Sec. 413.86(g)(12), introductory Sec. 413.79(k), introductory text.

text. Sec. 413.86(g)(12)(i),

Sec. 413.79(k)(1), introductory introductory text.

text. Sec. 413.86(g)(12)(i)(A)......... Sec. 413.79(k)(1)(i). Sec. 413.86(g)(12)(i)(B)......... Sec. 413.79(k)(1)(ii). Sec. 413.86(g)(12)(ii),

Sec. 413.79(k)(2), introductory introductory text.

text. Sec. 413.86(g)(12)(ii)(A)........ Sec. 413.79(k)(2)(i). Sec. 413.86(g)(12)(ii)(B),

Sec. 413.79(k)(2)(ii), introductory text.

introductory text. Sec. 413.86(g)(12)(ii)(B)(1), Sec. 413.79(k)(2)(ii)(A), introductory text.

introductory text. Sec. 413.86(g)(12)(ii)(B)(1)(i).. Sec. 413.79(k)(2)(ii)(A)(1). Sec. 413.86(g)(12)(ii)(B)(1)(ii). Sec. 413.79(k)(2)(ii)(A)(2). Sec. 413.86(g)(12)(ii)(B)(2)..... Sec. 413.79(k)(2)(ii)(B). Sec. 413.86(g)(12)(iii).......... Sec. 413.79(k)(3). Sec. 413.86(g)(12)(iv),

Sec. 413.79(k)(4), introductory introductory text.

text. Sec. 413.86(g)(12)(iv)(A)........ Sec. 413.79(k)(4)(i). Sec. 413.86(g)(12)(iv)(B),

Sec. 413.79(k)(4)(ii), introductory text.

introductory text. Sec. 413.86(g)(12)(iv)(B)(1)..... Sec. 413.79(k)(4)(ii)(A).

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Sec. 413.86(g)(12)(iv)(B)(2)..... Sec. 413.79(k)(4)(ii)(B). Sec. 413.86(g)(12)(v),

Sec. 413.79(k)(5), introductory introductory text.

text. Sec. 413.86(g)(12)(v)(A)......... Sec. 413.79(k)(5)(i). Sec. 413.86(g)(12)(v)(B)......... Sec. 413.79(k)(5)(ii). Sec. 413.86(g)(12)(v)(C)......... Sec. 413.79(k)(5)(iii). Sec. 413.86(g)(12)(vi)........... Sec. 413.79(k)(6). Sec. 413.86(g)(13)............... Sec. 413.79(l). Sec. 413.86(h)................... Sec. 413.80. Sec. 413.86(h)(1), introductory Sec. 413.80(a), introductory text.

text. Sec. 413.86(h)(1)(i)............. Sec. 413.80(a)(1). Sec. 413.86(h)(1)(ii)............ Sec. 413.80(a)(2). Sec. 413.86(h)(2)................ Sec. 413.80(b). Sec. 413.86(h)(3)................ Sec. 413.80(c). Sec. 413.86(h)(4)................ Sec. 413.80(d). Sec. 413.86(h)(5)................ Sec. 413.80(e). Sec. 413.86(h)(6)................ Sec. 413.80(f). Sec. 413.86(i)................... Sec. 413.81. Sec. 413.86(i)(1), introductory Sec. 413.81(a), introductory text.

text. Sec. 413.86(i)(1)(i)............. Sec. 413.81(a)(1). Sec. 413.86(i)(1)(ii)............ Sec. 413.81(a)(2). Sec. 413.86(i)(2)................ Sec. 413.81(b). Sec. 413.86(i)(3)(i)............. Sec. 413.81(c)(1). Sec. 413.86(i)(3)(ii)............ Sec. 413.81(c)(2). Sec. 413.86(j), introductory text Sec. 413.80(g), introductory text. Sec. 413.86(j)(1)................ Sec. 413.80(g)(1). Sec. 413.86(j)(2)................ Sec. 413.80(g)(2). Sec. 413.86(j)(3)................ Sec. 413.80(g)(3). Sec. 413.86(j)(4)................ Sec. 413.80(g)(4). Sec. 413.86(j)(5)................ Sec. 413.80(g)(5). Sec. 413.86(j)(6)................ Sec. 413.80(g)(6). Sec. 413.86(j)(7)................ Sec. 413.80(g)(7). Sec. 413.86(k)................... Sec. 413.82. Sec. 413.86(k)(1)................ Sec. 413.82(a). Sec. 413.86(k)(2)................ Sec. 413.82(b). Sec. 413.86(k)(3)................ Sec. 413.82(c). Sec. 413.86(l)................... Sec. 413.83. Sec. 413.86(l)(1)................ Sec. 413.83(a). Sec. 413.86(l)(1)(i)............. Sec. 413.83(a)(1). Sec. 413.86(l)(1)(ii)............ Sec. 413.83(a)(2). Sec. 413.86(l)(2)(iii)........... Sec. 413.83(a)(3). Sec. 413.86(l)(2)................ Sec. 413.83(b). Sec. 413.86(l)(2)(i)............. Sec. 413.83(b)(1). Sec. 413.86(l)(2)(ii)............ Sec. 413.83(b)(2). Sec. 413.86(l)(2)(iii)........... Sec. 413.83(b)(3).

Note to Readers: Proposed redesignated Sec. Sec. 413.77, 413.78 and 413.79 are the only three sections of the proposed redesignated Sec. Sec. 413.75 through 413.83 that contain proposed policy changes, as discussed in section IV. O. of the preamble of this proposed rule. Therefore, we will only consider public comments on the following paragraphs of the proposed redesignated sections:

Sections 413.77(d) introductory text, (d)(2), (d)(2)(iii)(B), (d)(2)(iii)(B)(3), (d)(2)(iii)(B)(4), (d)(2)(iii)(B)(5), (d)(2)(iii)(C), and (f).

Sections 413.78(e), (e)(1), (e)(2), and (e)(3).

Section 413.79(a), (c)(1), (c)(2), (c)(3), (c)(4), and (c)(5).

The remaining portions of the proposed redesignated Sec. Sec. 413.75 through 413.83 contain only coding, cross-reference, and conforming redesignation changes. For these remaining portions, we will consider comments on redesignation, coding, and cross-reference changes only.

List of Subjects

42 CFR Part 403

Health insurance, Hospitals, Incorporation by reference, Intergovernmental relations, Medicare, Reporting and recordkeeping requirements.

2 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare, Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 418

Health facilities, Hospice care, Incorporation by reference, Medicare, Reporting and recordkeeping requirements.

42 CFR Part 460

Aged, Health, Incorporation by reference, Medicare, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 480

Medicare Program; Utilization and quality control, Quality Improvement Organizations (QIOs).

42 CFR Part 482

Grant program-health, Hospitals, Medicaid, Medicare, Reporting and recordkeeping requirements.

42 CFR Part 483

Grant program-health, Health facilities, Health professions, Health records, Medicaid, Medicare, Nursing

[[Continued on page 28345]]

From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

[[pp. 28345-28394]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

[[Continued from page 28344]]

[[Page 28345]]

homes, Nutrition, Reporting and recordkeeping requirements, Safety.

42 CFR Part 485

Grant programs-health, Health facilities, Medicaid, Medicare, Reporting and record keeping requirements.

42 CFR Part 489

Health facilities, Medicare, Reporting and record keeping requirements.

For the reasons stated in the preamble of this proposed rule, the Centers for Medicare & Medicaid Services is proposing to amend 42 CFR chapter IV as follows:

A. Part 403 is amended as follows:

PART 403--SPECIAL PROGRAMS AND PROJECTS

1. The authority citation for part 403 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 403.744 is amended by--

A. Revising paragraph (a)(1).

B. Revising paragraph (c).

C. Removing paragraph (c)(1) and paragraph (c)(2).

The revision reads as follows:

Sec. 403.744 Condition of Participation: Life safety from fire.

(a) General. An RNHCI must meet the following conditions:

(1) Except as otherwise provided in this section--

(i) The RNHCI must meet the applicable provisions of the 2000 edition of the Life Safety Code of the National Fire Protection Association. The Director of the Office of the Federal Register has approved the NFPA 101[reg] 2000 edition of the Life Safety Code, issued January 14, 2000, for incorporation by reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. A copy of the Code is available for inspection at the CMS Information Resource Center, 7500 Security Boulevard, Baltimore, MD and at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.

Copies may be obtained from the National Fire Protection Association, 1 Batterymarch Park, Quincy, MA 02269. If any changes in this edition of the Code are incorporated by reference, CMS will publish notice in the Federal Register to announce the changes.

(ii) Chapter 19.3.6.3.2, exception number 2 of the adopted Life Safety Code does not apply to an RNHCI. * * * * *

(c) Phase-in period. Beginning March 13, 2006, an RNHCI must be in compliance with Chapter 19.2.9, Emergency Lighting. Beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 2 does not apply to RNHCIs.

B. Part 412 is amended as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES

1. The authority citation for part 412 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 412.2 is amended by adding a new paragraph (b)(3) to read as follows:

Sec. 412.2 Basis for payment.

* * * * *

(b) Payment in full. * * * * *

(3) If a patient is admitted to an acute care hospital and then the acute care hospital meets the criteria at Sec. 412.23(e) to be paid as a LTCH, during the course of the patient's hospitalization, Medicare considers all the days of the patient stay in the facility (days prior to and after the designation of LTCH status) to be a single episode of LTCH care. Medicare will not make payment under subpart H for any part of the hospitalization. Payment for the entire patient stay (days prior to and after the designation of LTCH status) will be made in accordance with the requirements specified in Sec. 412.521. The requirements of this paragraph (b)(3) apply only to a patient stay in which a patient is in an acute care hospital and that hospital is designated as a LTCH on or after October 1, 2004. * * * * *

3. Section 412.4 is amended by revising paragraph (d) to read as follows:

Sec. 412.4 Discharges and transfers.

* * * * *

(d) Qualifying DRGs.

(1) For purposes of paragraph (c) of this section, and subject to the provisions of paragraph (d)(2) of this section, the qualifying DRGs must meet the following criteria for both of the 2 most recent fiscal years for which data are available:

(i) The DRG must have a geometric mean length of stay of at least 3 days.

(ii) The DRG must have at least 14,000 cases identified as postacute care transfer cases.

(iii) The DRG must have at least 10 percent of the postacute care transfers occurring before the geometric mean length of stay for the DRG.

(iv) If the DRG is one of a paired DRG based on the presence or absence of a comorbidity or complication, one of the DRGs meets the criteria specified under paragraphs (d)(1)(i) through (d)(1)(iii) of this section.

(v) To initially qualify, the DRG must meet the criteria specified in paragraphs(d)(1)(i) through (d)(1)(iv) of this section and must have a decline in the geometric mean length of stay for the DRG during the most recent 5-year period of at least 7 percent. Once a DRG initially qualifies, the DRG is subject to the criteria specified under paragraphs (d)(1)(i) through (d)(1)(iv) of this section for each subsequent fiscal year.

(2) Effective October 1, 2004, if a DRG fails to meet the qualifying criteria under paragraph (d)(1) of this section, the qualifying DRG must meet the following criteria for both of the 2 most recent fiscal years for which data are available:

(i) The DRG must have a geometric mean length stay of at least 3 days.

(ii) The DRG must have at least 5,000 cases identified as postacute care transfer cases.

(iii) The DRG must have a percentage of the postacute care transfer cases occurring before the geometric mean length of stay of at least 2 standard deviations above the geometric mean length of stay across all DRGs.

(iv) If the DRG is one of a paired DRG based on the presence or absence of a comorbidity or complication, one of the DRGs meets the criteria specified under paragraph (d)(2)(i) through (d)(2)(iii) of this section.

(v) To initially qualify, the DRG meets the criteria specified in paragraph (d)(2)(i) through (d)(2)(iv) of this section and must either have experienced a decline in its geometric mean length of stay during the most recent 5-year period of at least 7 percent, or contain only cases that would have been included in a DRG to which the policy applied in the prior year. Once a DRG initially qualifies, the DRG is subject to the criteria specified under paragraphs (d)(2)(i) through (d)(2)(iv) for each subsequent fiscal year. * * * * *

4. Section 412.22 is amended by--

A. Adding a sentence at the end of paragraph (a).

B. Revising paragraph (e).

The addition and revision read as follows:

[[Page 28346]]

Sec. 412.22 Excluded hospitals and hospital units: General rules.

(a) Criteria. * * * For purposes of this subpart, the term ``hospital'' includes a critical access hospital (CAH). * * * * *

(e) Hospitals-within-hospitals. Except as provided in paragraph (f) of this section, a hospital that occupies space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital, must meet the following criteria in order to be excluded from the prospective payment systems specified in Sec. 412.1(a)(1):

(1) For cost reporting periods beginning on or after October 1, 1987, and before October 1, 2004--

(i) Separate governing body. The hospital has a governing body that is separate from the governing body of the hospital occupying space in the same building or on the same campus. The hospital's governing body is not under the control of the hospital occupying space in the same building or on the same campus, or of any third entity that controls both hospitals.

(ii) Separate chief medical officer. The hospital has a single chief medical officer who reports directly to the governing body and who is responsible for all medical staff activities of the hospital. The chief medical officer of the hospital is not employed by or under contract with either the hospital occupying space in the same building or on the same campus or any third entity that controls both hospitals.

(iii) Separate medical staff. The hospital has a medical staff that is separate from the medical staff of the hospital occupying space in the same building or on the same campus. The hospital's medical staff is directly accountable to the governing body for the quality of medical care provided in the hospital, and adopts and enforces by laws governing medical staff activities, including criteria and procedures for recommending to the governing body the privileges to be granted to individual practitioners.

(iv) Chief executive officer. The hospital has a single chief executive officer through whom all administration authority flows, and who exercises control and surveillance over all administrative activities of the hospital. The chief executive officer is not employed by, or under contract with, either the hospital occupying space in the same building or on the same campus or any third entity that controls both hospitals.

(v) Performance of basic hospital functions. The hospital meets one of the following criteria:

(A) The hospital performs the basic functions specified in Sec. Sec. 482.21 through 482.27, 482.30, 482.42, 482.43, and 482.45 of this chapter through the use of employees or under contracts or other agreements with entities other than the hospital occupying space in the same building or on the same campus, or a third entity that controls both hospitals. Food and dietetic services and housekeeping, maintenance, and other services necessary to maintain a clean and safe physical environment could be obtained under contracts or other agreements with the hospital occupying space in the same building or on the same campus, or with a third entity that controls both hospitals.

(B) For the same period of at least 6 months used to determine compliance with the criterion regarding the age of patients in Sec. 412.23(d)(2) or the length-of-stay criterion in Sec. 412.23(e)(2), or for hospitals other than children's or long-term care hospitals, for a period of at least 6 months immediately preceding the first cost reporting period for which exclusion is sought, the cost of the services that the hospital obtains under contracts or other agreements with the hospital occupying space in the same building or on the same campus, or with a third entity that controls both hospitals, is no more than 15 percent of the hospital's total inpatient operating costs, as defined in Sec. 412.2(c). For purposes of this paragraph (e)(1)(v)(B), however, the costs of preadmission services are those specified under Sec. 413.40(c)(2) rather than those specified under Sec. 412.2(c)(5).

(C) For the same period of at least 6 months used to determine compliance with the criterion regarding the age of inpatients in Sec. 412.23(d)(2) or the length-of-stay criterion in Sec. 412.23(e)(2), or for hospitals other than children's or long-term care hospitals, for the period of at least 6 months immediately preceding the first cost reporting period for which exclusion is sought, the hospital has an inpatient population of whom at least 75 percent were referred to the hospital from a source other than another hospital occupying space in the same building or on the same campus.

(2) Effective for cost reporting periods beginning on or after October 1, 2004, the hospital must meet the following:

(i) Governance and control requirements. The hospital meets the criteria under paragraphs (e)(1)(i) through (e)(1)(iv) of this section.

(ii) Ownership interest and control. The hospital must not be owned, wholly or in part, by a person or party that has any ownership interest in the hospital occupying space in the same building or on the same campus, or of any third party entity that controls both hospitals. However, hospitals that were excluded from the prospective payment systems specified in Sec. 412.1(a) as of June 30, 2004, will be deemed to these criteria.

(iii) Admissions criteria. For the same period of at least 6 months used to determine compliance with the criterion regarding the age of inpatients in Sec. 412.23(d)(2) or the length-of-stay criterion in Sec. 412.23(e)(2), or for hospitals other than children's or long-term care hospitals, for the period of at least 6 months immediately preceding the first cost reporting period for which exclusion is sought, the hospital has an inpatient population of whom at least 75 percent were referred to the hospital from a source other than another hospital occupying space in the same building or on the same campus.

(3) Notification of co-located status. A long-term care hospital that occupies space in a building used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital that meets the criteria of (e)(1) or (e)(2) of this section must notify its fiscal intermediary and CMS in writing of its co-location within 60 days of its first cost reporting period that begins on or after October 1, 2002. * * * * *

5. Section 412.25 is amended by adding a new paragraph (g), to read as follows:

Sec. 412.25 Excluded hospital units: Common requirements.

* * * * *

(g) CAH units not meeting applicable requirements. If a psychiatric or rehabilitation unit of a CAH does not meet the requirements of Sec. 485.645 with respect to a cost reporting period, no payment may be made to the CAH for services furnished in that unit for that period. Payment to the CAH for services in the unit may resume only after the unit has demonstrated to CMS that the unit meets the requirements of Sec. 485.645.

6. Section 412.63 is amended by--

A. Revising the heading of the section.

B. Revising paragraph (a).

C. Adding introductory text to paragraph (b).

D. Revising paragraph (c)(1), (c)(5), and (c)(6)

E. Revising paragraph (u).

The revisions and addition read as follow:

[[Page 28347]]

Sec. 412.63 Federal rates for inpatient operating costs for Federal fiscal years 1984 through 2004.

(a) General rule. (1) CMS determines a national adjusted prospective payment rate for inpatient operating costs for each inpatient hospital discharge in Federal fiscal years 1985 through 2004 involving inpatient hospital service of a hospital in the United States, subject to the PPS, and determines a regional adjusted PPS rate for operating costs for such discharges in each region for which payment may be made under Medicare Part A.

(2) Each such rate is determined for hospitals located in urban or rural areas within the United States and within each such region, respectively, as described under paragraphs (b) through (u) of this section. * * * * *

(b) Geographic classifications. Effective for fiscal years 1985 through 2004, the following rules apply. * * * * *

(c) Updating previous standardized amounts. (1) For discharges occurring in fiscal year 1985 through fiscal year 2003, CMS computes average standardized amounts for hospitals in urban areas and rural areas within the United States, and in urban areas and rural areas within each region. For discharges occurring in fiscal year 2004, CMS computes an average standardized amount for hospitals located in all areas. * * * * *

(5) For fiscal years 1987 through 2004, CMS standardizes the average standardized amounts by excluding an estimate of indirect medical education payments.

(6) For fiscal years 1988 through 2003, CMS computes average standardized amounts for hospitals located in large urban areas, other urban areas, and rural areas. The term large urban area means an MSA with a population of more than 1,000,000 or an NECMA, with a population of more than 970,000 based on the most recent available population data published by the Census Bureau. For fiscal year 2004, CMS computes an average standardized amount for hospitals located in all areas. * * * * *

(u) Applicable percentage change for fiscal year 2004. The applicable percentage change for fiscal year 2004 is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for hospitals in all areas. * * * * *

7. A new Sec. 412.64 is added to Subpart D to read as follows:

Sec. 412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and subsequent fiscal years.

(a) General rule. CMS determines a national adjusted prospective payment rate for inpatient operating costs for each inpatient hospital discharge in Federal fiscal year 2005 and subsequent fiscal years involving inpatient hospital services of a hospital in the United States subject to the prospective payment system for which payment may be made under Medicare Part A.

(b) Geographic classifications. (1) For purposes of this section, the following definitions apply:

(i) The term region means one of the 9 metropolitan divisions comprising the 50 States and the District of Columbia, established by the Executive Office of Management and Budget for statistical and reporting purposes.

(ii) The term urban area means--

(A) A Metropolitan Statistical Area, as defined by the Executive Office of Management and Budget; or

(B) The following New England counties, which are deemed to be parts of urban areas under section 601(g) of the Social Security Amendments of 1983 (Public Law 98-21, 42 U.S.S. 1395ww (note)): Litchfield County, Connecticut; York County, Maine; Sagadahoc County, Maine; Merrimack County, New Hampshire; and Newport County, Rhode Island.

(C) The term rural area means any area outside an urban area.

(D) The phrase hospital reclassified as rural means a hospital located in a county that, in FY 2004, was part of an MSA, but was redesignated as rural after September 30, 2004, as a result of the most recent census data and implementation of the new MSA definitions announced by OMB on June 6, 2003.

(2) For hospitals within an MSA that crosses census division boundaries, the MSA is deemed to belong to the census division in which most of the hospitals within the MSA are located.

(3) For discharges occurring on or after October 1, 2004, a hospital located in a rural county adjacent to one or more urban areas is deemed to be located in an urban area and receives the Federal payment amount for the urban area to which the greater number of workers in the county commute if the rural county would otherwise be considered part of an urban area, under the standards for designating MSAs if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or central counties of all adjacent MSAs. These EOMB standards are set forth in the notice of final revised standards for classification of MSAs published in the Federal Register on December 27, 2000 (65 FR 82228), announced by EOMB on June 6, 2003, and available from CMS, 7500 Security Boulevard, Baltimore, Maryland 21244.

(4) For purposes of this section, any change in an MSA designation is recognized on October 1 following the effective date of the change. Such a change in MSA designation may occur as a result of redesignation of an MSA by the Executive Office of Management and Budget.

(c) Computing the standardized amount. CMS computes an average standardized amount that is applicable to all hospitals located in all areas, updated by the applicable percentage increase specified in paragraph (d) of this section.

(d) Applicable percentage change for fiscal year 2005 and for subsequent fiscal years.

(1) Subject to the provisions of paragraph (d)(2) of this section, the applicable percentage change for fiscal year 2005 and for subsequent years for updating the standardized amount is the percentage increase in the market basket index for prospective payment hospitals (as defined in Sec. 413.40(a) of this subchapter) for hospitals in all areas.

(2) For fiscal years 2005, 2006, and 2007, the applicable percentage change specified in paragraph (d)(1) of this section is reduced by 0.4 percentage points in the case of a ``subsection (d) hospital,'' as defined under section 1886(d)(1)() of the Act, that does not submit quality data on a quarterly basis to CMS, as specified by CMS. Any reduction of the percentage change will apply only to the fiscal year involved and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year.

(e) Maintaining budget neutrality. (1) CMS makes an adjustment to the standardized amount to ensure that--

(i) Changes to the DRG classifications and recalibrations of the DRG relative weights are made in a manner so that aggregate payments to hospitals are not affected; and

(ii) The annual updates and adjustments to the wage index under paragraph (h) of this section are made in a manner that ensures that aggregate payments to hospitals are not affected.

(2) CMS also makes an adjustment to the rates to ensure that aggregate payments after implementation of reclassifications under subpart L of this part are equal to the aggregate prospective payments that would have

[[Page 28348]]

been made in the absence of these provisions.

(f) Adjustment for outlier payments. CMS reduces the adjusted average standardized amount determined under paragraph (c) through (e) of this section by a proportion equal to the proportion estimated by CMS) to the total amount of payments based on DRG prospective payment rates that are additional payments for outlier cases under subpart F of this part.

(g) Computing Federal rates for inpatient operating costs for hospitals located in all areas. For each discharge classified within a DRG, CMS establishes for the fiscal year a national prospective payment rate for inpatient operating costs based on the standardized amount for the fiscal year and the weighting factor determined under Sec. 412.60(b) for that DRG.

(h) Adjusting for different area wage levels. CMS adjusts the proportion of the Federal rate for inpatient operating costs that are attributable to wages and labor-related costs for area differences in hospital wage levels by a factor (established by CMS based on survey data) reflecting the relative level of hospital wages and wage-related costs in the geographic area (that is, urban or rural area as determined under the provisions of paragraph (b) of this section) of the hospital compared to the national average level of hospital wages and wage-related costs. The adjustment described in this paragraph (h) also takes into account the earnings and paid hours of employment by occupational category.

(1) The wage index is updated annually.

(2) CMS determines the proportion of the Federal rate that is attributable to wages and labor-related costs from time to time, employing a methodology that is described in the annual regulation updating the system of payment for inpatient hospital operating costs.

(3) For discharges occurring on or after October 1, 2004, CMS employs 62 percent as the proportion of the rate that is adjusted for the relative level of hospital wages and wage-related costs, unless employing that percentage would result in lower payments for the hospital than employing the proportion determined under the methodology described in paragraph (h)(2) of this section.

(i) Adjusting the wage index to account for commuting patterns of hospital workers.

(1) General criteria. For discharges occurring on or after October 1, 2004, CMS adjusts the hospital wage index for hospitals located in qualifying counties to recognize the commuting patterns of hospital employees. A qualifying county is a county that meets all of the following criteria:

(i) Hospital employees in the county commute to work in an MSA (or MSAs) with a wage index (or wage indices) higher than the wage index of the MSA or rural statewide area in which the county is located.

(ii) At least 10 percent of the county's hospital employees commute to an MSA (or MSAs) with a higher wage index (or wage indices).

(iii) The 3-year average hourly wage of the hospital(s) in the county equals or exceeds the 3-year average hourly wage of all hospitals in the MSA or rural statewide area in which the county is located.

(2) Amount of adjustment. A hospital located in a county that meets the criteria under paragraphs (i)(l)(i) through (i)(1)(iii) of this section will receive an increase in its wage index that is equal to a weighted average of the difference between the prereclassified wage index of the MSA (or MSAs) with the higher wage index (or wage indices) and the prereclasssified wage index of the MSA or rural statewide area in which the qualifying county is located, weighted by the overall percentage of the hospital employees residing in the qualifying county who are employed in any MSA with a higher wage index.

(3) Process for determining the adjustment.

(i) CMS will use the most accurate data available, as determined by CMS, to determine the out-migration percentage for each county.

(ii) CMS will include, in its annual proposed and final notices of updates to the hospital inpatient prospective payment system, a listing of qualifying counties and the hospitals that are eligible to receive the adjustment to their wage indexes for commuting hospital employees, and the wage index increase applicable to each qualifying county.

(iii) Any wage index adjustment made under this paragraph (i) is effective for a period of 3 fiscal years, except that hospitals in a qualifying county may elect to waive the application of the wage index adjustment. A hospital may waive the application of the wage index adjustment by notifying CMS in writing within 45 days after the publication of the annual notice of proposed rulemaking for the hospital inpatient prospective payment system.

(iv) A hospital in a qualifying county that receives a wage index adjustment under this paragraph (g) is not eligible for reclassification under Subpart L of this part.

(j) Wage index assignment for rural referral centers for FY 2005.

(1) CMS makes an exception to the wage index assignment of a rural referral center for FY 2005 if the rural referral center meets the following conditions:

(i) The rural referral center was reclassified for FY 2004 by the MGCRB to another MSA, but, upon applying to the MGCRB for FY 2005, was found to be ineligible for reclassification because its average hourly wage was less than 84 percent (but greater than 82 percent) of the average hourly wage of the hospitals geographically located in the MSA to which the rural referral center applied for reclassification for FY 2005.

(ii) The hospital may not qualify for any geographic reclassification under subpart L of this part, effective for discharges occurring on or after October 1, 2004.

(2) CMS will assign a rural referral center that meets the conditions of paragraph (j)(1) of this section the wage index value of the MSA to which it was reclassified by the MGCRB in FY 2004.

(k) Midyear corrections to the wage index.

(1) CMS makes a midyear correction to the wage index for an area only if a hospital can show that--

(i) The intermediary or CMS made an error in tabulating its data; and

(ii) The hospital could not have known about the error, or did not have the opportunity to correct the error, before the beginning of the Federal fiscal year.

(2) A midyear correction to the wage index is effective prospectively from the date the change is made to the wage index.

(l) Judicial decision. If a judicial decision reverses a CMS denial of a hospital's wage data revision request, CMS pays the hospital by applying a revised wage index that reflects the revised wage data as if CMS's decision had been favorable rather than unfavorable.

8. Section 412.87 is amended by revising paragraph (b)(3) to read as follows:

Sec. 412.87 Additional payment for new medical services and technologies: General provisions.

* * * * *

(b) Eligibility criteria. * * *

(3) The DRG prospective payment rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate, based on application of a threshold amount to estimated charges incurred with respect to such discharges. To determine whether the

[[Page 28349]]

payment would be adequate, CMS will determine whether the charges of the cases involving a new medical service or technology will exceed a threshold amount that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of one standard deviation beyond the geometric mean standardized charge for all cases in the DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant DRGs if the new medical service or technology occurs in many different DRGs). Standardized charges reflect the actual charges of a case adjusted by the prospective payment system payment factors applicable to an individual hospital, such as the wage index, the indirect medical education adjustment factor, and the disproportionate share adjustment factor.

Sec. 412.88 [Amended]

9. Section 412.88 is amended by removing paragraph (c).

10. A new Sec. 412.101 is added to read as follows:

Sec. 412.101 Special treatment: Inpatient hospital payment adjustment for low-volume hospitals.

(a) General considerations.

(1) CMS provides an additional payment to a qualifying hospital for the higher incremental costs associated with a low volume of discharges. The amount of any additional payment for a qualifying hospital is calculated in accordance with paragraph (b) of this section.

(2) In order to qualify for this adjustment, a hospital must have 500 or fewer discharges during the fiscal year, as reflected in its cost report specified in paragraph (a)(3) of this section, and be located more than 25 road miles from the nearest inpatient acute care prospective payment system hospital.

(3) The fiscal intermediary makes the determination of the discharge count for purposes of determining a hospital's qualification for the adjustment and the amount of the adjustment based on the hospital's most recent submitted cost report.

(4) In order to qualify for the adjustment, a hospital must provide its fiscal intermediary with sufficient evidence that it meets the distance requirement specified under paragraph (a)(2) of this section. The fiscal intermediary will base its determination of whether the distance requirement is satisfied upon the evidence presented by the hospital and other relevant evidence, such as maps, mapping software, and inquiries to State and local police, transportation officials, or other government officials.

(b) Determination of the adjustment amount. The maximum low-volume adjustment is 25 percent. Each qualifying hospital's low-volume adjustment is calculated as follows: 1.25-(.0005*D), where 0The requirements of section 401 of Public Law 108-173, equalizing the standardized amounts for urban and other areas at the level computed for urban hospitals during FY 2004, updated by the applicable percentage increase required under section 501(a) of Public Law 108-173;

The requirements of section 403 of Public Law 108-173, establishing two labor-related shares that are applicable to the standardized amounts depending on whether the hospital's payments would be higher with a lower (in the case of a wage index below 1.0000) or higher (in the case of a wage index above 1.0000) labor share;

Updates of 3.3 percent for all areas (that is, the full market basket percentage increase of 3.3 percent, as required by section 501(a) of Public Law 108-173), and reflecting the requirements of section 501(b) of Public Law 108-173, to reduce the applicable percentage increase by 0.4 percentage points for hospitals that fail to submit data in a form and manner specified by the Secretary, relating to the quality of inpatient care furnished by the hospital;

An adjustment to ensure the proposed DRG recalibration and wage index update and changes are budget neutral, as provided for under sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act, by applying new budget neutrality adjustment factors to the standardized amount;

An adjustment to ensure the effects of geographic reclassification are budget neutral, as provided for in section 1886(d)(8)(D) of the Act, by removing the FY 2004 budget neutrality factor and applying a revised factor;

An adjustment to apply the new outlier offset by removing the FY 2004 outlier offsets and applying a new offset;

An adjustment to ensure the effects of the rural community hospital demonstration required under section 410A of Public Law 108- 173 are budget neutral, as required under section 410A(c)(2) of Public Law 108-173.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

The national standardized amount is based on per discharge averages of adjusted hospital costs from a base period (section 1886(d)(2)(A) of the Act) or, for Puerto Rico, adjusted target amounts from a base period (section 1886(d)(9)(B)(i) of the Act), updated and otherwise adjusted in accordance with the provisions of section 1886(d) of the Act. The preamble to the September 1, 1983 interim final rule (48 FR 39763) contained a detailed explanation of how base-year cost data (from cost reporting periods ending during FY 1981) were established in the initial development of standardized amounts for the IPPS. The September 1, 1987 final rule (52 FR 33043, 33066) contains a detailed explanation of how the target amounts were determined, and how they are used in computing the Puerto Rico rates.

Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to update base-year per discharge costs for FY 1984 and then standardize the cost data in order to remove the effects of certain sources of cost variations among hospitals. These effects include case-mix, differences in area wage levels, cost-of-living adjustments for Alaska and Hawaii, indirect medical education

[[Page 28374]]

costs, and costs to hospitals serving a disproportionate share of low- income patients.

Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, the Secretary estimates from time-to-time the proportion of costs that are wages and wage-related costs. The standardized amount is divided into labor-related and nonlabor-related amounts; only the proportion considered the labor-related amount is adjusted by the wage index. The current labor-related share is 71.1 percent. The current labor-related share in Puerto Rico is 71.3 percent.

Section 403 of Public Law 108-173 revises the proportion of the standardized amount that is considered labor-related. Specifically, section 403 requires that 62 percent of the standardized amount be adjusted by the wage index, unless doing so would result in lower payments to a hospital than would otherwise be made (section 403(b) extends this provision to the Puerto Rico standardized amounts). As a consequence, we are adjusting 62 percent of the national and Puerto Rico standardized amount by the wage index for all hospitals whose wage indexes are less than or equal to 1.0000; otherwise, the wage index is applied to 71.1 percent of the standardized amount. 2. Computing the Average Standardized Amount

Sections 1886(d)(2)(D) and (d)(3) of the Act previously required the Secretary to compute two average standardized amounts for discharges occurring in a fiscal year: one for hospitals located in large urban areas and one for hospitals located in other areas. In addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the Act, the average standardized amount per discharge was determined for hospitals located in large urban and other areas in Puerto Rico. In accordance with section 1886(b)(3)(B)(i) of the Act, the large urban average standardized amount was 1.6 percent higher than the other area average standardized amount.

Section 402(b) of Public Law 108-7 required that, effective for discharges occurring on or after April 1, 2003, and before October 1, 2003, the Federal rate for all IPPS hospitals would be based on the large urban standardized amount. Subsequently, Public Law 108-89, extended section 402(b) of Public Law 108-7 beginning with discharges on or after October 1, 2003 and before March 31, 2004. Finally, section 401(a) of Public Law 108-173 requires that, beginning with fiscal year 2004 and thereafter, an equal standardized amount is to be computed for all hospitals at the level computed for large urban hospitals during FY 2003, updated by the applicable percentage update. This provision in effect makes permanent the equalization of the standardized amounts at the level of the previous standardized amount for large urban hospitals. Section 401(c) also equalizes the Puerto Rico-specific urban and other area rates. Accordingly, we are providing in this proposed rule for a single national standardized amount, and a single Puerto Rico standardized amount, for FY 2005 and thereafter. 3. Updating the Average Standardized Amount

In accordance with section 1886(d)(3)(A)(iv) of the Act, we are proposing to update the equalized standardized amount for FY 2005 by the full estimated market basket percentage increase for hospitals in all areas, as specified in section 1886(b)(3)(B)(i)(XIX) of the Act, as amended by section 501 of Public Law 108-173. The percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient care. The most recent forecast of the hospital market basket increase for FY 2005 is 3.3 percent. Thus, for FY 2005, the proposed update to the average standardized amount equals 3.3 percent for hospitals in all areas.

As discussed above in section IV.E. of this proposed rule, section 501(b) of Public Law 108-173 amended section 1886(b)(3)(B) of the Act to add a new subclause (vii) to revise the mechanism used to update the standardized amount for payment for inpatient hospital operating costs. Specifically, the amendment provides for a reduction of 0.4 percentage points to the update percentage increase (also known as the market basket update) for each of FYs 2005 through 2007 for any ``subsection (d) hospital'' that does not submit data on a set of 10 quality indicators established by the Secretary as of November 1, 2003. The statute also provides that any reduction will apply only to the fiscal year involved, and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. This measure establishes an incentive for hospitals to submit data on quality measures established by the Secretary. The standardized amount in Tables 1A through 1D of section VI. of this addendum reflect these differential amounts.

Although the update factors for FY 2005 are set by law, we are required by section 1886(e)(3) of the Act to report to the Congress our initial recommendation of update factors for FY 2005 for both IPPS hospitals and hospitals excluded from the IPPS. Our recommendation on the update factors (which is required by sections 1886(e)(4)(A) and (e)(5)(A) of the Act) is set forth as Appendix B of this proposed rule. 4. Other Adjustments to the Average Standardized Amount

As in the past, we are proposing to adjust the FY 2005 standardized amount to remove the effects of the FY 2004 geographic reclassifications and outlier payments before applying the FY 2005 updates. We then apply the new offsets for outliers and geographic reclassifications to the standardized amount for FY 2005.

We do not remove the prior year's budget neutrality adjustments for reclassification and recalibration of the DRG weights and for updated wage data because, in accordance with section 1886(d)(4)(C)(iii) of the Act, estimated aggregate payments after the changes in the DRG relative weights and wage index should equal estimated aggregate payments prior to the changes. If we removed the prior year adjustment, we would not satisfy this condition.

Budget neutrality is determined by comparing aggregate IPPS payments before and after making the changes that are required to be budget neutral (for example, reclassifying and recalibrating the DRGs, updating the wage data, and geographic reclassifications). We include outlier payments in the payment simulations because outliers may be affected by changes in these payment parameters.

We are also proposing to adjust the standardized amount this year by an amount estimated to ensure that aggregate IPPS payments do not exceed the amount of payments that would have been made in the absence of the rural community hospital demonstration required under section 410A of Public Law 108-173. This demonstration is required to be budget neutral under section 410A(c)(2) of Public Law 108-173. a. Recalibration of DRG Weights and Updated Wage Index--Budget Neutrality Adjustment

Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in FY 1991, the annual DRG reclassification and recalibration of the relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section II. of the preamble, we normalized the recalibrated DRG weights by an adjustment factor, so that the average

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case weight after recalibration is equal to the average case weight prior to recalibration. However, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years, we are proposing to make a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

Section 1886(d)(3)(E) of the Act requires us to update the hospital wage index on an annual basis beginning October 1, 1993. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. For FY 2005, we are proposing to apply an occupational mix adjustment to the wage index. We describe our proposed occupational mix adjustment in section III.C. of this proposed rule. Since section 1886(d)(3)(E) of the Act requires us to update the wage index on a budget neutral basis, we are including the effects of this proposed occupational mix adjustment on the wage index in our budget neutrality calculations.

Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is not located in a rural area may not be less than the area wage index applicable to hospitals located in rural areas in that State. This provision is required by section 4410(b) of Public Law 105- 33 to be budget neutral. Therefore, we include the effects of this provision in our calculation of the wage update budget neutrality factor.

Section 1886(d)(5)(K)(ii)(III) of the Act previously required that we adjust the rates to ensure that any add-on payments for new technology under section 1886(d)(5)(K) of the Act be budget neutral. However, section 503(d)(2) of Public Law 108-173 has repealed this requirement. We discuss this provision in section II.E. of this proposed rule. In accordance with this provision, we are proposing no budget neutrality adjustment to account for approval of new technologies for add-on payments in FY 2005.

To comply with the requirement that DRG reclassification and recalibration of the relative weights be budget neutral, and the requirement that the updated wage index be budget neutral, we used FY 2003 discharge data to simulate payments and compared aggregate payments using the FY 2004 relative weights and wage index to aggregate payments using the proposed FY 2005 relative weights and wage index. The same methodology was used for the FY 2004 budget neutrality adjustment (although the FY 2004 adjustment included the effects of new technology add-on payments).

Based on this comparison, we computed a proposed budget neutrality adjustment factor equal to 0.998969. We also are proposing to adjust the Puerto Rico-specific standardized amount for the effect of DRG reclassification and recalibration. We computed a proposed budget neutrality adjustment factor for Puerto Rico-specific standardized amount equal to 0.999326. These budget neutrality adjustment factors are applied to the standardized amounts without removing the effects of the FY 2004 budget neutrality adjustments.

In addition, we are proposing to apply these same adjustment factors to the hospital-specific rates that are effective for cost reporting periods beginning on or after October 1, 2004. (See the discussion in the September 4, 1990 final rule (55 FR 36073)). b. Reclassified Hospitals--Budget Neutrality Adjustment

Section 1886(d)(8)(B) of the Act provides that, effective with discharges occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In addition, section 1886(d)(10) of the Act provides for the reclassification of hospitals based on determinations by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be reclassified for purposes of the wage index.

Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amount to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. (Neither the wage index reclassifications provided under section 508 of Public Law 108-173, nor the wage index adjustments provided under section 505 of Public Law 108-173, are budget neutral. Section 508(b) provides that the wage index reclassifications approved under section 508(a) ``shall not be effected in a budget neutral manner.'' Section 505(a) similarly provides that any increase in a wage index under that section shall not be taken into account ``in computing any budget neutrality adjustment with respect to such index under'' section 1886(d)(8)(D) of the Act.) To calculate this budget neutrality factor, we used FY 2003 discharge data to simulate payments, and compared total IPPS payments prior to any reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS payments after such reclassifications. Based on these simulations, we are proposing to apply an adjustment factor of 0.994295 to ensure that the effects of this reclassification are budget neutral.

The proposed adjustment factor is applied to the standardized amount after removing the effects of the FY 2004 budget neutrality adjustment factor. We note that the proposed FY 2005 adjustment reflects proposed FY 2005 wage index reclassifications approved by the MGCRB or the Administrator, and the effects of MGCRB reclassifications approved in FY 2003 and FY 2004 (section 1886(d)(10)(D)(v) of the Act makes wage index reclassifications effective for 3 years). c. Outliers

Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic prospective payments, for ``outlier'' cases involving extraordinarily high costs. To qualify for outlier payments, a case must have costs above a fixed-loss cost threshold amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for outlier payment). To determine whether the costs of a case exceed the fixed-loss threshold, a hospital's cost-to-charge ratio is applied to the total covered charges for the case to convert the charges to costs. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the costs above the threshold.

Under section 1886(d)(5)(A)(iv) of the Act, outlier payments for any year must be projected to be not less than 5 percent nor more than 6 percent of total operating DRG payments plus outlier payments. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce the average standardized amount by a factor to account for the estimated proportion of total DRG payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires the Secretary to reduce the average standardized amounts applicable to hospitals in Puerto Rico to account for the estimated proportion of total DRG payments made to outlier cases.

i. Proposed FY 2005 outlier fixed-loss cost threshold. In the August 1, 2003 IPPS final rule (68 FR 45476-45478), we established a threshold for FY 2004 that was equal to the prospective payment rate for the DRG, plus any IME and DSH payments and any additional payments

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for new technology, plus $31,000. The marginal cost factor (the percent of costs paid after costs for the case exceed the threshold) was 80 percent.

To calculate the proposed FY 2005 outlier thresholds, we simulated payments by applying proposed FY 2005 rates and policies using cases from the FY 2003 MedPAR file. Therefore, in order to determine the appropriate proposed FY 2005 threshold, it was necessary to inflate the charges on the MedPAR claims by 2 years, from FY 2003 to FY 2005. We are proposing to use a 2-year average annual rate of change in charges per case to inflate FY 2003 charges to approximate FY 2005 charges. The 2-year average annual rate of change in charges per case from FY 2000 to FY 2001, and from FY 2001 to FY 2002, was 12.5978 percent annually or 26.8 percent over 2 years.

We are proposing to continue to use the 2-year average annual rate of change in charges per case to establish the proposed FY 2005 threshold. The 2-year average annual rate of change in charges per case from FY 2001 to FY 2002, and from FY 2002 to FY 2003, was 14.5083 percent annually, or 31.1 percent over 2 years. As we have done in the past, we are using hospital cost-to-charge ratio from the most recently Provider Specific File, in this case the December 2003 update. This file includes cost-to-charge ratios reflecting implementation of changes we made last year to the policy affecting the applicable cost- to-charge ratios (68 FR 34494). As of October 1, 2003, fiscal intermediaries use either the most recent settled or the most recent tentative settled cost report, whichever is from the latest reporting period. Because in the past cost-to-charge ratios were taken from the latest settled cost reports and for some hospitals there were delays in settling their cost reports, the cost-to-charge ratios on the Provider Specific File may have been from cost reporting periods that were several years prior. This change results in more up-to-date and, generally, lower cost-to-charge ratios.

Using this methodology, we are proposing to establish a fixed-loss cost outlier threshold equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $35,085. This single threshold would be applicable to qualify for both operating and capital outlier payments. We also are proposing to maintain the marginal cost factor for cost outliers at 80 percent.

This proposed outlier threshold for FY 2005 may be higher than might have been anticipated on the basis of the more up-to-date and, generally, lower cost-to-charge ratios that we are now employing. We believe that a significant factor in this result may be the 2-year average annual rates of change that we are employing to update charges in the MedPAR data from FY 20003 to FY 2005. As we discussed above, we are employing the 2-year average annual rate of change in charges per case from FY 2001 to FY 2002, and from FY 2002 to FY 2003, which is 14.5083 percent annually, or 31.1 percent over 2 years. These rates of increase derive from the period before the changes we made last year to the policy affecting the applicable cost-to-charge ratios (68 FR 34494). In fact, they derive from the years just prior to the adoption of the policy changes, when some hospitals were increasing charges at a rapid rate in order to increase their outlier payments. Therefore, they represent rates of increase that may be higher than the rates of increase under our new policy. We have always used actual data from prior years, rather than projections, to update charges for purposes of determining the outlier threshold. In light of the increase in the proposed outlier threshold for FY 2005, compared to the threshold previously in effect, we welcome comments on the data we are using to update charges for purposes of computing the threshold. We especially encourage commenters to provide any recommendations for data that might better reflect current trends in charge increases.

ii. Other changes concerning outliers. As stated in the September 1, 1993 final rule (58 FR 46348), we establish outlier thresholds that are applicable to both hospital inpatient operating costs and hospital inpatient capital-related costs. When we modeled the combined operating and capital outlier payments, we found that using a common set of thresholds resulted in a lower percentage of outlier payments for capital-related costs than for operating costs. We project that the proposed thresholds for FY 2005 would result in outlier payments equal to 5.10 percent of operating DRG payments and 5.03 percent of capital payments based on the Federal rate.

In accordance with section 1886(d)(3)(B) of the Act, we reduced the proposed FY 2005 standardized amount by the same percentage to account for the projected proportion of payments paid to outliers.

The proposed outlier adjustment factors to be applied to the standardized amount for FY 2005 are as follows:

Operating standardized Capital amounts Federal rate

National................................

0.948994

0.949706 Puerto Rico.............................

0.974692 0.9747329

We apply the outlier adjustment factors after removing the effects of the FY 2004 outlier adjustment factors on the standardized amount.

To determine whether a case qualifies for outlier payments, we apply hospital-specific cost-to-charge ratios to the total covered charges for the case. Operating and capital costs for the case are calculated separately by applying separate operating and capital cost- to-charge ratios. These costs are then combined and compared with the fixed-loss outlier threshold.

The June 9, 2003 outlier final rule (68 FR 34494) eliminated the application of the statewide average for hospitals whose cost-to-charge ratios fall below 3 standard deviations from the national mean cost-to- charge ratio. However, for those hospitals for which the fiscal intermediary computes operating cost-to-charge ratios greater than 1.460 or capital cost-to-charge ratios greater than 0.173, or hospitals for whom the fiscal intermediary is unable to calculate a cost-to- charge ratio (as described at Sec. 412.84(i)(3)), we are still using statewide average ratios to calculate costs to determine whether a hospital qualifies for outlier payments.\7\ Table 8A in section VI. of this Addendum contains the statewide average operating cost-to-charge ratios for urban hospitals and for rural hospitals for which the fiscal intermediary is unable to compute a hospital-specific cost-to-charge ratio within the above range. These statewide average ratios would replace the ratios published in the August 1, 2003 IPPS final rule (68 FR 45637). Table 8B in section VI. of this Addendum contains the proposed comparable statewide average capital cost-to-charge ratios. Again, the proposed cost-to-charge ratios in Tables 8A and 8B would be used during FY 2005 when hospital-specific cost-to-charge ratios based on the latest settled cost report are either not available or are outside the range noted above.

\7\ These figues represent 3.0 standard deviations from the mean of the log distribution of cost-to-charge ratios for all hospitals.

iii. FY 2003 and FY 2004 outlier payments. In the August 1, 2003 IPPS final rule (68 FR 45478), we stated that, based on available data, we estimated that actual FY 2003 outlier payments would be approximately 6.5 percent of actual total DRG payments. This estimate was computed based on

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simulations using the FY 2002 MedPAR file (discharge data for FY 2002 bills). That is, the estimate of actual outlier payments did not reflect actual FY 2003 bills, but instead reflected the application of FY 2003 rates and policies to available FY 2002 bills.

Our current estimate, using available FY 2003 bills, is that actual outlier payments for FY 2003 were approximately 5.7 percent of actual total DRG payments. Thus, the data indicate that, for FY 2003, the percentage of actual outlier payments relative to actual total payments is higher than we projected before FY 2003 (and, thus, exceeds the percentage by which we reduced the standardized amounts for FY 2003). Nevertheless, consistent with the policy and statutory interpretation we have maintained since the inception of the IPPS, we do not plan to make retroactive adjustments to outlier payments to ensure that total outlier payments for FY 2003 are equal to 5.1 percent of total DRG payments.

We currently estimate that actual outlier payments for FY 2004 will be approximately 4.4 percent of actual total DRG payments, 0.7 percentage points lower than the 5.1 percent we projected in setting outlier policies for FY 2004. This estimate is based on simulations using the FY 2003 MedPAR file (discharge data for FY 2003 bills). We used these data to calculate an estimate of the actual outlier percentage for FY 2004 by applying FY 2004 rates and policies, including an outlier threshold of $31,000 to available FY 2003 bills. d. Section 410A Rural Community Hospital Demonstration Program Adjustment

Section 410A of Public Law 108-173 requires the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to fifteen small rural hospitals. Section 410A(c)(2) requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' As discussed in section IV.P. of this proposed rule, we are proposing to satisfy this requirement by adjusting national IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. We estimate that the average additional annual payment that will be made to each participating hospital under the demonstration will be approximately $1,120,000. We based this estimate on the recent historical experience of the difference between inpatient cost and payment for hospitals that would be eligible for the demonstration. For 15 participating hospitals, the total annual impact of the demonstration program is estimated to be $16,820,148. We estimate that there will be an average decrease in payment per discharge of approximately $0.83. The required adjustment as a result of the demonstration to the Federal rate in calculating Medicare inpatient prospective payments is 0.999818.

In order to achieve budget neutrality, we are proposing to adjust national IPPS rates by an amount sufficient to account for the added costs of this demonstration. We are proposing, in other words, to apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. This is because the statutory language requires ``aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented,'' but does not identify the range across which aggregate payments must be held equal. We invite public comment on this proposal. 5. Proposed FY 2005 Standardized Amount

The adjusted standardized amount is divided into labor and nonlabor portions. Tables 1A and 1B in section VI. of this Addendum contain the national standardized amount that we are proposing to apply to all hospitals, except hospitals in Puerto Rico. The amounts shown in the two tables differ only in that the labor-related share applied to the standardized amounts in Table 1A is 71.1 percent, and the labor-related share applied to the standardized amounts in Table 1B is 62 percent. As described in section II.A.1. of this Addendum, we are proposing to implement section 403 of Public Law 108-173, which provides that the labor-related share is 62 percent, unless the application of that percentage would result in lower payments to a hospital than would otherwise be made. The effect of this provision is that the labor- related share of the standardized amount is 62 percent for all hospitals whose wage indexes are less than or equal to 1.0000. However, the labor-related share of the standardized amount remains 71.1 percent (reflecting the Secretary's current estimate of the proportion of costs that are wages and wage-related costs) for hospitals whose wage indexes are greater than 1.0000. In addition, both tables include standardized amounts reflecting the full 3.3 percent update for FY 2005, and standardized amounts reflecting the 0.4 percentage point reduction to the update applicable for hospitals that fail to submit quality data consistent with section 501(b) of Public Law 108-173. (Tables 1C and 1D show the new standardized amounts for Puerto Rico, reflecting the different labor shares that apply, that is, 71.3 percent or 62 percent.)

The following tables illustrate the proposed changes from the FY 2004 national average standardized amount. The first column shows the proposed changes from the 2004 standardized amounts for hospitals that satisfy the quality data submission requirement for receiving the full update (3.3 percent). The second column shows the proposed changes for hospitals receiving the reduced update (2.9 percent). The first row in the table shows the updated (through FY 2003) average standardized amount after restoring the FY 2004 offsets for outlier payments and geographic reclassification budget neutrality. The DRG reclassification and recalibration and wage index budget neutrality factor is cumulative. Therefore, the FY 2004 factor is not removed from the amount in the table. We have added separate rows to this table to reflect the different labor-related shares that apply to hospitals.

Comparison of FY 2004 Standardized Amounts to Proposed FY 2005 Single Standardized Amount With Full Update and Reduced Update

Full update (3.3 percent) Reduced update (2.9 percent).

FY 2004 Base Rate (after removing

Labor: $3,331.33........... Labor: $3,331.33 reclassification budget neutrality and Nonlabor: $1,354.09........ Nonlabor: $1,354.09. outlier offset). Proposed FY 2005 Update Factor........... 1.033...................... 1.029.

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Proposed FY 2005 DRG Recalibrations and 0.998969................... 0.998969. Wage Index Budget Neutrality Factor. Proposed FY 2005 Reclassification Budget 0.994295................... 0.994295. Neutrality Factor. Adjusted for Blend of FY 2004 DRG

Labor: $3,418.04........... Labor: $3,404.81 Recalibration and Wage Index Budget Nonlabor: $1,389.33........ Nonlabor: $1,383.95. Neutrality Factors*. Proposed FY 2005 Outlier Factor.......... 0.948994................... 0.948994. Proposed Rural Demo Budget Neutrality 0.999818................... 0.999818. Factor. Proposed Rate for FY 2005 (after

Labor: $2,828.03........... Labor: $2,817.08 multiplying FY 2004 base rate by above Nonlabor: $1,733.30........ Nonlabor: $1,726.59. factors) where the wage index is less than or equal to 1.0000. Proposed Rate for FY 2005 (after

Labor: $3,243.10........... Labor: $3,230.55 multiplying FY 2004 base rate by above Nonlabor: $1,318.22........ Nonlabor: $1,313.12 factors) where the wage index is greater than 1.0000.

*In order to calculate this adjustment correctly, it is necessary to multiply on the DRG recalibration and wage index budget neutrality factor of 1.002608 (1.002588 from October 1, 2003 through March 31, 2004; 1.002628 from April 1, 2004 through September 30, 2004) and divide off the factor of 1.002628 from the second half of FY 2004. This is to account for the fact that it was necessary to employ different budget neutrality adjustments for the first and second halves of FY 2004 due to the extension of the extension of the standardized amount equalization, effective April 1, 2004.

Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto Rico payment rate is based on the discharge-weighted average of the national large urban standardized amount (as set forth in Table 1A). The labor and nonlabor portions of the national average standardized amounts for Puerto Rico hospitals are set forth in Table 1C of section VI. of this Addendum. This table also includes the Puerto Rico standardized amounts. The labor share applied to the Puerto Rico standardized amount is 71.3 percent, or 62 percent, depending on which is more advantageous to the hospital. (Section 403(b) of Public Law 108-173 provides that the labor-related share for hospitals in Puerto Rico will be 62 percent, unless the application of that percentage would result in lower payments to the hospital.)

B. Adjustments for Area Wage Levels and Cost-of-Living

Tables 1A through 1D, as set forth in section VI. of this Addendum, contain the labor-related and nonlabor-related shares that we are proposing to use to calculate the prospective payment rates for hospitals located in the 50 States, the District of Columbia, and Puerto Rico. This section addresses two types of adjustments to the standardized amounts that are made in determining the proposed prospective payment rates as described in this Addendum. 1. Adjustment for Area Wage Levels

Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the national and Puerto Rico prospective payment rates, respectively, to account for area differences in hospital wage levels. This adjustment is made by multiplying the labor-related portion of the adjusted standardized amounts by the appropriate wage index for the area in which the hospital is located. In section III. of the preamble to this proposed rule, we discuss the data and methodology for the proposed FY 2005 wage index. The proposed FY 2005 wage index is set forth in Tables 4A, 4B, 4C, and 4F of section VI. of this Addendum. 2. Adjustment for Cost-of-Living in Alaska and Hawaii

Section 1886(d)(5)(H) of the Act authorizes an adjustment to take into account the unique circumstances of hospitals in Alaska and Hawaii. Higher labor-related costs for these two States are taken into account in the adjustment for area wages described above. For FY 2005, we are proposing to adjust the payments for hospitals in Alaska and Hawaii by multiplying the nonlabor portion of the standardized amount by the appropriate adjustment factor contained in the table below. If the Office of Personnel Management releases revised cost-of-living adjustment factors before July 1, 2004, we will publish them in the final rule and use them in determining FY 2005 payments.

Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals

Cost of living Area

adjustment factor.

Alaska-All areas........................................

1.25. Hawaii:

. County of Honolulu....................................

1.25. County of Hawaii......................................

1.165. County of Kauai.......................................

1.2325. County of Maui........................................

1.2375. County of Kalawao.....................................

1.2375

(The above factors are based on data obtained from the U.S. Office of Personnel Management.)

C. DRG Relative Weights

As discussed in section II. of the preamble, we have developed a classification system for all hospital discharges, assigning them into DRGs, and have developed relative weights for each DRG that reflect the resource utilization of cases in each DRG relative to Medicare cases in other DRGs. Table 5 of section VI. of this Addendum contains the relative weights that we are proposing to use for discharges occurring in FY 2005. These factors have been recalibrated as explained in section II. of the preamble of this proposed rule.

D. Calculation of Proposed Prospective Payment Rates for FY 2005

General Formula for Calculation of Proposed Prospective Payment Rates for FY 2005

The proposed operating prospective payment rate for all hospitals paid under the IPPS located outside of Puerto Rico, except SCHs and MDHs, equals the Federal rate based on the corresponding amounts in Table 1A or Table 1B in section VI. of this Addendum.

[[Page 28379]]

The proposed prospective payment rate for SCHs equals the higher of the applicable Federal rate (from Table 1A or Table 1B) or the hospital-specific rate as described below. The proposed prospective payment rate for MDHs equals the higher of the Federal rate, or the Federal rate plus 50 percent of the difference between the Federal rate and the hospital-specific rate as described below. The proposed prospective payment rate for Puerto Rico equals 25 percent of the Puerto Rico rate plus 75 percent of the applicable national rate from Table 1C or Table 1D in section VI. of this Addendum. 1. Federal Rate

For discharges occurring on or after October 1, 2004 and before October 1, 2005, except for SCHs, MDHs, and hospitals in Puerto Rico, payment under the IPPS is based exclusively on the Federal rate.

The Federal rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (Table 1A for wage indexes greater than 1.0000 and Table 1B for wage indexes less than or equal to 1.0000) and whether the hospital has submitted qualifying quality data (full update for qualifying hospitals, update minus 0.4 percent for nonqualifying hospitals).

Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located or the area to which the hospital is reclassified (see Tables 4A, 4B, and 4C of section VI. of this Addendum).

Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor- related portion of the standardized amount by the appropriate cost-of- living adjustment factor.

Step 4--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount (adjusted, if appropriate, under Step 3).

Step 5--Multiply the final amount from Step 4 by the relative weight corresponding to the appropriate DRG (see Table 5 of section VI. of this Addendum).

The Federal rate as determined in Step 5 may then be further adjusted if the hospital qualifies for either the IME or DSH adjustment. 2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs) a. Calculation of Hospital-Specific Rate

Section 1886(b)(3)(C) of the Act provides that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge.

Section 1886(d)(5)(G) of the Act provides that MDHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal rate or the Federal rate plus 50 percent of the difference between the Federal rate and the greater of the updated hospital-specific rates based on either FY 1982 or FY 1987 costs per discharge. MDHs do not have the option to use their FY 1996 hospital- specific rate.

Hospital-specific rates have been determined for each of these hospitals based on either the FY 1982 costs per discharge, the FY 1987 costs per discharge or, for SCHs, the FY 1996 costs per discharge. For a more detailed discussion of the calculation of the hospital-specific rates, we refer the reader to the September 1, 1983 interim final rule (48 FR 39772); the April 20, 1990 final rule with comment (55 FR 15150); the September 4, 1990 final rule (55 FR 35994); and the August 1, 2000 final rule (65 FR 47082). In addition, for both SCHs and MDHs, the hospital-specific rate is adjusted by the proposed budget neutrality adjustment factor (that is, by 0.998969) as discussed in section II.A.4.a. of this Addendum. The resulting rate would be used in determining the payment rate an SCH or MDH would receive for its discharges beginning on or after October 1, 2004. b. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific Rates for FY 2005

We are proposing to increase the hospital-specific rates by 3.3 percent (the hospital market basket percentage increase) for SCHs and MDHs for FY 2005. Section 1886(b)(3)(C)(iv) of the Act provides that the update factor applicable to the hospital-specific rates for SCHs is equal to the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for SCHs in FY 2005, is the market basket rate of increase. Section 1886(b)(3)(D) of the Act provides that the update factor applicable to the hospital-specific rates for MDHs also equals the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2005, is the market basket rate of increase. 3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2004 and Before October 1, 2005

Section 504 of Public Law 108-173 changes the current blend of 50 percent the Puerto Rico national prospective payment rate and 50 percent of the Puerto Rico-specific prospective payment rate to 62.5 percent Puerto Rico national and 37.5 percent Puerto Rico-specific effective for discharges occurring on or after April 1, 2004 and before October 1, 2004. Effective for discharges occurring on or after October 1, 2004, the effective blend is 75 percent of the Puerto Rico national prospective payment rate and 25 percent of the Puerto Rico-specific rate. a. Puerto Rico Rate

The Puerto Rico prospective payment rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (Table 1C for wage indexes greater than 1.0000 and Table 1D for wage indexes less than or equal to 1.0000).

Step 2--Multiply the labor-related portion of the standardized amount by the appropriate Puerto Rico-specific wage index (see Table 4F of section VI. of the Addendum).

Step 3--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount.

Step 4--Multiply the result in Step 3 by 25 percent.

Step 5--Multiply the amount from Step 4 by the appropriate DRG relative weight (see Table 5 of section VI. of the Addendum). b. National Rate

The national prospective payment rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (Table 1C for wage indexes greater than 1.0000 and Table 1D for wage indexes less than or equal to 1.0000).

Step 2--Add the amount from Step 1 and the nonlabor-related portion of the national average standardized amount.

Step 3--Multiply the result in Step 2 by 75 percent.

Step 4--Multiply the amount from Step 3 by the appropriate DRG relative weight (see Table 5 of section VI. of the Addendum).

The sum of the Puerto Rico rate and the national rate computed above equals the prospective payment for a given discharge for a hospital located in Puerto Rico. This rate may then be

[[Page 28380]]

further adjusted if the hospital qualifies for either the IME or DSH adjustment.

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2005

The PPS for acute care hospital inpatient capital-related costs was implemented for cost reporting periods beginning on or after October 1, 1991. Effective with that cost reporting period, hospitals were paid during a 10-year transition period (which extended through FY 2001) to change the payment methodology for Medicare acute care hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

The basic methodology for determining Federal capital prospective rates is set forth in regulations at Sec. Sec. 412.308 through 412.352. Below we discuss the factors that we are proposing to use to determine the capital Federal rate for FY 2005, which would be effective for discharges occurring on or after October 1, 2004. The 10- year transition period ended with hospital cost reporting periods beginning on or after October 1, 2001 (FY 2002). Therefore, for cost reporting periods beginning in FY 2002, all hospitals (except ``new'' hospitals under Sec. Sec. 412.304(c)(2) and 412.324(b)) are paid based on 100 percent of the capital Federal rate.

For FY 1992, we computed the standard Federal payment rate for capital-related costs under the IPPS by updating the FY 1989 Medicare inpatient capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital costs per case. Each year after FY 1992, we update the capital standard Federal rate, as provided at Sec. 412.308(c)(1), to account for capital input price increases and other factors. The regulations at Sec. 412.308(c)(2) provides that the capital Federal rate is adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital Federal rate to total capital payments under the capital Federal rate. In addition, Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for (regular and special) exception under Sec. 412.348. Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be adjusted so that the effects of the annual DRG reclassification and the recalibration of DRG weights and changes in the geographic adjustment factor are budget neutral.

For FYs 1992 through 1995, Sec. 412.352 required that the capital Federal rate also be adjusted by a budget neutrality factor so that aggregate payments for inpatient hospital capital costs were projected to equal 90 percent of the payments that would have been made for capital-related costs on a reasonable cost basis during the fiscal year. That provision expired in FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to the capital rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the 0.28 percent reduction to the capital rate made in FY 1996 as a result of the revised policy of paying for transfers. In FY 1998, we implemented section 4402 of Public Law 105-33, which requires that, for discharges occurring on or after October 1, 1997, and before October 1, 2002, the unadjusted capital standard Federal rate is reduced by 17.78 percent. As we discussed in the August 1, 2002 IPPS final rule (67 FR 50102) and implemented in Sec. 412.308(b)(6)), a small part of that reduction was restored effective October 1, 2002.

To determine the appropriate budget neutrality adjustment factor and the regular exceptions payment adjustment during the 10-year transition period, we developed a dynamic model of Medicare inpatient capital-related costs; that is, a model that projected changes in Medicare inpatient capital-related costs over time. With the expiration of the budget neutrality provision, the capital cost model was only used to estimate the regular exceptions payment adjustment and other factors during the transition period. As we explained in the August 1, 2001 IPPS final rule (66 FR 39911), beginning in FY 2003, an adjustment for regular exception payments is no longer necessary because regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991, and before October 1, 2001 (see Sec. 412.348(b)). Because, effective with cost reporting periods beginning in FY 2002, payments are no longer being made under the regular exception policy, we no longer use the capital cost model. The capital cost model and its application during the transition period are described in Appendix B of the August 1, 2001 IPPS final rule (66 FR 40099).

In accordance with section 1886(d)(9)(A) of the Act, under the IPPS for acute care hospital operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. However, effective October 1, 1997, in accordance with section 4406 of Public Law 105-33, operating payments to hospitals in Puerto Rico are based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges on or after October 1, 1997, we also revised the methodology for computing capital payments to hospitals in Puerto Rico and computing capital payments based on a blend of 50 percent of the Puerto Rico capital rate and 50 percent of the capital Federal rate.

As we discuss in section VI. of this Addendum to the proposed rule, section 504 of Public Law 108-173 increases the national portion of the operating IPPS payment for Puerto Rico hospitals from 50 percent to 62.5 percent and decreases the Puerto Rico portion of the operating IPPS payments from 50 percent to 37.5 percent for discharges occurring on or after April 1, 2004 through September 30, 2004 (see the March 26, 2004 One-Time Notification (Change Request 3158)). In addition, section 504 of Public Law 108-173 provides that the national portion of operating IPPS payments for Puerto Rico hospitals is equal to 75 percent and the Puerto Rico portion of operating IPPS payments is equal to 35 percent for discharges occurring on or after October 1, 2004. Consistent with this change in operating IPPS payment to hospitals in Puerto Rico for FY 2005, as we discuss in section V.B. of this Addendum to this proposed rule, we are proposing to revise methodology for computing capital IPPS payments to hospitals located in Puerto Rico. We are proposing that we would compute capital payments to hospitals located in Puerto Rico based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate for discharges occurring on or after October 1, 2004.

Section 412.374 provides for the use of a blended payment system for payments to Puerto Rico hospitals under the PPS for acute care hospital inpatient capital-related costs. Accordingly, under the capital IPPS, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital-related costs.

[[Page 28381]]

A. Determination of Proposed Federal Hospital Inpatient Capital-Related Prospective Payment Rate Update

In the final IPPS rule published in the Federal Register on August 1, 2003 (68 FR 45346), we established a capital Federal rate of $415.47 for FY 2004. However, a correction notice to the FY 2004 IPPS final rule issued in the Federal Register on October 6, 2003 (68 FR 57731) contains corrections and revisions to the wage index and geographic adjustment factor (GAF). In conjunction with the change to the wage index and GAF corrections, we established a revised capital PPS standard Federal rate of $414.18 effective for discharges occurring in FY 2004. Furthermore, the One-Time Notification (Change Request 3158), issued on March 26, 2004, implemented various changes in operating IPPS payments required by sections 401, 402 and 504 of Public Law 108-173. As a result of these changes to payments under the operating IPPS, the fixed loss amount for determining the cost outlier threshold was revised effective for discharges occurring on or after April 1, 2004, through September 30, 2004. Because the regulations at Sec. 412.312(c) establish a unified outlier methodology for inpatient operating and capital-related costs, a single set of thresholds are used to identify outlier cases under both the operating IPPS and the capital IPPS. As a result of the revision to the fixed loss amount used for determining the cost outlier threshold effective for discharges occurring on or after April 1, 2004, through September 30, 2004, we established a new capital IPPS standard Federal rate of $413.48 effective for discharges occurring on or after April 1, 2004, through September 30, 2004.

Because there are two capital IPPS standard Federal rates in effect during FY 2004 ($414.18 from October 2003 through March 2004 and $413.48 from April 2004 through September 2004), we are proposing to use an average of the rates effective for the first half of FY 2004 (October 1, 2003 through March 31, 2004) ($414.18) and the second half FY 2004 (April 1, 2004 through September 30, 2004) ($413.48) to determine the proposed FY 2005 capital Federal rate. (The proposed average is $413.83 (($414.18 + $413.48)/2.) As a result of the changes that we are proposing to the factors used to determine the proposed capital Federal rate that are explained in this Addendum, the proposed FY 2005 capital standard Federal rate is $416.59.

In the discussion that follows, we explain the factors that were used to determine the proposed FY 2005 capital Federal rate. In particular, we explain why the proposed FY 2005 capital Federal rate has increased 0.67 percent compared to the FY 2004 capital Federal rate. We also estimate aggregate capital payments will remain constant from FY 2004 to FY 2005. We are projecting aggregate capital PPS to remain unchanged primarily due to a projected decrease in Medicare Part A (fee-for-service) admissions. We are projecting a decrease in Medicare Part A enrollment, in part, because we are projecting an increase in Medicare managed care (M+C) enrollment as a result of implementing several sections of Public Law 108-173.

Total payments to hospitals under the IPPS are relatively unaffected by changes in the capital prospective payments. Since capital payments constitute about 10 percent of hospital payments, a 1- percent change in the capital Federal rate yields only about 0.1 percent change in actual payments to hospitals. Aggregate payments under the capital PPS are estimated to increase in FY 2005 compared to FY 2004. 1. Proposed Capital Standard Federal Rate Update a. Description of the Update Framework

Under Sec. 412.308(c)(1), the capital standard Federal rate is updated on the basis of an analytical framework that takes into account changes in a capital input price index (CIPI) and several other policy adjustment factors. Specifically, we have adjusted the projected CIPI rate of increase as appropriate each year for case-mix index-related changes, for intensity, and for errors in previous CIPI forecasts. The proposed update factor for FY 2005 under that framework is 0.7 percent based on the best data available at this time. The proposed update factor is based on a projected 0.7 percent increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 percent adjustment for case- mix, a 0.0 percent adjustment for the FY 2003 DRG reclassification and recalibration, and a forecast error correction of 0.0 percent. We explain the basis for the FY 2005 CIPI projection in section III.C. of this Addendum. Below we describe the proposed policy adjustments that have been applied.

The case-mix index is the measure of the average DRG weight for cases paid under the IPPS. Because the DRG weight determines the prospective payment for each case, any percentage increase in the case- mix index corresponds to an equal percentage increase in hospital payments.

The case-mix index can change for any of several reasons:

The average resource use of Medicare patients changes (``real'' case-mix change);

Changes in hospital coding of patient records result in higher weight DRG assignments (``coding effects''); and

The annual DRG reclassification and recalibration changes may not be budget neutral (``reclassification effect'').

We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients as opposed to changes in coding behavior that result in assignment of cases to higher weighted DRGs but do not reflect higher resource requirements. In the update framework for the PPS for operating costs, we adjust the update upwards to allow for real case-mix change, but remove the effects of coding changes on the case-mix index. We also remove the effect on total payments of prior year changes to the DRG classifications and relative weights, in order to retain budget neutrality for all case-mix index- related changes other than patient severity. (For example, we adjusted for the effects of the FY 2003 DRG reclassification and recalibration as part of our update for FY 2005.) We have adopted this case-mix index adjustment in the capital update framework as well.

For FY 2005, we are projecting a 1.0 percent total increase in the case-mix index. We estimate that the real case-mix increase would equal 1.0 percent in FY 2005. The net adjustment for change in case-mix is the difference between the projected total increase in case-mix and the projected increase in real case-mix change. Therefore, the net adjustment for case-mix change in FY 2005 is 0.0 percentage points.

We estimate that FY 2003 DRG reclassification and recalibration would result in a 0.0 percent change in the case-mix when compared with the case-mix index that would have resulted if we had not made the reclassification and recalibration changes to the DRGs. Therefore, we are making a 0.0 percent adjustment for DRG reclassification and recalibration in the update for FY 2005 to maintain budget neutrality.

The capital update framework contains an adjustment for forecast error. The input price index forecast is based on historical trends and relationships ascertainable at the time the update factor is established for the upcoming year. In any given year, there may be unanticipated price fluctuations that may result in differences between the actual increase in prices and the forecast used in calculating the update

[[Page 28382]]

factors. In setting a prospective payment rate under the framework, we make an adjustment for forecast error only if our estimate of the change in the capital input price index for any year is off by 0.25 percentage points or more. There is a 2-year lag between the forecast and the measurement of the forecast error. A forecast error of 0.0 percentage points was calculated for the FY 2003 update. That is, current historical data indicate that the forecasted FY 2003 CIPI used in calculating the FY 2003 update factor (0.7 percent) slightly overstated the actual realized price increases (0.6 percent) by 0.1 percentage points. This slight overprediction was mostly due to an underestimation of the interest rate cuts by the Federal Reserve Board in 2003, which impacted the interest component of the CIPI. However, since this estimation of the change in the CIPI is less than 0.25 percentage points, it is not reflected in the update recommended under this framework. Therefore, we are making a 0.0 percent adjustment for forecast error in the update for FY 2005.

Under the capital PPS system framework, we also make an adjustment for changes in intensity. We calculate this adjustment using the same methodology and data that are used in the framework for the operating PPS. The intensity factor for the operating update framework reflects how hospital services are utilized to produce the final product, that is, the discharge. This component accounts for changes in the use of quality-enhancing services, for changes in within-DRG severity, and for expected modification of practice patterns to remove noncost-effective services.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services) and changes in real case-mix. The use of total charges in the calculation of the intensity factor makes it a total intensity factor, that is, charges for capital services are already built into the calculation of the factor. Therefore, we have incorporated the intensity adjustment from the operating update framework into the capital update framework. Without reliable estimates of the proportions of the overall annual intensity increases that are due, respectively, to ineffective practice patterns and to the combination of quality-enhancing new technologies and within-DRG complexity, we assume, as in the operating update framework, that one- half of the annual increase is due to each of these factors. The capital update framework thus provides an add-on to the input price index rate of increase of one-half of the estimated annual increase in intensity, to allow for within-DRG severity increases and the adoption of quality-enhancing technology.

We have developed a Medicare-specific intensity measure based on a 5-year average. Past studies of case-mix change by the RAND Corporation (``Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between 1987 and 1988'' by G. M. Carter, J. P. Newhouse, and D. A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix change was not dependent on total change, but was usually a fairly steady 1.0 to 1.4 percent per year. We use 1.4 percent as the upper bound because the RAND study did not take into account that hospitals may have induced doctors to document medical records more completely in order to improve payment.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case-mix. As we noted above, in accordance with Sec. 412.308(c)(1)(ii), we began updating the capital standard Federal rate in FY 1996 using an update framework that takes into account, among other things, allowable changes in the intensity of hospital services. For FYs 1996 through 2001, we found that case-mix constant intensity was declining and we established a 0.0 percent adjustment for intensity in each of those years. For FYs 2001 and 2002, we found that case-mix constant intensity was increasing and we established a 0.3 percent adjustment and 1.0 percent adjustment for intensity, respectively.

Using the methodology described above, for FY 2005 we examined the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case- mix for FYs 1999 through 2003. We found that, over this period and in particular the last 4 years of this period (FYs 2000 through 2003), the charge data appear to be skewed. More specifically, we found a dramatic increase in hospital charges for FYs 2000 through 2003 without a corresponding increase in hospital case-mix index. These findings are similar to the considerable increase in hospitals charges we found when we were determining the intensity factor in the FY 2004 update recommendation as discussed in the August 1, 2003 final rule (69 FR 45482). If hospitals were treating new or different types of cases, which would result in an appropriate increase in charges per discharge, then we would expect hospitals' case-mix to increase proportionally.

As we discussed in the August 1, 2003 final rule (68 FR 45482), because our intensity calculation relies heavily upon charge data and we believe that this charge data may be inappropriately skewed, we established a 0.0 percent adjustment for intensity for FY 2004. In that same final rule, we stated that we believe that it is appropriate to propose a zero intensity adjustment until we believe that any increase in charges can be tied to intensity rather then to attempts to maximize outlier payments. As discussed above, based on the most recent available data, we believe that the charge data used to make this determination may still be inappropriately skewed. Since our intensity calculation relies heavily upon charge data (which may be inappropriately skewed), we are proposing a 0.0 percent adjustment for intensity for FY 2005 in this proposed rule. We note that, in past FYs (1996 through 2000) when we found intensity to be declining, we believed a zero (rather then negative) intensity adjustment was appropriate. Similarly, we believe that it is appropriate to propose a zero intensity adjustment for FY 2005 until we believe that any increase in charges can be tied to intensity rather than to attempts to maximize outlier payments.

Above we described the basis of the components used to develop the proposed 0.7 percent capital update factor for FY 2005 as shown in the table below.

CMS's Proposed FY 2005 Update Factor to the Capital Federal Rate

.

Capital Input Price Index...................................... 0.7. Intensity...................................................... 0.0. Case-Mix Adjustment Factors:. Projected Case-Mix Change.................................... 1.0 Real Across DRG Change....................................... -1.0.

Subtotal................................................... 0.0. Effect of FY 2003 Reclassification and Recalibration........... 0.0 Forecast Error Correction...................................... 0.0.

Total Proposed Update........................................ 0.7

b. Comparison of CMS and MedPAC Update Recommendation

In the past, MedPAC has included update recommendations for capital PPS in a Report to Congress. In its March 2004 Report to Congress, MedPAC did not make an update recommendation for capital PPS payments for FY 2005. However, in that same report, MedPAC made an update

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recommendation for hospital inpatient and outpatient services (page 87). MedPAC reviews inpatient and outpatient services together since they are so closely interrelated. MedPAC's recommendation of the full market basket update for both the inpatient and outpatient PPSs is based on their assessment of beneficiaries' access to care, volume growth, access to capital, quality, and the relationship of Medicare payments to costs in the hospital sector.

2. Outlier Payment Adjustment Factor

Section 412.312(c) establishes a unified outlier methodology for inpatient operating and inpatient capital-related costs. A single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments. Section 412.308(c)(2) provides that the standard Federal rate for inpatient capital-related costs be reduced by an adjustment factor equal to the estimated proportion of capital related outlier payments to total inpatient capital-related PPS payments. The outlier thresholds are set so that operating outlier payments are projected to be 5.1 percent of total operating DRG payments.

In the August 1, 2003 IPPS final rule (68 FR 45482), we estimated that outlier payments for capital in FY 2004 would equal 4.79 percent of inpatient capital-related payments based on the FY 2004 capital Federal rate. Accordingly, we applied an outlier adjustment factor of 0.9521 to the FY 2004 capital Federal rate. However, as we noted above, we published a correction notice in the Federal Register on October 6, 2003 (68 FR 57731), which established revised rates and factors for FY 2004. In that same correction notice (68 FR 57734), we estimated that outlier payments for capital in FY 2004 would equal 4.77 percent of inpatient capital-related payments based on the FY 2004 capital Federal rate. Accordingly, we established a revised outlier adjustment of 0.9523 for use in determining the FY 2004 capital Federal rate. In addition, as we noted above, a One-Time Notification (Change Request 3158) issued on March 26, 2004, implemented various changes in operating IPPS payments required by sections 401, 402, and 504 of Public Law 108-173, effective for discharges on or after April 1, 2004, through September 30, 2004. As a result of changes made to payments under the operating IPPS, the rates and some of the factors, including the outlier adjustment, under the capital IPPS were also revised effective for discharges on or after April 1, 2004, through September 30, 2004. The revised outlier adjustment effective for the second half of FY 2004 (April 2004 through September 2004) is 0.9508.

Based on the thresholds as set forth in section II.A.4.c. of this Addendum, we estimate that outlier payments for capital would equal 5.03 percent of inpatient capital-related payments based on the proposed capital Federal rate in FY 2005. Therefore, we are proposing an outlier adjustment factor of 0.9497 to the capital Federal rate. Thus, the percentage of capital outlier payments to total capital standard payments for FY 2005 is higher than the percentages estimated for the first half (4.77 percent for October 2003 through March 2004) and the second half (4.92 percent for April 2004 through September 2004) of FY 2004.

The outlier reduction factors are not built permanently into the capital rates; that is, they are not applied cumulatively in determining the capital Federal rate. As we discussed above, there were two outlier adjustment factors applied during FY 2004 (0.9523 from October 2003 through March 2004 and 0.9508 from April 2004 through September 2004). The proposed FY 2005 outlier adjustment of 0.9497 is a -0.19 percent change from the average FY 2004 outlier adjustment of 0.9515 (the mean of the factors for the first half of FY 2004 (0.9523) and the second half of FY 2004 (0.9508) calculated from unrounded numbers). The proposed net change in the outlier adjustment to the capital Federal rate for FY 2005 is 0.9981 (0.9497/0.9515). Thus, the proposed outlier adjustment decreases the FY 2005 capital Federal rate by 0.19 percent compared with the average FY 2004 outlier adjustment. 3. Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the Geographic Adjustment Factor

Section 412.308(c)(4)(ii) requires that the capital Federal rate be adjusted so that aggregate payments for the fiscal year based on the capital Federal rate after any changes resulting from the annual DRG reclassification and recalibration and changes in the geographic adjustment factor (GAF) are projected to equal aggregate payments that would have been made on the basis of the capital Federal rate without such changes.

Since we implemented a separate geographic adjustment factor for Puerto Rico, we apply separate budget neutrality adjustments for the national geographic adjustment factor and the Puerto Rico geographic adjustment factor. We apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. Separate adjustments were unnecessary for FY 1998 and earlier fiscal years since the geographic adjustment factor for Puerto Rico was implemented in FY 1998.

In the past, we used the actuarial capital cost model (described in Appendix B of the August 1, 2001 IPPS final rule (66 FR 40099)) to estimate the aggregate payments that would have been made on the basis of the capital Federal rate with and without changes in the DRG classifications and weights and in the GAF to compute the adjustment required to maintain budget neutrality for changes in DRG weights and in the GAF. During the transition period, the capital cost model was also used to estimate the regular exception payment adjustment factor. As we explain in section III.A.4. of this Addendum, beginning in FY 2002, an adjustment for regular exception payments is no longer necessary. Therefore, we are no longer using the capital cost model. Instead, we are using historical data based on hospitals' actual cost experiences to determine the exceptions payment adjustment factor for special exceptions payments.

To determine the proposed factors for FY 2005, we compared (separately for the national capital rate and the Puerto Rico capital rate) estimated aggregate capital Federal rate payments based on the FY 2004 DRG relative weights and the average FY 2004 GAF (that is, the mean of the GAFs applied from October 2003 through March 2004 and the GAFs applied from April 2004 through September 2004) to estimated aggregate capital Federal rate payments based on the proposed FY 2005 relative weights and the proposed FY 2005 GAF. For the first half of FY 2004 (October 1, 2003 through March 31, 2004), the budget neutrality adjustment factors were 0.9908 for the national capital rate and 0.9974 for the Puerto Rico capital rate (see the October 6, 2003 correction notice). For the second half of FY 2004 (April 1, 2004 through September 30, 2004), the budget neutrality adjustment factor was revised to 0.9907 for the national capital rate. The budget neutrality factor for the Puerto Rico capital rate remained unchanged (0.9974). In making the comparison, we set the regular and special exceptions reduction factors to 1.00.

To achieve budget neutrality for the changes in the national GAF, based on calculations using updated data, we are proposing to apply an incremental budget neutrality adjustment of 1.0018 for FY 2005 to the average of the previous cumulative FY 2004

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adjustments of 0.9908 ((0.99083 + 0.99072)/2), yielding a proposed cumulative adjustment of 0.9925 through FY 2005 (calculations were done with unrounded numbers). For the Puerto Rico GAF, we are proposing to apply an incremental budget neutrality adjustment of 0.9989 for FY 2005 to the average of the previous cumulative FY 2004 adjustment of 0.9974, yielding a proposed cumulative adjustment of 0.9963 through FY 2005.

We then compared estimated aggregate capital Federal rate payments based on the FY 2004 DRG relative weights and the average FY 2004 GAF to estimated aggregate capital Federal rate payments based on the proposed FY 2005 DRG relative weights and the proposed FY 2005 GAF. The proposed incremental adjustment for DRG classifications and changes in relative weights is 0.9997 both nationally and for Puerto Rico. The proposed cumulative adjustments for DRG classifications and changes in relative weights and for changes in the GAF through FY 2005 are 0.9922 nationally and 0.9960 for Puerto Rico. The following table summarizes the adjustment factors for each fiscal year: BILLING CODE 4120-03-U

[GRAPHIC] [TIFF OMITTED] TP18MY04.407

BILLING CODE 4120-03-C

The methodology used to determine the proposed recalibration and geographic (DRG/GAF) budget neutrality adjustment factor for FY 2005 is similar to that used in establishing budget neutrality adjustments under the PPS for operating costs. One difference is that, under the operating PPS, the budget neutrality adjustments for the effect of geographic reclassifications are determined separately from the effects of other changes in the hospital wage index and the DRG relative weights. Under the capital PPS, there is a single DRG/GAF budget neutrality adjustment factor (the national capital rate and the Puerto Rico capital rate are determined separately) for changes in the GAF (including geographic reclassification) and the DRG relative weights. In addition, there is no adjustment for the effects that geographic reclassification has on the other payment parameters, such as the payments for serving low-income patients, indirect medical education payments, or the large urban add-on payments.

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In the August 1, 2003 IPPS final rule (68 FR 45346), we calculated a GAF/DRG budget neutrality factor of 1.00591 for FY 2004. As we noted above, as a result of the revisions to the GAF effective for FY 2004 in the October 6, 2003 correction notice, we calculated a GAF/DRG budget neutrality factor of 1.00256 for discharges occurring in FY 2004. As we also noted above, as a result of implementing sections 401, 402, and 504 of Public Law 108-173, we calculated a GAF/DRG budget neutrality factor of 1.00245 for discharges occurring on or after April 1, 2004 through September 30, 2004. Furthermore, as noted above, the average of capital rates and factors in effect for the first half (October 2003 through March 2004) and second half (April 2004 through September 2004) of FY 2004 was used in determining the FY 2005 capital rates.

For FY 2005, we are proposing a GAF/DRG budget neutrality factor of 1.0015. The GAF/DRG budget neutrality factors are built permanently into the capital rates; that is, they are applied cumulatively in determining the capital Federal rate. This follows from the requirement that estimated aggregate payments each year be no more or less than they would have been in the absence of the annual DRG reclassification and recalibration and changes in the GAF. The proposed incremental change in the adjustment from FY 2004 to FY 2005 is 1.0015. The proposed cumulative change in the capital Federal rate due to this adjustment is 0.9922 (the product of the incremental factors for FY 1993, FY 1994, FY 1995, FY 1996, FY 1997, FY 1998, FY 1999, FY 2000, FY 2001, FY 2002, FY 2003, average FY 2004 and the proposed incremental factor for FY 2005: 0.9980 x 1.0053 x 0.9998 x 0.9994 x 0.9987 x 0.9989 x 1.0028 x 0.9985 x 0.9979 x 0.9934 x 0.9956 x 1.0025 x 1.0015=0.9922).

This proposed factor accounts for DRG reclassifications and recalibration and for changes in the GAF. It also incorporates the effects on the GAF of FY 2005 geographic reclassification decisions made by the MGCRB compared to FY 2004 decisions. However, it does not account for changes in payments due to changes in the DSH and IME adjustment factors or in the large urban add-on.

4. Exceptions Payment Adjustment Factor

Section 412.308(c)(3) requires that the capital standard Federal rate be reduced by an adjustment factor equal to the estimated proportion of additional payments for both regular exceptions and special exceptions under Sec. 412.348 relative to total capital PPS payments. In estimating the proportion of regular exception payments to total capital PPS payments during the transition period, we used the actuarial capital cost model originally developed for determining budget neutrality (described in Appendix B of the August 1, 2001 IPPS final rule (66 FR 40099)) to determine the exceptions payment adjustment factor, which was applied to both the Federal and hospital- specific capital rates.

An adjustment for regular exception payments is no longer necessary in determining the FY 2005 capital Federal rate because, in accordance with Sec. 412.348(b), regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991 and before October 1, 2001. Accordingly, as we explained in the August 1, 2001 IPPS final rule (66 FR 39949), in FY 2002 and subsequent fiscal years, no payments will be made under the regular exceptions provision. However, in accordance with Sec. 412.308(c), we still need to compute a budget neutrality adjustment for special exception payments under Sec. 412.348(g). We describe our methodology for determining the special exceptions adjustment used in calculating the FY 2005 capital Federal rate below.

Under the special exceptions provision specified at Sec. 412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a disproportionate share percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals with a combined Medicare and Medicaid inpatient utilization of at least 70 percent. An eligible hospital may receive special exceptions payments if it meets (1) a project need requirement as described at Sec. 412.348(g)(2), which, in the case of certain urban hospitals, includes an excess capacity test as described at Sec. 412.348(g)(4); (2) an age of assets test as described at Sec. 412.348(g)(3); and (3) a project size requirement as described at Sec. 412.348(g)(5).

Based on information compiled from our fiscal intermediaries, six hospitals have qualified for special exceptions payments under Sec. 412.348(g). Since we have cost reports ending in FY 2003 for all of these hospitals, we calculated the proposed adjustment based on actual cost experience. Using data from cost reports ending in FY 2003 from the March 2004 update of the HCRIS data, we divided the capital special exceptions payment amounts for the six hospitals that qualified for special exceptions by the total capital PPS payment amounts (including special exception payments) for all hospitals. Based on the data from cost reports ending in FY 2003, this ratio is rounded to 0.0004. Because we have not received all cost reports ending in FY 2003, we also divided the FY 2003 special exceptions payments by the total capital PPS payment amounts for all hospitals with cost reports ending in FY 2002. This ratio also rounds to 0.0004. Because special exceptions are budget neutral, we are proposing to offset the capital Federal rate by 0.04 percent for special exceptions payments for FY 2005. Therefore, the proposed exceptions adjustment factor is equal to 0.9996 (1-0.0004) to account for special exceptions payments in FY 2005.

In the August 1, 2003 IPPS final rule (68 FR 45384) for FY 2004, we estimated that total (special) exceptions payments would equal 0.05 percent of aggregate payments based on the capital Federal rate. Therefore, we applied an exceptions adjustment factor of 0.9995 (1- 0.0005) in determining the FY 2004 capital Federal rate. (We note that the special exceptions adjustment factor for FY 2004 was not revised in either the October 6, 2003 correction notice or the March 26, 2004 One- Time Notification.) As we stated above, we estimate that exceptions payments in FY 2005 would equal 0.04 percent of aggregate payments based on the FY 2005 capital Federal rate. Therefore, we are proposing to apply an exceptions payment adjustment factor of 0.9996 to the capital Federal rate for FY 2005. The proposed exceptions adjustment factor for FY 2005 is 0.01 percent higher than the factor for FY 2004 published in the August 1, 2003 IPPS final rule (68 FR 45346). The exceptions reduction factors are not built permanently into the capital rates; that is, the factors are not applied cumulatively in determining the capital Federal rate. Therefore, the proposed net change in the exceptions adjustment factor used in determining the proposed FY 2005 capital Federal rate is 1.0001 (0.9996/0.9995).

5. Proposed Capital Standard Federal Rate for FY 2005

In the August 1, 2003 IPPS final rule (68 FR 45346) we established a capital Federal rate of $415.47 for FY 2004. As we noted above, as a result of the revisions to the GAF for FY 2004, in the October 6, 2003 correction notice, we established a capital Federal rate of $414.18 for discharges occurring in FY 2004. As we also discussed above, a One-Time Notification issued on March 26, 2004, which implemented various

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changes in operating IPPS payments required by sections 401, 402, and 504 of Public Law 108-173, resulted in a revised capital Federal rate of $413.48 effective for discharges occurring on or after April 1, 2004 through September 30, 2004. Because there are two capital IPPS standard Federal rates in effect during FY 2004 ($414.18 from October 2003 through March 2004 and $413.48 from April 2004 through September 2004), we are proposing to use an average of the rates effective for the first half ($414.18) and the second half ($413.48) of FY 2004 of $413.83 (($414.18 + $413.48)/2) in determining the proposed FY 2005 capital Federal rate. In this proposed rule, we are proposing to establish a capital Federal rate of $416.59 for FY 2005. The proposed capital Federal rate for FY 2005 was calculated as follows:

The proposed FY 2005 update factor is 1.007; that is, the update is 0.7 percent.

The proposed FY 2005 budget neutrality adjustment factor that is applied to the capital standard Federal payment rate for changes in the DRG relative weights and in the GAF is 1.0015.

The proposed FY 2005 outlier adjustment factor is 0.9497.

The proposed FY 2005 (special) exceptions payment adjustment factor is 0.9996.

Because the proposed capital Federal rate has already been adjusted for differences in case-mix, wages, cost-of-living, indirect medical education costs, and payments to hospitals serving a disproportionate share of low-income patients, we are proposing to make no additional adjustments in the capital standard Federal rate for these factors, other than the budget neutrality factor for changes in the DRG relative weights and the GAF.

We are providing a chart that shows how each of the proposed factors and adjustments for FY 2005 affected the computation of the proposed FY 2005 capital Federal rate in comparison to the average FY 2004 capital Federal rate. The proposed FY 2005 update factor has the effect of increasing the capital Federal rate by 0.70 percent compared to the average FY 2004 Federal rate. The proposed GAF/DRG budget neutrality factor has the effect of increasing the capital Federal rate by 0.15 percent. The proposed FY 2005 outlier adjustment factor has the effect of decreasing the capital Federal rate by 0.19 percent compared to the average FY 2004 capital Federal rate and the proposed FY 2005 exceptions payment adjustment factor has the effect of increasing the capital Federal rate by 0.01 percent compared to the exceptions payment adjustment factor for the FY 2004 capital Federal rate. The combined effect of all the proposed changes is to increase the capital Federal rate by 0.67 percent compared to the average FY 2004 capital Federal rate.

Comparison of Factors and Adjustments: FY 2004 Capital Federal Rate 1 and Proposed FY 2005 Capital Federal Rate

Proposed FY

Percent FY 2004 \1\ 2005

Change change

Update factor \2\.........................................

1.0070

1.0070 1.0070

0.70 GAF/DRG Adjustment Factor \2\.............................

1.0025

1.0015 1.0015

0.15 Outlier Adjustment Factor \3\.............................

0.9515

0.9497 0.9981

-0.19 Exceptions Adjustment Factor \3\..........................

0.9995

0.9996 1.0001

0.01 Capital Federal Rate...................................... $413.83 $416.59

1.0067

0.67

\1\ Because there are two capital IPPS standard Federal rates in effect during FY 2004 ($414.18 from October 2003 through March 2004 and $413.48 from April 2004 through September 2004), an average of the rates and factors effective for the first half (October 2003 through March 2004) and the second half (April 2004 through September 2004)) of FY 2004 were used. \2\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental change from FY 2004 to FY 2005 resulting from the application of the proposed 1.0015 GAF/DRG budget neutrality factor for FY 2005 is 1.0015. \3\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the proposed FY 2005 outlier adjustment factor is 0.9497/0.9515, or 0.9981.

6. Special Capital Rate for Puerto Rico Hospitals

As discussed above, beginning in FY 1998, hospitals in Puerto Rico are currently paid based on 50 percent of the Puerto Rico capital rate and 50 percent of the capital Federal rate. The Puerto Rico capital rate is derived from the costs of Puerto Rico hospitals only, while the capital Federal rate is derived from the costs of all acute care hospitals participating in the PPS (including Puerto Rico). Section 504 of Public Law 108-173 increases the national portion of the operating IPPS payment for Puerto Rico hospitals from 50 percent to 75 percent and decreases the Puerto Rico portion of the operating IPPS payments for hospitals located in Puerto Rico from 50 percent to 37.5 percent for discharges occurring on or after April 1, 2004, through September 30, 2004. In addition, section 504 of Public Law 108-173 provides that the national portion of operating IPPS payments for Puerto Rico hospitals is equal to 75 percent and the Puerto Rico portions of the operating IPPS payments is equal to 37.5 percent for discharges occurring on or after October 1, 2004. As discussed in section V.B. of the preamble of this proposed rule, under the broad authority of section 1886(g) of the Act, we are proposing for FY 2005 to increase the national portion of the capital IPPS payment to hospitals located in Puerto Rico from 50 percent to 75 percent, as well. Therefore, for discharges occurring on or after October 1, 2004, capital payments to hospitals in Puerto Rico would be based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate.

To adjust hospitals' capital payments for geographic variations in capital costs, we apply a GAF to both portions of the blended capital rate. The GAF is calculated using the operating PPS wage index and varies, depending on the MSA or rural area in which the hospital is located. We use the Puerto Rico wage index to determine the GAF for the Puerto Rico part of the capital-blended rate and the national wage index to determine the GAF for the national part of the blended capital rate.

Because we implemented a separate GAF for Puerto Rico in FY 1998, we also apply separate budget neutrality adjustments for the national GAF and for the Puerto Rico GAF. However, we apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. As we stated above in section III.A.4. of this Addendum, for Puerto

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Rico the proposed GAF budget neutrality factor is 0.9989, while the proposed DRG adjustment is 0.9997, for a proposed combined cumulative adjustment of 0.9960.

In computing the payment for a particular Puerto Rico hospital, the Puerto Rico portion of the capital rate (currently 50 percent; 25 percent proposed for FY 2005 and thereafter) is multiplied by the Puerto Rico-specific GAF for the MSA in which the hospital is located, and the national portion of the capital rate (currently 50 percent; 75 percent proposed for FY 2005 and thereafter) is multiplied by the national GAF for the MSA in which the hospital is located (which is computed from national data for all hospitals in the United States and Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to the Puerto Rico capital rate as a result of Public Law 105-33. In FY 2003, a small part of that reduction was restored.

For FY 2004, before application of the GAF, the special capital rate for Puerto Rico hospitals was $203.17 for discharges occurring on or after October 1, 2003 through March 31, 2004 (see the October 6, 2003 correction notice) and $202.96 for discharges occurring on or after April 1, 2004 through September 30, 2004 (see the March 26, 2004 One-Time Notification). With the changes we are proposing to the factors used to determine the capital rate, the proposed FY 2005 special capital rate for Puerto Rico is $200.52.

B. Calculation of Inpatient Capital-Related Prospective Payments for FY 2005

Because the 10-year capital PPS transition period ended in FY 2001, all hospitals (except ``new'' hospitals under Sec. 412.324(b) and under Sec. 412.304(c)(2)) are paid based on 100 percent of the capital Federal rate in FY 2005. The applicable proposed capital Federal rate was determined by making adjustments as follows:

For outliers, by dividing the proposed capital standard Federal rate by the proposed outlier reduction factor for that fiscal year; and

For the payment adjustments applicable to the hospital, by multiplying the hospital's proposed GAF, disproportionate share adjustment factor, and IME adjustment factor, when appropriate.

For purposes of calculating payments for each discharge during FY 2005, the capital standard Federal rate is adjusted as follows: (Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on, if applicable) x (COLA adjustment for hospitals located in Alaska and Hawaii) x (1 + Disproportionate Share Adjustment Factor + IME Adjustment Factor, if applicable). The result is the adjusted capital Federal rate.

Hospitals also may receive outlier payments for those cases that qualify under the thresholds established for each fiscal year. Section 412.312(c) provides for a single set of thresholds to identify outlier cases for both inpatient operating and inpatient capital-related payments. The proposed outlier thresholds for FY 2005 are in section II.A.4.c. of this Addendum. For FY 2005, a case qualifies as a cost outlier if the cost for the case plus the IME and DSH payments is greater than the prospective payment rate for the DRG plus $35,085.

An eligible hospital may also qualify for a special exceptions payment under Sec. 412.348(g) for up through the 10th year beyond the end of the capital transition period if it meets: (1) a project need requirement described at Sec. 412.348(g)(2), which in the case of certain urban hospitals includes an excess capacity test as described at Sec. 412.348(g)(4); and (2) a project size requirement as described at Sec. 412.348(g)(5). Eligible hospitals include sole community hospitals, urban hospitals with at least 100 beds that have a DSH patient percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals that have a combined Medicare and Medicaid inpatient utilization of at least 70 percent. Under Sec. 412.348(g)(8), the amount of a special exceptions payment is determined by comparing the cumulative payments made to the hospital under the capital PPS to the cumulative minimum payment level. This amount is offset by: (1) Any amount by which a hospital's cumulative capital payments exceed its cumulative minimum payment levels applicable under the regular exceptions process for cost reporting periods beginning during which the hospital has been subject to the capital PPS; and (2) any amount by which a hospital's current year operating and capital payments (excluding 75 percent of operating DSH payments) exceed its operating and capital costs. Under Sec. 412.348(g)(6), the minimum payment level is 70 percent for all eligible hospitals.

During the transition period, new hospitals (as defined under Sec. 412.300) were exempt from the capital PPS for their first 2 years of operation and were paid 85 percent of their reasonable costs during that period. Effective with the third year of operation through the remainder of the transition period, under Sec. 412.324(b) we paid the hospital under the appropriate transition methodology. If the hold- harmless methodology were applicable, the hold-harmless payment for assets in use during the base period would extend for 8 years, even if the hold-harmless payments extend beyond the normal transition period. As discussed in section VI.A. of the preamble of this proposed rule, under Sec. 412.304(c)(2), for cost reporting periods beginning on or after October 1, 2002, we pay a new hospital 85 percent of their reasonable costs during the first 2 years of operation unless it elects to receive payment based on 100 percent of the capital Federal rate. Effective with the third year of operation, we pay the hospital based on 100 percent of the capital Federal rate (that is, the same methodology used to pay all other hospitals subject to the capital PPS).

C. Capital Input Price Index

1. Background

Like the operating input price index, the capital input price index (CIPI) is a fixed-weight price index that measures the price changes associated with capital costs during a given year. The CIPI differs from the operating input price index in one important aspect--the CIPI reflects the vintage nature of capital, which is the acquisition and use of capital over time. Capital expenses in any given year are determined by the stock of capital in that year (that is, capital that remains on hand from all current and prior capital acquisitions). An index measuring capital price changes needs to reflect this vintage nature of capital. Therefore, the CIPI was developed to capture the vintage nature of capital by using a weighted-average of past capital purchase prices up to and including the current year.

We periodically update the base year for the operating and capital input prices to reflect the changing composition of inputs for operating and capital expenses. The CIPI was last rebased to FY 1997 in the August 1, 2002 final rule (67 FR 50044). 2. Forecast of the CIPI for Federal Fiscal Year 2005

Based on the latest forecast by Global Insight, Inc. (first quarter of 2004), we are forecasting the CIPI to increase 0.7 percent in FY 2005. This reflects a projected 1.2 percent increase in vintage- weighted depreciation prices (building and fixed equipment, and movable equipment) and a 3.0 percent increase in other capital expense prices in FY 2005, partially offset by a 2.5 percent decline in vintage- weighted

[[Page 28388]]

interest expenses in FY 2005. The weighted average of these three factors produces the 0.7 percent increase for the CIPI as a whole in FY 2005.

IV. Proposed Changes to Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages

[If you choose to comment on issues in this section, please include the caption ``Excluded Hospitals Rate of Increase'' at the beginning of your comment.]

As discussed in section VI. of the preamble of this proposed rule, in accordance with section 1886(b)(3)(H)(i) of the Act and effective for cost reporting periods beginning on or after October 1, 2002, payments to existing psychiatric hospitals and units, rehabilitation hospitals and units, and long-term care hospitals excluded from the IPPS are no longer subject to limits on a hospital-specific target amount (expressed in terms of the inpatient operating cost per discharge) that are set for each hospital, based on the hospital's own historical cost experience trended forward by the applicable rate-of- increase percentages (update factors).

Effective for cost reporting periods beginning on or after October 1, 2002, rehabilitation hospitals and units are paid 100 percent of the IRF PPS Federal rate. Effective for cost reporting periods beginning on or after October 1, 2002, LTCHs also are no longer paid on a reasonable cost basis, but are paid under a LTCH DRG-based PPS. As part of the payment process for LTCHs, we established a 5-year transition period from reasonable cost-based reimbursement to a fully Federal PPS. However, a LTCH may elect to be paid based on 100 percent of the Federal prospective payment rate. We have proposed, but not finalized, an IPF PPS under which psychiatric hospitals and units would no longer be paid on a reasonable cost basis but would be paid on a prospective per diem basis. (68 FR 66920, November 28, 2003)

In accordance with existing Sec. Sec. 413.40(c)(4)(ii) and (d)(1)(i) and (ii), where applicable, excluded psychiatric hospitals and units continue to be paid on a reasonable cost basis, payments are based on their Medicare inpatient operating costs, not to exceed the ceiling (as defined in Sec. 413.40(a)(3)). In addition, LTCHs that are paid under a blend methodology will have the TEFRA portion subject to the ceiling as well.

Section 1886(b)(7) of the Act had established a payment limitation for new rehabilitation hospitals and units, psychiatric hospitals and units, and long-term care hospitals that first received payment as a hospital or unit excluded from the IPPS on or after October 1, 1997. However, effective for cost reporting periods beginning on or after October 1, 2002, this payment limitation is no longer applicable to new rehabilitation hospitals or units because they are paid 100 percent of the Federal prospective rate under the IRF PPS. Also, effective for cost reporting periods beginning on or after October 1, 2002, new LTCHs are paid based on 100 percent of the fully Federal prospective rate. In contrast, those ``new'' LTCHs that meet the definition of ``new'' under Sec. 412.40(f)(2)(ii) and that have their first cost reporting periods beginning on or after October 1, 1997 and before October 1, 2002, may be paid under the LTCH PPS transition methodology. Since those hospitals by definition would have been considered new before October 1, 2002, they would have been subject to the updated payment limitation on new hospitals that was published in the FY 2003 IPPS final rule (67 FR 50103). A discussion of how the payment limitation was calculated can be found in the August 29, 1997 final rule with comment period (62 FR 46019); the May 12, 1998 final rule (63 FR 26344); the July 31, 1998 final rule (63 FR 41000); and the July 30, 1999 final rule (64 FR 41529).

The amount of payment for a ``new'' psychiatric hospital or unit would be determined as follows:

Under existing Sec. 413.40(f)(2)(ii), for the first 12- month cost reporting periods beginning on or after October 1, 1997, the amount of payment for a new hospital or unit that was not paid as an excluded hospital or unit before October 1, 1997, is the lower of: (1) The hospital's net inpatient operating costs per case; or (2) 110 percent of the national median of the target amounts for the same class of excluded hospitals and units, adjusted for differences in wage levels and updated to the first cost reporting period in which the hospital receives payment. The second 12-month cost reporting period is subject to the same target amount applied to the first cost reporting period.

In the case of a hospital that received payments under Sec. 413.40(f)(2)(ii) as a newly created hospital or unit, to determine the hospital's or unit's target amount for the hospital's or unit's third 12-month cost reporting period, the payment amount determined under Sec. 413.40(f)(2)(ii)(A) for the preceding cost reporting period is updated to the third cost reporting period.

The amounts included in the following table reflect the proposed updated 110 percent of the national median target amounts of new excluded psychiatric hospitals and units for cost reporting periods beginning during FY 2005. These figures are updated with the most recent data available to reflect the projected market basket increase percentage of 3.3 percent. This projected percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient hospital services (as projected by CMS' Office of the Actuary based on its historical experience with the IPPS). For a new provider, the labor-related share of the target amount is multiplied by the appropriate geographic area wage index, without regard to IPPS reclassifications, and added to the nonlabor-related share in order to determine the per case limit on payment under the statutory payment methodology for new providers.

Proposed FY 2005 Proposed FY 2005 Class of excluded hospital or unit labor-related nonlabor-related share

share.

Psychiatric.......................

$7,534.70

$2,994.67

This payment limitation is no longer applicable to new LTCHs that meet the definition of Sec. 412.23(e)(4) since they will be paid 100 percent of the Federal rate. (Section 412.23(e)(4) states that for purposes of payment under the LTCH PPS, a new LTCH is a provider of inpatient services that meets the qualifying criteria in paragraphs (e)(1) and (e)(2) of this section and, under present or previous ownership (or both), its first cost reporting period as a LTCH begins on or after October 1, 2002). Under the LTCH PPS, new LTCHs are based on 100 percent of the fully Federal prospective rate (they may not participate in the 5-year transition from cost-based reimbursement to

[[Page 28389]]

prospective payment). In contrast, those ``new'' LTCHs that meet the definition of ``new'' under Sec. 413.40(f)(2)(ii) and that have their first cost reporting periods beginning on or after October 1, 1997, and before October 1, 2002, may be paid under the LTCH PPS transition methodology. Because those hospitals by definition would have been considered new before October 1, 2002, they would have been subject to the updated payment limitation on new hospitals that was published in the FY 2003 IPPS final rule (67 FR 50103). Under existing regulations at Sec. 413.40(f)(2)(ii), the ``new'' hospital would be subject to the same cap in its second cost reporting period; this cap would not be updated for the new hospital's second cost reporting year. Thus, since the same cap is to be used for the ``new'' LTCH's first two cost reporting periods, it is no longer necessary to publish an updated cap.

V. Payment for Blood Clotting Factor Administered to Hemophilia Inpatients

[If you choose to comment on issues in this section, please include the caption ``Payment for Blood Clotting Factor'' at the beginning of your comment.]

In December 2002, the Department implemented a policy that established the Single Drug Pricer (SDP) to correct identified discrepancies, further the legislative goal of establishing a uniform payment allowance as a reflection of the average wholesale price (AWP), and otherwise apply the existing stature and regulation more accurately and efficiently (CMS Program Memorandum AB-02-174, December 3, 2002, which can be accessed at: http://www.cms.hhs.gov/manuals). Under the

SDP, CMS will establish prices centrally, thereby resulting in greater consistency in drug pricing nationally. The SDP instruction applies to blood clotting factors furnished to hospital inpatients. The payment allowance for the single national drug price for each Medicare covered drug is based on 95 percent of the AWP, except for drugs billed to durable medical equipment regional carriers (DMERCs) and hospital outpatient drugs billed to fiscal intermediaries. We are publishing this notice here because we previously have addressed the add-on payment for the costs of administering blood clotting factor in the IPPS annual rule (see the August 1, 2000 IPPS final rule (65 FR 47116).

On a quarterly basis, CMS will furnish three SDP files to all fiscal intermediaries. Each fiscal intermediary must accept the SDP files and process claims for any drug identified on the files on the basis of the price shown on the applicable file. Previously, the fiscal intermediary performed annual update calculations based on the most recent AWP data available to the carrier. The fiscal intermediary should use the SDP to price the blood clotting factors.

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

[[pp. 28495-28544]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

[[pp. 28545-28594]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

[[pp. 28595-28644]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

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From the Federal Register Online via GPO Access [wais.access.gpo.gov] ]

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Appendix A--Regulatory Analysis of Impacts

[If you choose to comment on issues in this section, please include the caption ``Impact Analyses'' at the beginning of your comment.]

I. Background and Summary

We have examined the impacts of this proposed rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.

Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

We have determined that this proposed rule is a major rule as defined in 5 U.S.C. 804(2). Based on the overall percentage change in payments per case estimated using our payment simulation model (a 4.9 percent increase), we estimate that the total impact of these proposed changes for FY 2005 payments compared to FY 2004 payments to be approximately a $4.3 billion increase. As a result, total IPPS payments will increase from approximately $100 billion to approximately $104.3 billion. This amount does not reflect changes in hospital admissions or case-mix intensity, which would also affect overall payment changes.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $5 million to $25 million in any 1 year. For purposes of the RFA, all hospitals and other providers and suppliers are considered to be small entities. Individuals and States are not included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis for any proposed rule that may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we previously defined a small rural hospital as a hospital with fewer than 100 beds that is located outside of a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA). However, under the new labor market definitions that we are proposing to adopt, we no longer employ NECMAs to define urban areas in New England. Therefore, we now define a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA. Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98-21) designated hospitals in certain New England counties as belonging to the adjacent NECMA. Thus, for purposes of the IPPS, we continue to classify these hospitals as urban hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) also requires that agencies assess anticipated costs and benefits before issuing any proposed rule (or a final rule that has been preceded by a proposed rule) that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $100 million. This proposed rule would not mandate any requirements for State, local, or tribal governments.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have reviewed this proposed rule in light of Executive Order 13132 and have determined that it would not have any negative impact on the rights, roles, and responsibilities of State, local, or tribal governments.

In accordance with the provisions of Executive Order 12866, this proposed rule was reviewed by the Office of Management and Budget.

The following analysis, in conjunction with the remainder of this document, demonstrates that this proposed rule is consistent with the regulatory philosophy and principles identified in Executive Order 12866, the RFA, and section 1102(b) of the Act. The proposed rule would affect payments to a substantial number of small rural hospitals as well as other classes of hospitals, and the effects on some hospitals may be significant.

II. Objectives

The primary objective of the IPPS is to create incentives for hospitals to operate efficiently and minimize unnecessary costs while at the same time ensuring that payments are sufficient to adequately compensate hospitals for their legitimate costs. In addition, we share national goals of preserving the Medicare Trust Fund.

We believe the changes in this proposed rule would further each of these goals while maintaining the financial viability of the hospital industry and ensuring access to high quality health care for Medicare beneficiaries. We expect that these proposed changes would ensure that the outcomes of this payment system are reasonable and equitable while avoiding or minimizing unintended adverse consequences.

III. Limitations of Our Analysis

The following quantitative analysis presents the projected effects of our proposed policy changes, as well as statutory changes effective for FY 2005, on various hospital groups. We estimate the effects of individual policy changes by estimating payments per case while holding all other payment policies constant. We use the best data available, but we do not attempt to predict behavioral responses to our proposed policy changes, and we do not make adjustments for future changes in such variables as admissions, lengths of stay, or case-mix. As we have done in previous proposed rules, we are soliciting comments and information about the anticipated effects of these proposed changes on hospitals and our methodology for estimating them. Any comments that we receive in response to this proposed rule will be addressed in the final rule.

IV. Hospitals Included in and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating and capital-related costs encompass nearly all general short-term, acute care hospitals that participate in the Medicare program. There were 39 Indian Health Service hospitals in our database, which we excluded from the analysis due to the special characteristics of the prospective payment method for these hospitals. Among other short- term, acute care hospitals, only the 47 such hospitals in Maryland remain excluded from the IPPS under the waiver at section 1814(b)(3) of the Act.

As of April 2004, there are 3,904 IPPS hospitals to be included in our analysis. This represents about 65 percent of all Medicare- participating hospitals. The majority of this impact analysis focuses on this set of hospitals. There are also approximately 898 critical access hospitals (CAHs). These small, limited service hospitals are paid on the basis of reasonable costs rather than under the IPPS. There are also 1,194 specialty hospitals and units that are excluded from the IPPS. These specialty hospitals include psychiatric hospitals and units, rehabilitation hospitals and units, long-term care hospitals, children's hospitals, and cancer hospitals. The impacts of our proposed policy changes on these hospitals are discussed below.

V. Impact on Excluded Hospitals and Hospital Units

As of April 2004, there were 1,194 specialty hospitals excluded from the IPPS. Of these 1,194 specialty hospitals, 478 psychiatric hospitals, 80 children's, 11 cancer hospitals, and less than 10 percent of the LTCHs are being paid on a reasonable cost basis subject to the rate-of-increase ceiling under Sec. 413.40. The remaining providers--216 rehabilitation, and approximately 90 percent of the 331 LTCHs are paid 100 percent of the Federal rate under the IRF and LTCH PPS', respectively. In addition, there were 1,381 psychiatric units (paid on a reasonable cost basis) and 999 rehabilitation units (paid under the IRF PPS) in hospitals otherwise subject to the IPPS. Under Sec. 413.40(a)(2)(i)(A), the rate-of- increase ceiling is not applicable to the 47 specialty hospitals and units in Maryland that are paid in accordance with the waiver at section 1814(b)(3) of the Act.

In the past, hospitals and units excluded from the IPPS have been paid based on their reasonable costs subject to limits as established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Hospitals that continue to be paid based on

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their reasonable costs are subject to TEFRA limits for FY 2005. For these hospitals, the proposed update is the percentage increase in the excluded hospital market basket, currently estimated at 3.3 percent.

Inpatient rehabilitation facilities (IRFs) are paid under a prospective payment system (IRF PPS) for cost reporting periods beginning on or after January 1, 2002. For cost reporting periods beginning during FY 2005, the IRF PPS is based on 100 percent of the adjusted Federal IRF prospective payment amount, updated annually. Therefore, these hospitals would not be impacted by this proposed rule.

Effective for cost reporting periods beginning on or after October 1, 2002, LTCHs are paid under an LTCH PPS, based on the adjusted Federal prospective payment amount, updated annually. LTCHs will receive a blended payment (Federal prospective payment and a reasonable cost-based payment) over a 5-year transition period. However, under the LTCH PPS, an LTCH may also elect to be paid at 100 percent of the Federal prospective rate at the beginning of any of its cost reporting periods during the 5-year transition period. For purposes of the update factor, the portion of the LTCH PPS transition blend payment based on reasonable costs for inpatient operating services would be determined by updating the LTCH's TEFRA limit by the estimate of the excluded hospital market basket (or 3.3 percent).

Section 124 of the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) requires the development of a per diem prospective payment system (PPS) for payment of inpatient hospital services furnished in psychiatric hospitals and psychiatric units of acute care hospitals (inpatient psychiatric facilities (IFPs)). We published a proposed rule to implement the IPF PPS on November 28, 2003 (68 FR 66920). On January 30, 2004, we published a notice to extend the comment period for 30 additional days (69 FR 4464). The comment period closed on March 26, 2004.

Under the proposed rule, CMS would compute a Federal per diem base rate to be paid to all IPFs based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF adjusted for budget neutrality. The Federal per diem base rate would be adjusted to reflect certain patient characteristics such as age, specified DRGs, and selected high-cost comorbidities, and certain facility characteristics such as a wage index adjustment, rural location, and indirect teaching costs.

The November 28, 2003 proposed rule assumed an April 1, 2004 effective date for the purpose of ratesetting and calculating impacts. However, we are still in the process of analyzing public comments and developing a final rule for publication. The effective date of the IPF PPS would occur 5 months following publication of the final rule.

The impact on excluded hospitals and hospital units of the update in the rate-of-increase limit depends on the cumulative cost increases experienced by each excluded hospital or unit since its applicable base period. For excluded hospitals and units that have maintained their cost increases at a level below the rate-of- increase limits since their base period, the major effect is on the level of incentive payments these hospitals and hospital units receive. Conversely, for excluded hospitals and hospital units with per-case cost increases above the cumulative update in their rate- of-increase limits, the major effect is the amount of excess costs that will not be reimbursed.

We note that, under Sec. 413.40(d)(3), an excluded hospital or unit whose costs exceed 110 percent of its rate-of-increase limit receives its rate-of-increase limit plus 50 percent of the difference between its reasonable costs and 110 percent of the limit, not to exceed 110 percent of its limit. In addition, under the various provisions set forth in Sec. 413.40, certain excluded hospitals and hospital units can obtain payment adjustments for justifiable increases in operating costs that exceed the limit. At the same time, however, by generally limiting payment increases, we continue to provide an incentive for excluded hospitals and hospital units to restrain the growth in their spending for patient services.

VI. Quantitative Impact Analysis of the Proposed Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

In this proposed rule, we are announcing policy changes and payment rate updates for the IPPS for operating and capital-related costs. Based on the overall percentage change in payments per case estimated using our payment simulation model (a 4.9 percent increase), we estimate the total impact of these proposed changes for FY 2005 payments compared to FY 2004 payments to be approximately a $4.3 billion increase. This amount does not reflect changes in hospital admissions or case-mix intensity, which would also affect overall payment changes.

We have prepared separate impact analyses of the proposed changes to each system. This section deals with proposed changes to the operating prospective payment system. Our payment simulation model relies on the most recent available data to enable us to estimate the impacts on payments per case of certain changes we are proposing in this proposed rule. However, there are other changes we are proposing for which we do not have data available that would allow us to estimate the payment impacts using this model. For those proposed changes, we have attempted to predict the payment impacts of those proposed changes based upon our experience and other more limited data.

The data used in developing the quantitative analyses of changes in payments per case presented below are taken from the FY 2003 MedPAR file and the most current Provider-Specific File that is used for payment purposes. Although the analyses of the changes to the operating PPS do not incorporate cost data, data from the most recently available hospital cost report were used to categorize hospitals. Our analysis has several qualifications. First, we do not make adjustments for behavioral changes that hospitals may adopt in response to the proposed policy changes, and we do not adjust for future changes in such variables as admissions, lengths of stay, or case-mix. Second, due to the interdependent nature of the IPPS payment components, it is very difficult to precisely quantify the impact associated with each proposed change. Third, we draw upon various sources for the data used to categorize hospitals in the tables. In some cases, particularly the number of beds, there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available source overall. However, for individual hospitals, some miscategorizations are possible.

Using cases in the FY 2003 MedPAR file, we simulated payments under the operating IPPS given various combinations of payment parameters. Any short-term, acute care hospitals not paid under the IPPSs (Indian Health Service hospitals and hospitals in Maryland) were excluded from the simulations. The impact of payments under the capital IPPS, or the impact of payments for costs other than inpatient operating costs, are not analyzed in this section. Estimated payment impacts of proposed FY 2005 changes to the capital IPPS are discussed in section VIII. of this Appendix.

The proposed changes discussed separately below are the following:

The effects of the proposed annual reclassification of diagnoses and procedures and the recalibration of the DRG relative weights required by section 1886(d)(4)(C) of the Act.

The effects of applying a lower labor-related share for hospitals with wage indexes less than or equal to 1.0, as required under section 403 of Public Law 108-173.

The effects of the proposed adoption of the new MSAs as announced by OMB in June 2003.

The effects of the proposed changes in hospitals' wage index values reflecting wage data from hospitals' cost reporting periods beginning during FY 2001, compared to the FY 2000 wage data.

The effects of adjusting hospitals' wage data to reflect the occupational mix based on our survey of hospitals.

The effect of the proposed wage and DRG recalibration budget neutrality factors.

The effects of geographic reclassifications by the MGCRB that will be effective in FY 2005.

The effects of the proposed implementation of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in areas with higher wage indexes.

The total change in payments based on proposed FY 2005 policies and MMA-imposed changes relative to payments based on FY 2004 policies.

To illustrate the impacts of the proposed FY 2005 changes, our analysis begins with an FY 2005 baseline simulation model using: the proposed update of 3.3 percent; the FY 2004 DRG GROUPER (version 21.0); the MSA designations for hospitals based on OMB's MSA definitions prior to June 2003; the FY 2004 wage index; and no MGCRB

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reclassifications. Outlier payments are set at 5.1 percent of total operating DRG and outlier payments.

The baseline simulation model also reflects changes enacted by Public Law 108-173 to the IME and DSH adjustments. Section 402 provides that, for discharges occurring on or after April 1, 2004, all hospitals that qualify will receive DSH payments using the prior (before April 1, 2004) DSH adjustment formula for urban hospitals with 100 or more beds. Except for urban hospitals with 100 or more beds and rural referral centers, the DSH adjustment is capped at 12 percent. Section 502 modifies the IME adjustment for midway through FY 2004 and provides a new schedule of formula multipliers for FYs 2005 and thereafter.

Section 501(b) provides that, for FYs 2005 through 2007, the update factors will be reduced by 0.4 percentage point for any hospital that does not submit quality data. For purposes of the FY 2005 simulations in this proposed impact analysis, we are assuming all hospitals will qualify for the full update. Hospitals are not required to begin submitting these data in order to qualify for a full update until July 2004, and we are therefore unable to determine the rate of compliance with this requirement of receiving the full update.

Each proposed and statutory policy change is then added incrementally to this baseline model, finally arriving at an FY 2005 model incorporating all of the proposed changes. This allows us to isolate the effects of each proposed change.

Our final comparison illustrates the percent change in payments per case from FY 2004 to FY 2005. Five factors not discussed separately above have significant impacts here. The first is the update to the standardized amount. In accordance with section 1886(b)(3)(B)(i) of the Act, we are proposing to update the standardized amount for FY 2005 using the most recently forecasted hospital market basket increase for FY 2005 of 3.3 percent. (Hospitals that fail to comply with the quality data submission requirement to receive the full update will receive an update reduced by 0.4 percentage points to 2.9 percent.) Under section 1886(b)(3)(B)(iv) of the Act, the updates to the hospital-specific amounts for sole community hospitals (SCHs) and for Medicare- dependent small rural hospitals (MDHs) are also equal to the market basket increase, or 3.3 percent.

A second significant factor that impacts changes in hospitals' payments per case from FY 2004 to FY 2005 is the change in MGCRB status from one year to the next. That is, hospitals reclassified in FY 2004 that are no longer reclassified in FY 2005 may have a negative payment impact going from FY 2004 to FY 2005; conversely, hospitals not reclassified in FY 2004 that are reclassified in FY 2005 may have a positive impact. In some cases, these impacts can be quite substantial, so if a relatively small number of hospitals in a particular category lose their reclassification status, the percentage change in payments for the category may be below the national mean. However, this effect is alleviated by section 1886(d)(10)(D)(v) of the Act, which provides that reclassifications for purposes of the wage index are for a 3-year period.

A third significant factor is that we currently estimate that actual outlier payments during FY 2004 will be 4.4 percent of total DRG payments. When the FY 2004 final rule was published, we projected FY 2004 outlier payments would be 5.1 percent of total DRG plus outlier payments; the average standardized amounts were offset correspondingly. The effects of the lower than expected outlier payments during FY 2004 (as discussed in the Addendum to this proposed rule) are reflected in the analyses below comparing our current estimates of FY 2004 payments per case to estimated FY 2005 payments per case (with outlier payments projected to equal 5.1 percent of total DRG payments).

Fourth, as noted above, sections 402 and 502 of Public Law 108- 173 establish higher DSH and IME payments, respectively. As a result, payments for these factors will be higher in FY 2005 than in FY 2004.

Fifth, section 508 of Public Law 108-173 established a one-time appeal process for hospitals to be reclassified in order to receive a higher wage index for a period of 3 years beginning with discharges on or after April 1, 2004.

B. Analysis of Table I

Table I displays the results of our analysis. The table categorizes hospitals by various geographic and special payment consideration groups to illustrate the varying impacts on different types of hospitals. The top row of the table shows the overall impact on the 3,904 hospitals included in the analysis. This number is 145 fewer hospitals than were included in the impact analysis in the FY 2004 final rule (68 FR 45661). There are 94 new CAHs that were excluded from this year's analysis. The remaining 51 cases represent hospitals that have closed or hospitals for which we have no data.

The next four rows of Table I contain hospitals categorized according to their geographic location: all urban, which is further divided into large urban and other urban; and rural. We previously defined a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA or NECMA. However, under the new labor market definitions that we are proposing to adopt, we no longer employ NECMAs to define urban areas in New England. Therefore, we will now define a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA. There are 2,696 hospitals located in urban areas (MSAs or NECMAs) included in our analysis. Among these, there are 1,424 hospitals located in large urban areas (populations over 1 million), and 1,272 hospitals in other urban areas (populations of 1 million or fewer). In addition, there are 1,208 hospitals in rural areas. The next two groupings are by bed-size categories, shown separately for urban and rural hospitals. The final groupings by geographic location are by census divisions and are also shown separately for urban and rural hospitals.

The second part of Table I shows hospital groups based on hospitals' FY 2005 payment classifications, including any reclassifications under section 1886(d)(10) of the Act. For example, the rows labeled urban, large urban, other urban, and rural show that the number of hospitals paid based on these categorizations after consideration of geographic reclassifications are 2,624, 1,405, 1,219, and 1,280, respectively.

The next three groupings examine the impacts of the final changes on hospitals grouped by whether or not they have GME residency programs (teaching hospitals that receive an IME adjustment) or receive DSH payments, or some combination of these two adjustments. There are 2,787 nonteaching hospitals in our analysis, 916 teaching hospitals with fewer than 100 residents, and 201 teaching hospitals with 100 or more residents.

In the DSH categories, hospitals are grouped according to their DSH payment status, and whether they are considered urban or rural for DSH purposes. Previously, hospitals in the rural DSH categories in the impact table represented hospitals that were not reclassified for purposes of the standardized amount. (However, they may have been reclassified for purposes of the wage index.) However, reclassification for purposes of the standardized amount has been terminated as a result of the equalization of the standardized amounts. As a result, there are no longer cases in which reclassifications change the status of rural hospitals for DSH purposes. There is little or no impact from the termination of standardized amount reclassification under the operating IPPS, since there are few concrete cases in which change from rural to urban status now would have any effect under the revised DSH payment formulas. The next category groups hospitals considered urban after geographic reclassification, in terms of whether they receive the IME adjustment, the DSH adjustment, both, or neither.

The next five rows examine the impacts of the proposed changes on rural hospitals by special payment groups (SCHs, rural referral centers (RRCs), and Medicare dependant hospitals (MDHs)), as well as rural hospitals not receiving a special payment designation. There were 137 RRCs, 454 SCHs, 211 MDHs, and 73 hospitals that are both SCH and RRC.

The next two groupings are based on type of ownership and the hospital's Medicare utilization expressed as a percent of total patient days. These data are taken primarily from the FY 2001 Medicare cost report files, if available (otherwise FY 2000 data are used). Data needed to determine ownership status were unavailable for 68 hospitals. Similarly, the data needed to determine Medicare utilization were unavailable for 173 hospitals. The next two rows compare the impacts on those hospitals that converted from urban MSAs to rural CBSAs and for the hospitals that converted from rural MSAs to urban CBSAs.

The next series of groupings concern the geographic reclassification status of hospitals. The first grouping displays all hospitals that were reclassified by the MGCRB for FY 2005. The next two groupings separate the hospitals in the first group by urban and rural status. The final row in Table I contains hospitals located in rural counties

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but deemed to be urban under section 1886(d)(8)(B) of the Act.

Table I.--Impact Analysis of Proposed Changes for FY 2005 Operating Prospective Payment System [Percent Changes in Payments per Case]

Core

DRG & DRG Labor based New Occupa- wage

MGCRB

Out- All FY No. of recal share stat. wage tional index reclassifica- migration 2005 hosps.\1\ \2\ split areas data \5\ mix \6\ changes tion \8\ data \9\ changes \3\ \4\

\7\

\10\ (1) (2) (3) (4) (5)

(6)

(7)

(8)

(9)

(10)

By Geographic Location:

All hospitals.................... 3,904 0.1 0.5 0.0 0.0

0.0

0.0

0.0

0.0

4.9

Urban hospitals.................. 2,696 0.0 0.5 0.1 0.0

0.0

0.0

-0.3

0.0

4.7

Large urban areas (populations

1,424 0.0 0.3 0.1 0.0

0.0 -0.1

-0.4

0.0

4.5 over 1 million).................

Other urban areas (populations of 1,272 0.1 0.7 0.1 0.0

0.0

0.1

-0.2

0.1

5.0 1 million or fewer).............

Rural hospitals.................. 1,208 0.2 1.1 -0.2 0.0

0.0

0.2

1.9

0.0

6.0 Bed Size (Urban):

0-99 beds........................

684 0.2 0.5 0.4 0.0

0.0

0.3

-0.4

0.1

5.7

100-199 beds.....................

966 0.1 0.5 -0.1 0.0

0.0

0.0

-0.3

0.1

4.6

200-299 beds.....................

500 0.0 0.4 0.1 -0.2

0.0 -0.2

-0.2

0.0

4.4

300-499 beds.....................

415 0.0 0.5 0.1 0.1

0.0

0.1

-0.3

0.0

4.8

500 or more beds.................

131 0.0 0.3 0.0 -0.1

0.0 -0.1

-0.4

0.0

4.9 Bed Size (Rural):

0-49 beds........................

549 0.4 1.0 -0.1 0.2

0.0

0.5

0.4

0.1

6.3

50-99 beds.......................

393 0.3 0.9 -0.2 0.1

0.0

0.3

1.0

0.1

6.1

100-149 beds.....................

163 0.2 1.2 -0.3 0.1

0.1

0.3

2.6

0.1

6.0

150-199 beds.....................

57 0.2 1.3 -0.3 -0.1

0.1

0.0

3.2

0.0

5.9

200 or more beds.................

46 0.1 1.1 -0.1 -0.1

0.0 -0.1

2.9

0.0

5.6 Urban by Region:

New England......................

137 0.2 0.0 -0.4 -0.2

0.0 -0.2

-0.3

0.0

3.6

Middle Atlantic..................

397 0.0 0.3 0.2 -0.7

0.0 -0.8

-0.1

0.1

3.7

South Atlantic...................

419 0.1 0.5 0.2 0.1

0.0

0.1

-0.3

0.0

5.0

East North Central...............

450 0.0 0.3 0.0 0.1

0.0

0.1

-0.3

0.0

4.7

East South Central...............

175 0.1 1.2 0.2 0.1

0.0

0.2

-0.3

0.1

5.5

West North Central...............

160 0.1 0.6 0.1 0.2

0.0

0.2

-0.5

0.0

5.1

West South Central...............

346 0.0 0.9 0.0 0.5

0.0

0.5

-0.5

0.0

5.7

Mountain.........................

140 0.0 0.2 0.2 -0.4

0.0 -0.4

-0.1

0.0

3.8

Pacific..........................

421 0.1 0.0 0.1 0.1

0.0

0.2

-0.3

0.1

4.9

Puerto Rico......................

51 -0.4 6.2 -0.1 -0.2

0.0 -0.7

-0.5

0.0

14.3 Rural by Region:

New England......................

34 0.2 0.3 0.3 0.3

0.0

0.3

1.3

0.0

3.9

Middle Atlantic..................

57 0.3 1.0 -0.4 -0.2

0.0

0.0

1.8

0.0

4.2

South Atlantic...................

176 0.2 1.1 -0.7 -0.1

0.1

0.1

2.0

0.0

5.8

East North Central...............

160 0.2 0.8 -0.1 0.1

0.0

0.2

1.4

0.0

4.5

East South Central...............

192 0.2 2.0 0.0 -0.3

0.1 -0.1

2.8

0.1

9.4

West North Central...............

206 0.3 0.8 -0.1 0.3

0.0

0.5

1.3

0.0

5.7

West South Central...............

228 0.2 1.7 0.0 0.1

0.1

0.4

3.0

0.1

7.2

Mountain.........................

93 0.3 0.4 -0.2 0.2

0.0

0.4

0.5

0.1

4.4

Pacific..........................

62 0.2 0.0 0.0 0.3

0.0

0.5

0.8

0.1

4.5 By Payment Classification:

Urban hospitals.................. 2,624 0.0 0.5 0.1 0.0

0.0

0.0

-0.3

0.0

4.7

Large urban areas (populations

1,405 0.0 0.3 0.1 0.0

0.0 -0.1

-0.4

0.0

4.5 over 1 million).................

Other urban areas (populations of 1,219 0.1 0.7 0.1 0.0

0.0

0.1

-0.2

0.1

5.0 1 million or fewer).............

Rural areas...................... 1,280 0.3 1.0 -0.2 0.0

0.0

0.2

1.7

0.0

5.9 Teaching Status:

Non-teaching..................... 2,787 0.1 0.7 0.1 0.0

0.0

0.1

0.3

0.1

5.2

Fewer than 100 Residents.........

916 0.0 0.5 0.1 0.1

0.0

0.0

-0.2

0.0

4.8

100 or more Residents............

201 0.0 0.2 -0.1 -0.2

0.0 -0.3

-0.3

0.0

4.5 Urban DSH:

Non-DSH.......................... 1,156 0.1 0.4 0.1 0.0

0.0

0.0

-0.1

0.0

4.7

100 or more beds................. 1,465 0.0 0.5 0.0 0.0

0.0 -0.1

-0.3

0.0

4.7

Less than 100 beds...............

335 0.3 0.7 0.9 0.0

0.0

0.4

-0.4

0.1

7.0 Rural DSH:

Sole Community (SCH).............

482 0.3 0.6 -0.1 0.1

0.0

0.3

0.4

0.0

4.9

Referral Center (RRC)............

157 0.2 1.3 -0.2 -0.1

0.1

0.0

3.6

0.0

6.1

Other Rural: 100 or more beds.............

68 0.3 1.7 0.2 -0.2

0.1

0.1

1.1

0.1

8.9 Less than 100 beds...........

241 0.4 1.8 -0.3 -0.1

0.1

0.2

1.2

0.1

10.1 Urban teaching and DSH:

DSH..............................

800 0.0 0.4 0.0 0.0

0.0 -0.1

-0.3

0.0

4.6 Teaching and no DSH..........

250 0.1 0.3 0.0 0.1

0.0

0.0

-0.3

0.1

4.8 No teaching and DSH.......... 1,000 0.1 0.6 0.2 0.0

0.0

0.1

-0.2

0.1

5.1 No teaching and no DSH.......

574 0.1 0.4 0.2 -0.1

0.0

0.0

-0.3

0.0

4.6 Rural Hospital Types:

Non special status hospitals.....

400 0.4 1.6 -0.1 0.0

0.1

0.3

1.1

0.1

8.6

RRC..............................

137 0.2 1.7 -0.3 -0.1

0.1

0.0

4.6

0.0

6.4

SCH..............................

454 0.2 0.4 -0.1 0.1

0.0

0.2

0.2

0.0

4.0

Medicare-dependent hospitals

211 0.4 1.6 -0.2 0.3

0.1

0.6

0.9

0.1

8.1 (MDH)...........................

[[Page 28801]]

SCH and RRC......................

73 0.1 0.5 -0.2 0.1

0.0

0.1

1.4

0.0

4.5 Type of Ownership:

Voluntary........................ 2,343 0.1 0.5 0.1 0.0

0.0

0.0

0.0

0.0

4.7

Proprietary......................

717 0.0 0.7 -0.1 0.1

0.0

0.1

0.0

0.0

5.3

Government.......................

776 0.1 0.7 0.1 -0.1

0.0

0.0

0.2

0.1

5.4

Unknown..........................

68 -0.1 0.7 0.0 0.1

0.0

0.1

-0.5

0.0

5.1 Medicare Utilization as a Percent of Inpatient Days:

0-25.............................

227 -0.1 0.2 0.1 -0.1

0.0 -0.3

-0.2

0.0

4.4

25-50............................ 1,122 0.0 0.4 0.0 0.1

0.0

0.0

-0.3

0.0

4.7

50-65............................ 1,445 0.1 0.7 0.1 0.0

0.0

0.1

0.2

0.1

5.1

Over 65..........................

937 0.1 0.7 0.0 -0.1

0.0

0.0

0.3

0.0

4.9

Unknown..........................

173 0.0 0.4 0.1 -0.1

0.0 -0.2

-0.2

0.0

4.8 Rural Converted to Urban.............

164 0.2 1.2 3.6 -0.3

0.0

0.0

1.2

0.0

6.4 Urban Converted to Rural.............

69 0.2 0.7 -0.2 -0.1

0.0

0.1

0.3

0.0

4.8 Hospitals Reclassified by the Medicare Geographic Classification Review Board: FY 2005 Reclassifications:

All Reclassified Hospitals.......

485 0.2 0.9 0.3 0.0

0.0

0.1

3.7

0.0

5.2

Nonreclassified Hospitals........ 3,326 0.1 0.5 0.0 0.0

0.0

0.0

-0.5

0.0

4.8

All Reclassified Urban Hospitals.

118 0.1 0.6 1.1 0.0

0.0

0.0

3.8

0.0

14.3

Urban Nonreclassified Hospitals.. 2,486 0.0 0.4 0.0 0.0

0.0

0.0

-0.5

0.0

4.7

All Reclassified Rural Hospitals.

367 0.2 1.1 -0.2 0.0

0.0

0.2

3.7

0.0

5.9

Rural Nonreclassified Hospitals..

840 0.3 1.0 -0.2 0.1

0.0

0.3

-0.3

0.1

6.2

Other Reclassified Hospitals

93 0.2 0.5 0.4 -0.3

0.0 -0.1

-0.3

0.0

4.4 (Section 1886(D)(8)(B)).........

\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge data are from FY 2003, and hospital cost report data are from reporting periods beginning in FY 2001 and FY 2000. \2\ This column displays the payment impact of the recalibration of the DRG weights based on FY 2003 MedPAR data and the DRG reclassification changes, in accordance with section 1886(d)(4)(C) of the Act. \3\ This column displays the payment impact of applying a lower labor-related share for hospitals with wage indexes less than or equal to 1.0, as required under section 403 of Public Law 108-173. \4\ This column displays the impact of the proposed adoption of the new MSAs as announced by OMB in June 2003. \5\ This column displays the impact of updating the wage index with wage data from hospitals' FY 2001 cost reports. \6\ This column displays the effects of adjusting hospitals' wage data to reflect the occupational mix based on our survey of hospitals. \7\ This column shows the payment impact of the budget neutrality adjustment factor for DRG and wage index changes, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4 and 5, and the proposed FY 2005 budget neutrality factor of 0.994295 (the change to the labor-related share shown in column 3 is not included in the budget neutrality calculation). \8\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate the FY 2005 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 2005. Reclassification for prior years has no bearing on the payment impacts shown here. \9\ This column displays the impact of the proposed implementation of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes. \10\ This column shows changes in payments from FY 2004 to FY 2005. It incorporates all of the changes displayed in columns 3, 7, 8 and 9 (the changes displayed in columns 2, 4, 5 and 6 are included in column 7). It also reflects the impact of the FY 2005 update, changes in hospitals' reclassification status in FY 2005 compared to FY 2004, and the changes in payments as a result of implementing Section 508 of the MMA. The sum of these impacts may be different from the percentage changes shown here due to rounding and interactive effect.

C. Impact of the Proposed Changes to the DRG Reclassifications and Recalibration of Relative Weights (Column 2)

In column 2 of Table I, we present the combined effects of the DRG reclassifications and recalibration, as discussed in section II. of the preamble to this proposed rule. Section 1886(d)(4)(C)(i) of the Act requires us annually to make appropriate classification changes and to recalibrate the DRG weights in order to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

We compared aggregate payments using the FY 2004 DRG relative weights (GROUPER version 21.0) to aggregate payments using the proposed FY 2005 DRG relative weights (GROUPER version 22.0). We note that, consistent with section 1886(d)(4)(C)(iii) of the Act, we have applied a budget neutrality factor to ensure that the overall payment impact of the DRG changes (combined with the wage index changes) is budget neutral. This proposed budget neutrality factor of 0.994295 is applied to payments in Column 7. Because this is a combined DRG reclassification and recalibration and wage index budget neutrality factor, it is not applied to payments in this column.

The major DRG classification changes we are proposing include: reassigning the procedure code for left ventricular assist devices (LVADs) from DRG 525 to DRG 103 (now titled ``Heart Transplant or Implant of Heart Assist System''); reassigning the procedure codes involving artificial anal sphincters from DRGs 157 and 158 to DRGs 146 (Rectal Resection With CC) and 147 (Rectal Resection Without CC); modifying the ventilation by reassigning all those cases to DRGs 504 and 505; splitting the DRG 483 into two new DRGs based on the presence or absence of major OR procedures, DRG 541 (Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major Operating Room Procedure) and 542 (Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses Without Major Operating Room Procedure). In the aggregate, these proposed changes would result in 0.1 percent change in overall payments to hospitals. On average, the impacts of these changes on any particular hospital group are very small. The largest impact is a 0.2 percent increase among rural hospitals. This is likely primarily attributable to a 1.46 percent increase in DRG 127 (Heart Failure and Shock). This high-volume DRG comprises a disproportionate percentage of cases in small rural hospitals. Ten Puerto Rico hospitals also experience case mix declines of greater than 1 percent in this

[[Page 28802]]

column, leading to a 0.4 percent decrease overall for this row.

D. Impact of the Change in the Labor-Related Share

Section 403 of the MMA provides that, for discharges occurring on or after October 1, 2004, a hospital's labor-related share of the standardized amount will be decreased to 62 percent of the standardized amount unless such a change will result in lower total payments to the hospital. This provision also applies to the labor- related share of the standardized amount for hospitals in Puerto Rico. The overall impact of implementing this provision is a 0.5 percent payment increase to all hospitals (approximately $500 million). Large urban hospitals would experience a 0.3 percent increase while other urban hospitals would experience a 0.7 percent increase. Rural hospitals are expected to benefit from this provision with a 1.1 percent increase in payments in FY 2005.

Among regions, hospitals in Puerto Rico experience the largest increase of 6.2 percent (due to the relatively low national wage index levels in Puerto Rico). The smallest change among urban hospitals is in the New England and Pacific regions with a 0.0 percent change. The largest increase among rural regions is expected to be East South Central, with a 2.0 percent increase in payments.

E. Impact of Changing to New Labor Market Areas (Core Based Statistical Areas) From MSAs (Column 4)

In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, we currently define hospital labor market areas based on the definitions of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New England County Metropolitan Areas (NECMAs) issued by OMB. On June 6, 2003, OMB announced new Core Based Statistical Areas (CBSAs), comprised of MSAs and the new Micropolitan Statistical Areas based on Census 2000 data. CMS is proposing to adopt the new MSA definitions, including the 49 new Metropolitan areas designated under the new definitions. We are also proposing to adopt MSA definitions in New England in place of NECMAs. We are not adopting the newly defined Micropolitan Statistical Areas for use in the payment system: as a result, Micropolitan Statistical Areas will remain part of the statewide rural areas for purposes of IPPS payments. (However, as discussed in section III.B.1.d. of the preamble to this proposed rule, we are proposing a special transition policy for hospitals that were formerly in urban areas, but are now in areas considered rural or Micropolitan under the OMB definitions.) There are 46 counties with 72 hospitals that are currently in an MSA that would be treated as rural under our proposal to update the MSA definitions using only the new MSAs. To help alleviate the decreased payments for currently urban hospitals that would become rural, we are proposing to allow them to maintain their assignment to the MSA where they are currently located for the 3-year period including FY 2005, FY 2006, and FY 2007.

The impact of these changes to the new CBSAs is isolated in column 4 by holding the other payment parameters constant in this simulation. That is, column 4 shows the percentage changes in payments when going from a model using the current MSA designations to a model using the new CBSA designations (for Metropolitan areas only). Overall, the new CBSAs would lead to a zero percent change. Urban hospitals' wage indexes would increase by 0.1 percent. Rural hospitals would experience a 0.2 percent decrease in overall payments as a result of this provision. Among regions, the largest impact of updating the wage data is seen in the rural South Atlantic region (a 0.7 percent decrease). Rural hospitals in the Middle Atlantic would experience the next largest impact, with a 0.4 percent decrease.

Among urban hospitals, New England would experience a 0.4 percent decrease. These impacts result primarily from dividing the previously amalgamated Boston NECMA into four Metropolitan Divisions and several other small Metropolitan Statistical Areas. The counties that previously comprised the Boston MSA now form all or part of the Boston-Quincy, MA Metropolitan Division, the Cambridge-Newton- Framingham, MA Metropolitan Division, the Essex County, MA Metropolitan Division, the Rockingham County-Strafford County Metropolitan Division, the Manchester-Nashua Metropolitan Statistical Area, the Providence-New Bedford-Fall River, RI-MA Metropolitan Statistical Area, and the Worcester, MA Metropolitan Statistical Area. The Rockingham County-Strafford County Metropolitan Division, Manchester-Nashua MSA, and Boston-Quincy Metropolitan Division experience 9.4, 6.9, and 5.7 percent decreases, respectively.

As described in section III of the preamble to this proposed rule, to help alleviate the decreased payments for currently urban hospitals that would become rural, we are proposing to allow them to maintain their assignment to the MSA where they are currently located for the 3-year period including FY 2005, FY 2006, and FY 2007. The impact upon these hospitals is shown in the row labeled ``Urban to Rural Hospitals.'' Conversely, the row labeled ``Rural to Urban Hospitals'' displays formerly rural hospitals that are now in MSAs under the new definitions.

F. Impact of Proposed Wage Index Changes (Columns 5 and 6)

Section 1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, we annually update the wage data used to calculate the wage index. In accordance with this requirement, the proposed wage index for FY 2005 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2000 and before October 1, 2001. The impact of the new data on hospital payments is isolated in column 5 by holding the other payment parameters constant in this simulation. That is, column 5 shows the percentage changes in payments when going from a model using the FY 2004 wage index, based on FY 2000 wage data, to a model using the FY 2005 pre- reclassification wage index, based on FY 2001 wage data. The wage data collected on the FY 2001 cost report is the same as the FY 2000 wage data that were used to calculate the FY 2004 wage index. However, for the FY 2005 wage index, we added an occupational mix adjustment to the wage index. The occupational mix adjustment is based on data collected on the Medicare Wage Index Occupational Mix Survey, Form-CMS-10079. The data collection period for the survey was calendar year 2003 through February 7, 2004. The effects of the occupational mix adjustment are shown in the next column (6).

Column 5 shows the impacts of updating the wage data using FY 2001 cost reports. Overall, the new wage data would lead to a 0.0 percent change. Urban hospitals' wage indexes would not change (0.0 percent), and rural hospitals' wage indexes would also remain the same (0.0 percent). Among regions, the largest declines from updating the wage data are seen in urban Middle Atlantic and Mountain regions (a 0.7 and 0.4 percent decreases, respectively). In the Middle Atlantic, there are 352 hospitals (New York, Pennsylvania, and New Jersey) that are experiencing a drop in their wage index relative to last year with the introduction of the new wage data. Kingston, NY experiences a drop of 5.8 percent, while Buffalo sees a 2.8 percent drop. Additionally, two of the areas are divisions of New York City, including the Manhattan area (New York- Wayne-White Plains, NY) and Suffolk-Nassau, NY. While these areas do not necessarily experience a significant drop (2.5 and 1.5 percent), they include a large number of inpatient hospitals. Pittsburgh, PA, Rochester, NY, and Allentown, PA also see decreases due to this change. We note that this is due to below average increases in their average hourly wage and not as a result of real average hourly wage declines. Urban hospitals in the West South Central region would experience the next largest impact, with a 0.5 percent increase. The rural East South Central and Middle Atlantic regions experience 0.3 and 0.2 percent decreases, respectively while the Pacific, West South Central, and New England regions each experience a 0.3 percent increase.

The national average hourly wage increased 6.41 percent compared to FY 2004. Therefore, the only manner in which to maintain or exceed the previous year's wage index was to match the national 6.41 increase in average hourly wage. Of the 3,887 hospitals with wage index values in both FYs 2004 and 2005, 1,937, or 49.8 percent, also experienced an average hourly wage increase of 6.41 percent or more.

The following chart compares the shifts in wage index values for hospitals for FY 2005 relative to FY 2004. Among urban hospitals, 89 would experience an increase of between 5 percent and 10 percent and 45 would experience an increase of more than 10 percent. A total of 7 rural hospitals would experience increases greater than 5 percent, but none would experience increases of greater than 10 percent. On the negative side, 36 urban hospitals would experience decreases in their wage index values of at least 5 percent, but less than 10 percent. Two urban hospitals would experience decreases in their wage index values greater than 10 percent.

[[Page 28803]]

The following chart shows the projected impact for urban and rural hospitals.

No. of hospitals Percentage change in area wage index values ----------------- Urban Rural.

Increase more than 10 percent......................... 45 0. Increase more than 5 percent and less than 10 percent. 89 7. Increase or decrease less than 5 percent.............. 2,625 1,609. Decrease more than 5 percent and less than 10 percent. 36 0. Decrease more than 10 percent.........................

2

1

The next column (6) shows the impacts on the calculation of the FY 2005 wage index of adjusting for occupational mix. Section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, beginning with the FY 2005 wage index. A complete discussion of the initial collection of these data and the occupational mix adjustment that we are proposing to apply, beginning October 1, 2004 (the FY 2005 wage index), appears under section III.C. of this preamble. The calculation of the wage index now includes a blended rate of 90 percent of an unadjusted wage index and 10 percent of a wage index adjusted for occupational mix. We project an overall change increase of 0.0 percent for all hospitals. The biggest change is in the rural urban hospitals in the South Atlantic, East South Central, and West South Central regions, which are projected to experience a 0.1 percent increase for FY 2005.

G. Combined Impact of Proposed DRG and Wage Index Changes, Including Budget Neutrality Adjustment (Column 7)

The impact of the DRG reclassifications and recalibration on aggregate payments is required by section 1886(d)(4)(C)(iii) of the Act to be budget neutral. In addition, section 1886(d)(3)(E) of the Act specifies that any updates or adjustments to the wage index are to be budget neutral. As noted in the Addendum to this proposed rule, we compared simulated aggregate payments using the FY 2004 DRG relative weights and wage index to simulated aggregate payments using the proposed FY 2005 DRG relative weights and blended wage index.

We computed a proposed wage and recalibration budget neutrality factor of 0.994295. The 0.0 percent impact for all hospitals demonstrates that these proposed changes, in combination with the budget neutrality factor, are budget neutral. In Table I, the combined overall impacts of the effects of both the DRG reclassifications and recalibration and the updated wage index are shown in column 7. The proposed changes in this column are the sum of the final changes in columns 2, 5, and 6 combined with the budget neutrality factor and the wage index floor for urban areas required by section 4410 of Pub. L. 105-33, to be budget neutral (the change to the labor share in column 3 is not subject to budget neutrality. There also may be some variation of plus or minus 0.1 percentage point due to rounding.

Among urban regions, the largest impacts are in the Middle Atlantic and Puerto Rico, with 0.8 and 0.7 percent declines, respectively. The West South Central region experiences the largest increase of 0.5 percent. Among rural regions, the West North Central and Pacific regions benefit the most with 0.5 percent increases, while East South Central is the only region to experience a decline (0.1 percent).

H. Impact of MGCRB Reclassifications (Column 8)

Our impact analysis to this point has assumed hospitals are paid on the basis of their actual geographic location (with the exception of ongoing policies that provide that certain hospitals receive payments on bases other than where they are geographically located, such as hospitals in rural counties that are deemed urban under section 1886(d)(8)(B) of the Act). The changes in column 8 reflect the per case payment impact of moving from this baseline to a simulation incorporating the MGCRB decisions for FY 2005. These decisions affect hospitals' standardized amount and wage index area assignments.

By February 28 of each year, the MGCRB makes reclassification determinations that will be effective for the next fiscal year, which begins on October 1. The MGCRB may approve a hospital's reclassification request for the purpose of using another area's wage index value. The proposed FY 2005 wage index values incorporate all of the MGCRB's reclassification decisions for FY 2005. The wage index values also reflect any decisions made by the CMS Administrator through the appeals and review process through February 28, 2004. Additional changes that result from the Administrator's review of MGCRB decisions or a request by a hospital to withdraw its application will be reflected in the final rule for FY 2005.

The overall effect of geographic reclassification is required by section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, we applied an adjustment of 0.994295 to ensure that the effects of reclassification are budget neutral. (See section II.A.4.b. of the Addendum to this proposed rule.)

As a group, rural hospitals benefit from geographic reclassification. Their payments would rise 1.9 percent in column 8. Payments to urban hospitals would decline 0.3 percent. Hospitals in other urban areas would experience an overall decrease in payments of 0.2 percent, while large urban hospitals would also lose 0.4 percent. Among urban hospital groups (that is, bed size, census division, and special payment status), payments generally would decline.

A positive impact is evident among most of the rural hospital groups. The smallest increases among the rural census divisions are 0.5 percent in the Mountain region and 1.3 percent each for the New England and West North Central regions. The largest increases are in the rural East South Central region, with an increase of 2.8 percent and in the West South Central region that would experience an increase of 3.0 percent.

Among all the hospitals that were reclassified for FY 2005 (including hospitals that received wage index reclassifications in FY 2003 or FY 2004 that extend for 3 years), the MGCRB changes are estimated to provide a 3.7 percent increase in payments. Urban hospitals reclassified for FY 2005 are expected to receive an increase of 3.8 percent, while rural reclassified hospitals are expected to benefit from the MGCRB changes with a 3.7 percent increase in payments. Payments to urban and rural hospitals that did not reclassify are expected to decrease slightly due to the MGCRB changes, decreasing by 0.5 percent for urban hospitals and 0.3 percent for rural hospitals.

I. Impacts of Implementing the Wage Index Adjustment for Out- Migration (Column 9)

Section 505 of Public Law 108-173 established new section 1886(d)(13) of the Act. Section 1886(d)(13) requires that the Secretary establish a new process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. The process provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different area with a higher wage index. Hospitals located in counties that qualify for the payment adjustment would receive an increase in the wage index that is equal to a weighted average of the difference between the wage index of the resident county and the higher wage index work area(s) weighted by the overall percentage of workers who are employed in an area with a higher wage index. Using our proposed criteria, 224 counties and 411 hospitals qualify to receive a commuting adjustment.

Due to the statutory formula to calculate the adjustment and the small number of counties that qualify, the impact on hospitals would be minimal, with an overall impact on all hospitals of 0.0 percent. However, some regions would experience a discernible impact. For example, urban hospitals in the Middle Atlantic region would experience a 0.1 percent increase due to this provision. This is due in part to the fact that a hospital in that region would experience the largest increase for any hospital under this provision. A hospital located in Ulster County, New York would receive an increase in its wage index value of 0.1014. Hospital employees living in Ulster County commute to Albany, Columbia, Dutchess, Greene, New York, Orange, Rockland, Sullivan, and Westchester counties. Dutchess, New York, Orange, Rockland and Westchester counties are located in higher wage index areas. Thus, for FY 2005, this hospital's wage index would increase from 0.8874 to 0.9888.

J. All Changes (Column 10)

Column 10 compares our estimate of payments per case, incorporating all changes reflected in this proposed rule for FY 2005 (including statutory changes), to our estimate of payments per case in FY 2004. This

[[Page 28804]]

column includes all of the proposed policy changes. Because the reclassifications shown in column 8 do not reflect FY 2004 reclassifications, the impacts of FY 2005 reclassifications only affect the impacts from FY 2004 to FY 2005 if the reclassification impacts for any group of hospitals are different in FY 2005 compared to FY 2004.

Column 10 reflects all FY 2005 changes relative to FY 2004, shown in columns 2 through 9 and those not applied until the final rates are calculated. The average increase for all hospitals is approximately 4.9 percent. This increase includes the effects of the 3.3 percent market basket update. It also reflects the 0.7 percentage point difference between the projected outlier payments in FY 2004 (5.1 percent of total DRG payments) and the current estimate of the percentage of actual outlier payments in FY 2004 (4.4 percent), as described in the introduction to this Appendix and the Addendum to this proposed rule. As a result, payments are projected to be 0.7 percent lower in FY 2004 than originally estimated resulting in a 0.7 percent higher increase for FY 2005 than would otherwise occur. It also includes the impact of adjusting the labor share, shown in column 3, of approximately 0.5 percent. The remaining 0.4 percent increase is attributable to the indirect medical education formula changes for teaching hospitals; changes in payments due to the wage reclassifications under section 508 of the MMA, in effect for the whole year; and increased payments to Puerto Rico hospitals as a result of section 504 of the MMA, which changed the mix of the Federal standardized amount and the Puerto Rico- specific standardized amount. The overall increase also reflects changes to payments that resulted from implementing other changes as required by Public Law 108-173. These changes are discussed in other rules and in many sections of the preamble to this proposed rule.

Section 213 of Public Law 106-554 provides that all SCHs may receive payment on the basis of their costs per case during their cost reporting period that began during 1996. For FY 2005, eligible SCHs receive 100 percent of their 1996 hospital-specific rate. The impact of this provision is modeled in column 10 as well. Additionally, section 402 of Public Law 108-173 increases the disproportionate share hospital (DSH) adjustment for certain hospitals that serve a disproportionate share of low-income Medicare and Medicaid patients, which includes rural hospitals and urban hospitals with fewer than 100 beds, sole community hospitals, rural referral centers, and rural hospitals with less than 500 beds. The increase in DSH payments became effective for discharges occurring on or after April 1, 2004. As provided in the new Medicare law, the cap on DSH payment adjustments increase from 5.25 percent to 12 percent for urban hospitals fewer than 100 beds, sole community hospitals, and rural hospitals with less than 500 beds. There is no cap on rural referral centers, large urban hospitals over 100 beds, or rural hospitals over 500 beds.

We are no longer required to ensure that any add-on payments for new technology under section 1886(d)(5)(K) of the Act are budget neutral. However, we are still providing an estimate of the payment increases here, as they will have a significant impact on total payments made in FY 2005. As discussed in section II.E. of the preamble of this proposed rule, we are proposing to maintain the new technology status of the InFUSETMBone Graft/LT- CAGETMLumbar Tapered Fusion Device for spinal fusions. We estimate the total add-on payments associated with cases involving this new device for FY 2005 would be $4.7 million. In addition, several other technologies may receive approval if we receive appropriate supplemental data from the applicants (as discussed in the preamble) and after public comments are taken into consideration for approval or denial of the technologies for FY 2005. If we receive the necessary supplemental data for all of the devices that could be approved were to be approved, the total estimated increase in payments for FY 2005 could be $369 million.

There might also be interactive effects among the various factors comprising the payment system that we are not able to isolate. For these reasons, the values in column 10 may not equal the sum of the changes described above.

The overall change in payments per case for hospitals in FY 2005 would increase by 4.9 percent. Hospitals in urban areas would experience a 4.7 percent increase in payments per case compared to FY 2004. Hospitals in rural areas, meanwhile, would experience a 6.0 percent payment increase. Hospitals in large urban areas would experience a 4.5 percent increase in payments and hospitals in other urban areas would experience a 5.0 percent increase in payments.

Among urban census divisions, the largest payment increase would be 14.3 percent in Puerto Rico. This is due largely to the change in calculation of their payment rate to 75 percent of the National amount and the increase to the standardized amount to large urban hospitals. Additionally, the change to CBSAs makes all hospitals in Puerto Rico classify as urban hospitals instead of rural. (Because of these changes, we have deleted from Table I, the column included in prior years that shows the impacts on rural Puerto Rico hospitals.) Hospitals in the urban East South Central and West South Central regions would experience overall increases of 5.5 percent and 5.7 percent, respectively. The smallest increase would occur in the New England region, with an increase of 3.6 percent.

Among rural regions in column 10, no hospital category would experience overall payment decreases. The East South Central and West South Central regions would benefit the most, with 9.4 and 7.2 percent increases, respectively. The smallest increase would occur in the New England region, with 3.9 percent increases in payments.

Among special categories of rural hospitals in column 10, those hospitals receiving payment under the hospital-specific methodology (SCHs, MDHs, and SCH/RRCs) would experience payment increases of 4.0 percent, 8.1 percent, and 4.5 percent, respectively. This outcome is primarily related to the fact that, for hospitals receiving payments under the hospital-specific methodology, there were several increases to payments made in relation to implementation of the Public Law 108-173.

Hospitals that were reclassified for FY 2005 are estimated to receive a 5.2 percent increase in payments. Urban hospitals reclassified for FY 2005 are anticipated to receive an increase of 4.3 percent, while rural reclassified hospitals are expected to benefit from reclassification with a 5.9 percent increase in payments. Those hospitals located in rural counties but deemed to be urban under section 1886(d)(8)(B) of the Act are expected to receive an increase in payments of 4.4 percent.

Table II.--Impact Analysis of Proposed Changes for FY 2005 Operating Prospective Payment System [Payments per Case]

Average FY Average FY Number of 2004 payment 2005 payment All FY 2005 hospitals per case \1\ per case \1\ changes (1)

(2)

(3)

(4).

By Geographic Location:.

All hospitals...............................

3,904

7812

8193

4.9.

Urban hospitals.............................

2,696

8121

8504

4.7.

Large urban areas (populations over 1

1,424

8513

8896

4.5. million)...................................

Other urban areas (populations of 1 million

1,272

7684

8067

5.0. of fewer)..................................

Rural hospitals.............................

1,208

6110

6475

6.0. Bed Size (Urban):.

0-99 beds...................................

684

5812

6142

5.7.

100-199 beds................................

966

6914

7233

4.6.

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200-299 beds................................

500

7967

8316

4.4.

300-499 beds................................

415

8839

9266

4.8.

500 or more beds............................

131

10221

10718

4.9. Bed Size (Rural):.

0-49 beds...................................

549

5199

5527

6.3.

50-99 beds..................................

393

5751

6100

6.1.

100-149 beds................................

163

6048

6412

6.0.

150-199 beds................................

57

6636

7027

5.9.

200 or more beds............................

46

7837

8275

5.6. Urban by Region:.

New England.................................

137

8688

8997

3.6.

Middle Atlantic.............................

397

8809

9136

3.7.

South Atlantic..............................

419

7762

8147

5.0.

East North Central..........................

450

7830

8195

4.7.

East South Central..........................

175

7482

7896

5.5.

West North Central..........................

160

8008

8416

5.1.

West South Central..........................

346

7632

8063

5.7.

Mountain....................................

140

8066

8376

3.8.

Pacific.....................................

421

9612

10080

4.9.

Puerto Rico.................................

51

3525

4028

14.3. Rural by Region:.

New England.................................

34

8037

8354

3.9.

Middle Atlantic.............................

57

6138

6398

4.2.

South Atlantic..............................

176

6087

6439

5.8.

East North Central..........................

160

5998

6266

4.5.

East South Central..........................

192

5241

5735

9.4.

West North Central..........................

206

6514

6883

5.7.

West South Central..........................

228

5514

5913

7.2.

Mountain....................................

93

6918

7219

4.4.

Pacific.....................................

62

8934

9336

4.5. By Payment Classification:.

Urban hospitals.............................

2,624

8148

8533

4.7.

Large urban areas (populations over 1

1,405

8530

8915

4.5. million)...................................

Other urban areas (populations of 1 million

1,219

7716

8101

5.0. of fewer)..................................

Rural areas.................................

1,280

6104

6462

5.9. Teaching Status:.

Non-teaching................................

2,787

6542

6880

5.2.

Fewer than 100 Residents....................

916

8172

8561

4.8.

100 or more Residents.......................

201

12131

12672

4.5. Urban DSH:.

Non-DSH.....................................

1,156

7020

7347

4.7.

100 or more beds............................

1,465

8695

9101

4.7.

Less than 100 beds..........................

335

5540

5927

7.0. Rural DSH:

482

6592

6914

4.9.

Sole Community (SCH)........................

Referral Center (RRC).......................

157

6735

7147

6.1.

Other Rural:. 100 or more beds........................

68

5131

5588

8.9. Less than 100 beds......................

241

4483

4937

10.1. Urban teaching and DSH:

800

9558

9997

4.6.

Both teaching and DSH.......................

Teaching and no DSH.........................

250

8015

8399

4.8.

No teaching and DSH.........................

1,000

6963

7315

5.1.

No teaching and no DSH......................

574

6512

6810

4.6. Rural Hospital Types:.

Non special status hospitals................

400

4754

5163

8.6.

RRC.........................................

137

6179

6572

6.4.

SCH.........................................

454

7181

7467

4.0.

Medicare-dependent hospitals (MDH)..........

211

4434

4792

8.1.

SCH and RRC.................................

73

7676

8019

4.5. Type of Ownership:.

Voluntary...................................

2,343

7926

8298

4.7.

Proprietary.................................

717

7125

7503

5.3.

Government..................................

776

7958

8385

5.4.

Unknown.....................................

68

7853

8256

5.1.

[[Page 28806]]

Medicare Utilization as a Percent of Inpatient Days:.

0-25........................................

227

10405

10866

4.4.

25-50.......................................

1,122

8578

8985

4.7.

50-65.......................................

1,445

6956

7307

5.1.

Over 65.....................................

937

6900

7240

4.9.

Unknown.....................................

173

9887

10358

4.8.

Rural Converted to Urban....................

164

6473

6888

6.4.

Urban Converted to Rural....................

69

6097

6387

4.8. Hospitals Reclassified by the Medicare Geographic Classification Review Board: FY 2005 Reclassifications:.

All Reclassified Hospitals..................

485

7316

7699

5.2.

All Nonreclassified Hospitals...............

3,326

7909

8291

4.8.

All Reclassified Urban Hospitals............

118

8258

8612

4.3.

Urban Nonreclassified Hospitals.............

2,486

8151

8538

4.7.

All Reclassified Rural Hospitals............

367

6816

7215

5.9.

Rural Nonreclassified Hospitals.............

840

5402

5734

6.2.

Other Reclassified Hospitals (Section

93

5971

6237

4.4 1886(d)(8)(B)).............................

\1\ These payment amounts per case do not reflect any estimates of annual case-mix increase.

Table II presents the projected impact of the proposed changes for FY 2005 for urban and rural hospitals and for the different categories of hospitals shown in Table I. It compares the estimated payments per case for FY 2004 with the average estimated per case payments for FY 2005, as calculated under our models. Thus, this table presents, in terms of the average dollar amounts paid per discharge, the combined effects of the changes presented in Table I. The percentage changes shown in the last column of Table II equal the percentage changes in average payments from column 10 of Table I.

VII. Impact of Other Proposed Policy Changes

In addition to those proposed changes discussed above that we are able to model using our IPPS payment simulation model, we are proposing various other changes in this proposed rule. Generally, we have limited or no specific data available with which to estimate the impacts of these proposed changes. Our estimates of the likely impacts associated with these other proposed changes are discussed below.

A. Impact of Proposed Change to Postacute Care Transfer Payment Policy

Existing regulations at Sec. 412.4(b) define transfers from one acute care hospital to another, and Sec. 412.4(c) defines transfers to certain postacute care providers. The per diem rate paid to a transferring hospital is calculated by dividing the full DRG payment by the geometric mean length of stay for the DRG. The transferring hospital receives a per diem payment for cases that are transferred prior to the geometric mean length of stay for the DRG (Sec. 412.4(f)(1)). Under section IV.A. of the preamble of this proposed rule, we discuss our proposal to provide alternate criteria for determining which DRGs are included within the scope of the postacute care transfer policy. The occasion for this proposed revision is our decision to delete DRG 483, and to assign the cases that previously were included within DRG 483 to two new DRGs, 541 and 542. As a result of these proposed revised criteria, three additional DRGs would fall within the scope of the policy. These are the two proposed new DRGs, 541 and 542, along with DRG 430. We estimate that the net effect of these proposed changes will be to reduce Medicare program payments by approximately $25 million per year. The proposed change is entirely due to the effect of adding DRG 430 to the policy. The proposed inclusion of proposed new DRGs 541 and 542 will have no effect on payments, because all of the cases included within those proposed DRGs were previously included within DRG 483 and, thus, already fall within the policy.

B. Impact of Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs

In section II.D. of the preamble of this proposed rule, we discuss the proposed changes in the LTC-DRG relative weights for FY 2005 on the proposed version 22.0 of the CMS GROUPER. We estimate that the proposed changes would result in an aggregate decrease in LTCH payments of approximately a $55 million based on LTCH cases in the FY 2003 MedPAR file. As we discuss in further detail in the 2005 LTCH PPS rate year final rule published on May 7, 2004, based on an analysis of LTCH claims data in the FY 2003 MedPAR file. We have found that the average LTC-DRG relative weight has increased due to an increase of cases being assigned to LTC-DRGs with higher relative weights. This increase may be attributable to a number of factors, including improvements in coding practices, which are typically found when moving from a reasonable cost-based payment system to a PPS. The impact of including cases with relatively lower charges into LTC-DRGs that have a relatively higher relative weight in the GROUPER version 21.0 (FY 2004) is a decrease in the average relative weight for those LTC-DRGs in proposed GROUPER version 22.0. We believe that the proposed changes in the LTC-DRG relative weights, which include a number of proposed LTC-DRGs with lower proposed relative weights, would result in a slight decrease in LTCH PPS payments.

C. Impact of Proposed Policy on Payments for Inpatient Care in Providers That Change Classification Status During a Patient Stay

In section IV.B. of the preamble to this proposed rule, we discuss our proposal to change our policy to preclude making more than one payment under Medicare for cases in which a Medicare provider changes its Medicare payment classification during a patient's stay. Although this situation may occur in other settings, this payment issue is most prevalent for services furnished to cross-over patients in a newly established LTCH. Currently, when this situation arises, Medicare makes two payments for what is essentially only one beneficiary episode of care, one under the IPPS and one under the LTCH PPS. The intent of this proposed policy is to eliminate the Medicare payments for the single episode of care of such patients. While we believe that this proposed policy may generate savings for the Medicare program, we do not have readily available data to precisely estimate the effect of this proposed change. Because these proposed revisions would only affect new hospitals, we are unable to estimate the number of hospitals that would be affected. Furthermore, we cannot estimate the specific

[[Page 28807]]

DRGs that would be affected at those hospitals.

D. Impact on Proposed Policy Reporting of Hospital Quality Data for Annual Hospital Payment Update

In section IV.E. of the preamble to this proposed rule, we discuss the implementation of section 501(a) of Public Law 108-173, which provides that, the update factor for the operating payments for FY 2005 and subsequent fiscal years is the market basket percentage increase. Section 501(b) also provides that, for FYs 2005 through 2007, the update factor will be the market basket percentage increase minus 0.4 percentage points for any hospital that does not submit quality data as specified in the law. We are unable to precisely estimate the effect of this provision because, while receiving the full update for those years is conditional upon the submission of quality data by a hospital, submission of the data is not mandated unconditionally. Furthermore, hospitals will not begin to submit the quality data until very late in the process of developing the final rule for FY 2005. The Congressional Budget Office, in its analysis of Public Law 108-173, assumed that a significant number of hospitals would not provide the data required for a full payment update, and therefore estimated savings to the Medicare program of approximately $100 million per year. However, there has been a steady increase in the number of hospitals that are voluntarily submitting the specified quality data under the National Voluntary Hospital Reporting Initiative. We have also made efforts to ensure that QIOs provide assistance to all hospitals that wish to submit data. Therefore, we believe that a high proportion of hospitals will respond to the incentive provided by section 501(b) and submit quality data in order to receive the full update. For purposes of this proposed rule, we are assuming that no appreciable savings will result from this provision.

E. Impact of Proposed Policy on Threshold Criteria for Add-On Payments for New Technology and Medical Services

In section IV.H. of the preamble of this proposed rule, we discuss our proposal to revise the threshold amount for determining whether a new technology or medical service is an appropriate candidate for an add-on payment if it is inadequately paid otherwise under the DRG system. Furthermore, we are no longer required to ensure that any add-on payments for new technology under section 1886(d)(5)(K) of the Act are budget neutral. However, these payments will have a significant impact on total payments made in FY 2005. As discussed in section II.E. of the preamble of this proposed rule, we are proposing to maintain the new technology status of the INFUSE TMBone Graft/LT-CAGE TMLumbar Tapered Fusion Device for spinal fusions. We estimate the total add-on payments associated with cases involving this new device for FY 2005 would be $4.7 million. In addition, several other technologies may receive approval if we receive appropriate supplemental data from the applicants (as discussed in the preamble) and other interested parties. Therefore, if we approve all the devices that may warrant approval, the total estimated increase in payments for FY 2005 could be $369 million.

F. Impact of Proposed Policy on Additional Payments to Hospitals With High Percentage of End-Stage Renal Disease Discharge

In section IV.J. of the preamble of this proposed rule, we discuss our proposal to revise our regulations to state that, in determining whether a hospital qualifies for additional Medicare payments for hospitals with high percentages of ESRD discharges, only discharges involving ESRD Medicare beneficiaries who have received a dialysis treatment during an inpatient hospital stay are to be counted.

This proposed revision to the policy would reduce the number of hospitals that will qualify for this additional payment. Specifically, discharges of Medicare ESRD beneficiaries who have not received dialysis treatment during the course of their hospital stays will no longer be counted in determining whether hospitals meet the threshold for receiving this additional payment. Some hospitals that have previously qualified for this extra payment would not qualify under this proposed revised policy. Therefore, the effect of this change would be a reduction in Medicare program expenditures. However, we are unable to quantify the level of program savings because we lack data on the proportion of the discharges previously counted toward the threshold determination under this provision that involved Medicare ESRD beneficiaries who did not receive dialysis services during their hospital stays. Overall program expenditures under this provision have been approximately $15 million annually to approximately 41 hospitals. We estimate that, the savings due to this policy change will only be some proportion of that figure since some portion of these hospitals, which currently qualify for the adjustment, will no longer qualify for these payments under the revised criteria.

G. Impact of Proposed Policy on Payment Adjustments for Low-Volume Hospitals

In section IV.M. of the preamble of this proposed rule, we discuss our proposal to implement section 406 of Public Law 108-173, which provides for a new payment adjustment to account for the higher costs per discharge of low-volume hospitals under the IPPS.

Based on the empirical analysis, we are limiting the adjustment to hospitals with 500 or fewer discharges. It is difficult to estimate precisely the impact of this provision. While there were approximately 400 hospitals with 500 or fewer total discharges in the most recent year for which we have data, many of these hospitals may qualify for CAH status under the revised bed count threshold (under section 405(e) of Pub. L. 108-173). Furthermore, we have not yet determined which hospitals satisfy the requirement that the hospital be located more than 25 road miles from another subsection (d) hospital. We are proposing to require that a hospital that wishes to qualify for the adjustment must provide its fiscal intermediary with evidence that it meets this distance requirement. Until intermediaries are able to make these determinations, we are unable to determine how many hospitals qualify for the adjustment.

However, the aggregate impact of this provision is likely to be relatively small. Hospitals with fewer than 500 total discharges in a year are likely to have correspondingly few Medicare discharges, perhaps 200 Medicare discharges or fewer. The largest percentage adjustments under the proposed formula that we have developed would be realized by the smallest hospitals. For example, a hospital with 50 total discharges will receive an adjustment on each Medicare discharge (probably 20 to 25 Medicare discharges annually) of 22.5 percent. A hospital with 499 total discharges would receive an adjustment of only 0.05 percent on each Medicare discharge. The Congressional Budget Office's estimated that this provision would increase Medicare program expenditures by less than $50 million annually. In the absence of a more precise estimate for the reasons indicated above, we agree with the Congressional Budget Office's determination.

H. Impact of Proposed Policy on MGCRB Hospital Reclassifications

Sections 1886(d)(2)(D) and (d)(3) of the Act previously required the Secretary to compute two average standardized amounts for discharges occurring in a fiscal year: one for hospitals located in large urban areas and one for hospitals located in other areas. In addition, under sections 1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the Act, the average standardized amount per discharge was determined for hospitals located in large urban and other areas in Puerto Rico. In accordance with section 1886(b)(3)(B)(i) of the Act, the large urban average standardized amount was 1.6 percent higher than the other area average standardized amount.

Section 402(b) of Public Law 108-7 required that, effective for discharges occurring on or after April 1, 2003, and before October 1, 2003, the Federal rate for all IPPS hospitals would be based on the large urban standardized amount. Subsequently, Public Law 108- 89, extended section 402(b) of Public Law 108-7 beginning with fiscal year 2004 and thereafter, and equal standardized amount is to be computed for all hospitals at the level computed for large urban hospitals during FY 2003, updated by the applicable percentage update. This provision in effect makes permanent the equalization of the standardized amounts at the level of the previous standardized amount for large urban hospitals. As a result of this legislative change, the standardized amount reclassification criterion is no longer necessary or appropriate. Therefore, as discussed in section IV.N. of this proposed rule, we are proposing to remove all standardize amount criteria provisions from the regulations governing geographic reclassification. Specifically, we are proposing to remove the provisions that contain the criterion requiring individual hospitals and urban hospital groups to demonstrate that their costs are more comparable to the average amount they would be paid if they were reclassified than

[[Page 28808]]

the amount they would be paid if they were reclassified than the amount they would be paid under their current classification.

In conjunction with this change, we are proposing under the Secretary's general authority to make exceptions that any hospital whose urban county group application under Sec. 412.234 would have been approved by the MGCRB for FY 2004 and FY 2005, but for the failure to meet the requirements in Sec. 412.234(c), will be assigned the wage index for the MSA identified in the FY 2004 and FY 2005 group application (in cases where the group identified more than one preference, the hospital will be assigned the wage index that is most advantageous).

For our proposal to remove all standardized amount criteria provisions from the regulations, we are unable to quantify the impact of this change precisely. The deletion of the standardized amount criterion may allow more hospital group applications to qualify for reclassification. However, we cannot determine how many groups would be affected by this change, and, of those, how many groups would actually organize to apply under the revised standard. This change would not affect the aggregate level of Medicare expenditures since reclassification decisions are budget neutral under section 1886(d)(8)(B) of the Act. However, the exercise of the Secretary's exception authority to assign a new wage index to certain hospitals that failed to be approved for reclassification in FY 2004 and FY 2005 is not budget neutral. Our review of the group reclassification applications for those years indicates that only a very small number of hospitals would qualify for a new wage index assignment under this proposed exception. While we are unable to be certain about the exact number of hospitals that would qualify, we believe that the aggregate impact on program payments would be in the range of $10 million to $20 million annually for the three years during which this exception would be in place.

In addition, we are unable to quantify the precise impact of the proposed change precisely to the average hourly wage threshold for rural referral centers. Only a limited number of rural referral centers are actually located in urban areas. Effective October 1, 2000, if a hospital located in what is now an urban area was ever a rural referral center, it is reinstated to rural referral center status (65 FR 47089). We are unable to determine how many of these rural referral centers that would not otherwise have qualified for reclassification would now be able to meet the 82 percent threshold. However, this change would not affect the aggregate level of Medicare expenditures since reclassification decisions are budget neutral under section 1886(d)(8)(B) of the Act. The exercise of the Secretary's exception authority to assign a new wage index to certain rural referral centers that failed to be approved for reclassification in FY 2005 is not budget neutral. Our review of the reclassification applications indicates that only a very small number of hospitals would qualify for a new wage index assignment under this proposed exception. While we are unable to be certain about the exact number of hospitals that would qualify, we believe that the aggregate impact on program payments would be in the range of $10 million to $20 million for the one-year during which this exception would be in effect.

Further, we anticipate that our proposed use of the authority in section 1886(d)(5)(I)(i) of the statute, to provide special protection to a small number of hospitals in States with fewer than 10 people per square mile (as determined using 2000 census data) would only increase Medicare program expenditures by $3 million to $5 million at the maximum. We believe that Medicare expenditures associated with this change would not exceed this level because many of the SCHs in the States where the exception would be applied have already qualified for reclassification effective for discharges on or after October 1, 2004. Furthermore, these hospitals are relatively small, and some of them are paid under their hospital specific rates, which restricts the gain from reclassification in most cases to capital PPS payments and payments for outpatient services.

I. Impact of Proposed Policy on Payment for Direct Costs of Graduate Medical Education

1. Redistribution of Unused Resident Slots

As discussed in section IV.O.2.b. of this preamble, section 422 of Public Law 108-173 added a new section 1886(h)(7) to the Act that provides for reductions in the statutory FTE resident caps under Medicare for certain hospitals and authorizes a ``redistribution'' of the FTE resident slots resulting from the reduction in the FTE resident caps to other hospitals.

For purposes of this proposed rule, we have estimated the impact of section 422 on hospitals for FY 2005, making assumptions about update factors, geographic (locality) adjustment factors, and the number of unused residency positions for each hospital. For purposes of calculating the impact for direct GME payments, we used the projected national average per resident amount (PRA) for FY 2005 of $82,249, as determined in accordance with existing Sec. 413.86(e)(4)(ii)(B) (proposed to be redesignated as Sec. 413.77(d)(2)(ii) in this proposed rule), since section 1886(h)(7)(B)(v) of the Act requires that a hospital that receives an increase in its direct GME FTE resident cap under section 1886(h)(7)(B) of the Act will receive direct GME payments with respect to those additional FTE residents using the locality- adjusted national average PRA. Based on our analysis of hospitals' FTE resident caps and FTE resident counts from the Hospital Cost Report Information System (HCRIS) for the most recent cost reporting periods ending on or before September 30, 2002, and making assumptions for hospitals that submit a timely request to use their cost report that includes July 1, 2003, we estimate that approximately 2,600 FTE resident slots that were previously unfilled (and therefore, no direct GME or IME payments were made for those slots) would be redistributed to and filled by hospitals that request an increase to their FTE residents caps under section 1886(h)(7)(B). (We note that this estimate of 2,600 slots is not necessarily the same as the estimate we would ultimately use to redistribute resident positions under section 1886(h)(7)(B)). Since payments for direct GME are determined based on a hospital's Medicare inpatient utilization, for purposes of this impact, we have applied a factor of .35 as the average Medicare inpatient utilization. Accordingly, for FY 2005, we estimate an increase of $75.6 million in direct GME payments.

For purposes of estimating the impact on IME payments, we used an IME formula multiplier of 0.66, since section 1886(d)(5)(B)(ix) states that for a hospital whose FTE resident cap is increased as a result of a redistribution of unused resident positions, the IME adjustment factor is to be calculated using a formula multiplier of 0.66 with respect to any additional residents counted by the hospital as a result of that increase in the hospital's FTE resident cap. Based on an estimate of unused resident positions using FTE resident data from HCRIS for the most recent cost reporting periods ending on or before September 30, 2002, and making assumptions for hospitals that submit a timely request to use their cost report that includes July 1, 2003, we estimate that for FY 2005, IME payments would increase by approximately $66.5 million. Thus, since section 422 is not effective until the fourth quarter of FY 2005 (that is, July 1, 2005), the estimated total increase in Medicare payments for FY 2005 attributable to section 422 is $35.53 million ([$75.6 million + $66.5 million] divided by 4).

2. Per Resident Amount: Extension of Update Limitation on High-Cost Programs

In section IV.O.4. of the preamble of this proposed rule, we discuss our proposal to implement section 711 of Public Law 108-173, which freezes the annual CPI-U inflation factors to hospital- specific PRAs for direct GME payments for those PRAs that exceed the established ceiling for FYs 2004 through 2013. Under existing regulations, for FY 2005, if a hospital's PRA for the previous cost reporting period would be greater than 140 percent of the locality- adjusted national average PRA for that same previous cost reporting period, the hospital's PRA would be updated for inflation, except that the CPI-U applied for a 12-month period is reduced by 2 percentage points. Under the new provisions of section 711 of Pub. L. 108-173 for FY 2005, if a hospital-specific PRA for the previous cost period would be greater than 140 percent of the locality- adjusted national average PRA for that same previous cost reporting period, the hospital-specific PRA would be frozen at the FY 2004 PRA, and not updated for inflation. Therefore, the impact in direct GME payments for FY 2005 (attributable to section 711 of the Public Law 108-173) is the difference between updating the PRAs by the applicable CPI-U inflation factor minus 2 percentage points, and not updating the PRAs by any CPI-U inflation factor. We have calculated an impact for this provision, but the resulting savings are negligible (less than $100,000).

3. Residents Training in Nonhospital Settings

In section IV.O.5. of the preamble of this proposed rule, we discuss our proposal to implement section 713 of Public Law 108-173, which, through a moratorium, allows hospitals to count allopathic or osteopathic

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family practice residents training in nonhospital settings for IME and direct GME without regard to the financial arrangements between the hospital and the teaching physician practicing in the nonhospital setting in which the resident is assigned. We are unable to quantify the impact of these provisions because we do not know the number of residents or programs that are affected by these changes.

In addition, under IV.O.5. of this preamble, we discuss our proposed changes related to requirements for written agreements for residency training in nonhosital settings. We are proposing to revise the regulations to remove the requirement for a written agreement between the hospital and the nonhospital setting as a precondition for a hospital to count residents training in nonhospital settings for purposes of direct GME and IME payments. We are also proposing that, in order for the hospital to count residents training in a nonhospital setting, the hospital must pay for the nonhospital site training costs concurrently with the training that occurs during the cost reporting period. There is no monetary impact related to this proposed change because this proposal is administrative in nature, and does not affect a hospital's direct GME or IME payments.

J. Impact of Proposed Policy on Rural Community Hospital Demonstration Program

In section IV.P. of the preamble of this proposed rule, we discuss our proposal to implement section 410A of Public Law 108-173 requiring the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' As discussed in section IV.P. of this proposed rule, we are proposing to satisfy this requirement by adjusting national IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. We estimate that the average additional annual payment that would be made to each participating hospital under the demonstration would be approximately $1,120,000. We based this estimate on the recent historical experience of the difference between inpatient cost and reasonable cost payment for hospitals that would be eligible for the demonstration. For 15 participating hospitals, the total annual impact of the demonstration program is estimated to be $16,820,148. We estimate that there will be an average decrease in payment per discharge of approximately $0.83 in order to achieve budget neutrality. We describe the budget neutrality adjustment required for this purpose in the Addendum to this proposed rule.

K. Impact of Proposed Criteria for Hospitals-Within-Hospitals

In section VI.B. of the preamble of this proposed rule, we discuss three options for revising and strengthening the criteria to be used to classify hospitals-within-hospitals for purposes of payments that are excluded from the IPPS. The intent of our policies requiring separateness of administrative and medical governance and decision-making between the hospital-within-a-hospital and its host has been to discourage patient shifting between the excluded hospital-within-a-hospital and its host for financial rather than medical purposes. In 2002, there were 114 hospitals-within- hospitals, and these entities are increasing at an average annual rate of 30 percent (MedPAC, June 2003, p.85). To the extent that these proposed revisions would eliminate hospital-within-hospital arrangements that circumvented our existing requirements, the Medicare program would avoid making unnecessary payments under the more costly excluded hospital PPSs. We cannot estimate the numbers of existing entities that would be affected by these proposed revisions, nor can we estimate the specific DRGs that would be affected at those hospitals. In addition, we do not know the number of new applications for this status that would be subject to review under these new proposed standards. Therefore, we are unable to quantify the effect these propose changes would have upon Medicare expenditures. However, we believe that this proposed change in policy would likely result in a savings to the Medicare program.

L. Impact of Proposed Policy Changes Related to CAHs

In section VI.C.2. through VI.C.5. of the preamble of this proposed rule, we discuss our proposal to implement provisions in section 405 of Public Law 108-173 relating to payments to CAHs which include the percentage of change in the reasonable cost payment amount for certain services; the revised condition for a CAH's election of the optional payment method; the availability to CAHs of the periodic interim payment method (PIP); and expansion of types of emergency room providers who may be on call at CAHs.

These changes, taken together with the increase in the number of beds permitted to CAHs for acute care inpatient services discussed below, increase the incentive for conversion to CAH status by allowing larger rural hospitals and those with specialized units to become CAHs without materially reducing the size and scope of their activities. The added 1 percent reimbursement and flexibility to allow some physicians to opt out of method 2 for CAH billing should also increase the rate of conversion, while at the same time increasing the cost of CAHs to the Medicare program. The two payment methods are described in detail in section V.I.D.3. of the preamble and at Sec. 413.70(b). The Congressional Budget Office's official estimate was that section 405 of Public Law 108-173 would increase Medicare program expenditures by approximately $100 million annually. We do not have the information to quantify the extent of the anticipated increase more precisely or to determine how much each provision of section 405 might contribute to that increase.

In section VI.C.6. of this preamble, we discuss our proposal to our regulations to reflect the provisions of section 405(e) of Pub. L. 108-173, which provides for an increase in the number of beds permitted to CAHs for acute care inpatient services, from 15 to 25 beds. We anticipate that both Medicare providers and beneficiaries would welcome this change. The increase in the number of beds would benefit CAHs that experience seasonal increases in patient census due to weather conditions and tourism. With the increase, more Medicare beneficiaries may have access to health care in their communities without the need to be transferred to another hospital because the CAH is at capacity for acute care beds. In addition, the bed size increase would eliminate an obstacle for some small rural hospitals that, except for the bed size restriction of 15 acute care beds, could qualify for CAH status. Although we anticipate that these changes would increase the rate at which hospitals convert to CAH status we do not have the information needed to make quantitative estimates of the extent of this increase.

In section VI.C.7. of the preamble of this proposed rule, we discuss our proposal to implement section 405(g) of Public Law 108- 173, which grants authority for CAHs to establish psychiatric and rehabilitation distinct part units. This proposed rule would allow CAHs the option of providing rehabilitation and psychiatric services in such units.

Although we view the anticipated results of the proposed regulations as beneficial to the Medicaid and Medicare programs as well as to Medicare and Medicaid beneficiaries and State governments, we recognize that some of the provisions could be controversial and that some affected entities may respond unfavorably. We also recognize that not all of the potential effects of these provisions can definitely be anticipated, especially in view of their interaction with other Federal, State, and local activities regarding outpatient services. In particular, considering the effects of our simultaneous efforts to improve the delivery of outpatient services, it is impossible to quantify meaningfully a projection of the future effect of these provisions on a CAH's operating costs or on the frequency of substantial noncompliance and termination procedures.

We estimate that only those facilities that have the capabilities to operate a distinct part unit prior to becoming a CAH will elect to operate such a unit. Hospitals that currently operate a distinct part unit and wish to continue providing psychiatric and rehabilitation services to the community can continue to do so after converting to a CAH. Allowing a facility that converts to a CAH to continue providing inpatient rehabilitation and psychiatric services in rural areas would help to ensure availability of services that are disproportionately located in urban areas. Distinct-part units may be less common in rural areas due to the challenge of finding the resources needed to operate a distinct part unit. The United States General Accounting Office (GAO), in its September 2003 Report to Congress, entitled ``Modest Eligibility Expansion for Critical Access Hospital Program Should Be Considered,'' reported that a distinct part unit might provide a

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financial benefit to the hospital because it enables the hospital to spread its fixed costs over more services. CAHs potentially can experience a net gain on their Medicare payments.

Among the existing CAHs, 25 previously operated a distinct part unit but had to close it as part of becoming a CAH. GAO identified 683 rural hospitals as ``potential CAHs'' based on their having an annual average of no more than 15 acute care patients per day. About 14 percent (93) of these potential CAHs operate an inpatient psychiatric or rehabilitation distinct part unit, which they previously would have had to close to convert to CAH status. Among the potential CAHs that operate a distinct part, about half had a net loss on Medicare services, indicating they might benefit from CAH conversion.\8\

\8\ Information from United States General Accounting Office's Report to Congress, ``Modest Eligibility Expansion for Critical Access Hospital Program Should be Considered,'' GAO-03-948, September 2003.

Based on the GAO data, we estimate that approximately 50 hospitals that currently operate distinct part units would not incur any additional expense to convert to a CAH and, in fact, may increase their revenue. Therefore, we are only estimating burden for current CAHs (approximately 27) that might want to operate a distinct part unit due to their previous experience in operating a distinct part unit.

Inpatient psychiatric services in a CAH's distinct-part unit must be under the supervision of a clinical director, service chief, or equivalent who is qualified to provide the leadership required for an intensive treatment program, and who is board certified in psychiatry. The distinct part unit must also have a director of nursing services who is a registered nurse with a master's degree in psychiatric or mental health nursing or its equivalent from a school of accreditation by the National League of Nursing, who is qualified by education and experience in the care of persons with mental illness, and a director of social services. There must also be an adequate number of registered nurses to provide 24-hour coverage as well as licensed practical nurses and mental health workers.

A rehabilitation distinct-part unit of a CAH would be required to provide rehabilitation nursing, physical and occupational therapy, and, as needed, speech therapy, social services or psychological services and orthotics and prosthetics. The distinct part unit also must have a director of rehabilitation who, among other requirements, is experienced in rehabilitation and is a doctor of medicine or a doctor of osteopathy.

In addition, a CAH must comply with the common requirements for excluded units at Sec. 412.25. Therefore, both psychiatric and rehabilitation distinct part units would be required to meet those requirements, including written admission criteria that are applied uniformly to both Medicare and non-Medicare having patients and have admission and discharge records that are separately identified from those of the CAH in which it is located and are readily available. Both of these distinct part units also must have policies specifying that necessary clinical information be transferred to the unit and have utilization review standards applicable for the type of care offered in the unit. Psychiatric distinct part units would also have to meet requirements of Sec. 412.22, including maintenance of medical records that permit determination of the degree and intensity of the treatment provided to individuals who are furnished services in the unit. Each patient must also have an individual comprehensive treatment plan. Section 412.29 requires individuals having rehabilitation distinct part units to also have to meet the criteria of a preadmission screening procedure under which each prospective patient's condition and medical history are reviewed to determine whether the patient is likely to benefit significantly from an inpatient program. The unit must have also a plan of treatment for each inpatient. Notwithstanding the above discussion, we are not attributing burden for these requirements because they are industry standards for providing quality care and are already required conditions for both rehabilitation and psychiatric units.

Hours/estimated salary/number of CAHs

Annual cost

Estimated Costs for Psychiatric Distinct Part Units

Clinical Director or service chief; annual salary of

$2,025,000 $75,000 x 27 CAHs...................................... 24-hours nursing coverage--1 RN per 12 hour shift (2 RNs 2,814,480 total) = Annual salary of $52,120 x 2;................. One LPN per 12 hour shift = Annual salary of $32,500 x 2 1,755,000 = $65,000 x 27 CAHs;................................... Director of nursing--Annual salary of $60,000 x 27 =

1,620,000 $1,620,000............................................. Director of social services--Annual salary of $53,000 x

1,431,000 27 = $1,431,000........................................ Psychiatric aides--Annual salary of $25,650 x 2=$51,300

1,385,100 x 27 CAHs..............................................

Total............................................... 11,050,580

Estimated Costs for Rehabilitation Distinct Part Units

Director of Rehabilitation--Annual salary $75,000 x 27 = 2,025,000 $2,025,000............................................. Occupational Therapist--Annual salary $53,300 x 27 =

1,439,100 $1,439,100............................................. Physical Therapist--Annual salary $55,800 x 27 =

1,506,600 $1,506,600............................................. Speech Therapist--Annual salary $52,800 x 27 =

1,425,600 $1,425,600............................................. Rehabilitation nurse--Annual salary $32,500 x 27 =......

877,500

Total............................................... 7,273,800

In section VI.C.8. of the preamble of this proposed rule, we are proposing to implement section 405(h) of Public Law 108-173 which terminates a State's authority to waive the location requirement of more than a 35-mile drive (or in the case of mountainous terrain or secondary roads, a 15-mile drive) for a CAH by designating the CAH as a necessary provider. We do not have the information to quantify the extent of the anticipated increase more precisely or to determine how much this provision might contribute to that increase.

M. Impact of Proposed Policy Change Regarding Disclosure of Information by QIOs.

In section VII.A. of this proposed rule, we are proposing to revise our regulations to add provisions to allow QIOs to disclose information about practitioners and institutions and information from quality review studies if the practitioner or institution consents to or requests the disclosure of the information in writing. This disclosure would be in addition to the existing disclosure previously based on written consent of the institution or practitioner. In addition, we are proposing exceptions to the 30-day advance notice requirement to an institution or practitioner by a QIO of its intent to disclose confidential and nonconfidential information on a practitioner or an institution is at the request of or consent of the institution or practitioner. We are proposing to specify that the notification requirements would not apply if the institution or practitioner has requested in writing that the QIO make the disclosure, has provided written consent for the disclosure, or the information is public information.

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We believe that these proposed revisions would reduce the existing burden on practitioners, institutions, and QIOs and, at the same time, ensure that necessary protections on information are retained. These provisions would allow QIOs, institutions, and practitioners to share vital information in an effective manner and further our efforts to ensure the highest quality of care for Medicare beneficiaries.

N. Impact of Policy Change for Medicare Hospital Conditions of Participation for Discharge Planning

In section VIII.A. of the preamble of this proposed rule, we discuss our proposal to amend the regulations at Sec. 482.43 to incorporate the provisions of section 4321(a) of Public Law 105-33 and section 926(b) of Public Law 108-173 into the hospital conditions of participation. We are proposing to include the requirement for hospitals to provide lists of Medicare-certified HHAs and SNFs to patients or their representatives as part of the discharge planning process. We are proposing to require the SNF list to include Medicare-certified SNFs located in a geographic area chosen by the patient. We are not requiring that the list of Medicare-certified SNFs contain only those SNFs that are located in the area in which the patient resides. Because many available Medicare-certified SNFs are not located near where the patient resides, especially in rural areas, we believe that a requirement that restricts a patient to SNFs in areas where the patient resides is too restrictive and would limit the choices of posthospital extended care services for Medicare beneficiaries.

The nature of the proposed regulatory provision is such that this minimal regulatory burden would be placed upon hospitals, HHAs and SNFs exclusively. Therefore, we did not consider any regulatory relief options. We also certify that this proposed provision would not have a significant economic impact on a substantial number of small entities or a significant impact on the operations of a substantial number of small rural hospitals.

Compliance with section 4321(a) of the BBA and section 926(b) of Public Law 108-173 requires a hospital to collect on an initial and ongoing basis information to develop and maintain a current list of HHAs and SNFs available to Medicare beneficiaries. We anticipate that this effort would be minimal because hospitals currently access this information as an essential component of the discharge planning process. We do not anticipate that the operations of a substantial number of small rural hospitals would be significantly impacted. The impact would be even further minimized if a hospital chooses to access this information via the Home Health Compare or Nursing Home Compare tools on the CMS Web site, http://www.medicare.gov, or if

the hospital calls 1-800-MEDICARE (1-800-633-4227) to request a printout of the HHAs or SNFs in the desired geographic area.

The anticipated effects on patients would be an enhanced ability to make informed choices about the care they receive from HHAs or SNFs upon discharge from a hospital. Based on 2003 CMS data, there are approximately 6,000 Medicare-certified hospitals, 6,900 Medicare-certified HHAs, and 17,000 SNFs.

The requirements set forth in this proposed provision would place minimal burdens on hospitals, HHAs, and SNFs. A possible outcome of the implementation of all parts of the rule may be to influence hospital referral patterns, thus having an impact on HHAs and SNFs receiving post-hospitalization referrals. The information made available to maintain compliance with the statute and this proposed provision might impact patient choices about who furnishes Medicare services to them and, in turn, may have an indeterminable impact on entities that provide, or do not provide services to Medicare beneficiaries as a result.

This proposed provision would improve our information campaign to assist beneficiaries in making informed choices for health care delivery. Patient choice under the Medicaid program may be similarly affected if the providers on these lists also participate in that program.

We considered developing a standardized process, format, and timeframe for all hospitals to use in developing, maintaining, and updating a current list of HHAs and SNFs. Instead, we have chosen a less prescriptive approach. Hospitals have the flexibility to define a process for developing, maintaining, and updating their list of HHAs or SNFs in a manner that makes the most sense for both the hospital and the patients they serve. The hospital would have the flexibility to develop and maintain their own list of HHAs and SNFs, or simply print a list from the Home Health Compare or Nursing Home Compare site at the CMS Web site, http://www.medicare.gov, based on

the geographic area requested by the patient. Or, in the rare instance when a hospital does not have Internet access, the hospital can call 1-800-MEDICARE (1-800-633-4227) to request a printout of the list of HHAs or SNFs in the desired geographic area. In this way, hospitals would be able to develop and implement systems and processes that are the most effective and efficient in providing quality care and meeting the needs of their patients, as well as complying with the requirements of the proposed regulation.

In summary, this proposed provision would establish a process for implementing the statutory requirements under section 4321(a) of the BBA and section 926(b) of the MMA. This approach would enhance the information made available to Medicare beneficiaries and place minimal burdens on all entities that may be directly or indirectly affected.

O. Impact of Proposed Policy Changes Relating to Medicare Provider Agreements for Compliance with Bloodborne Pathogens Standards for Medicare-Participating Hospitals

In section VIII.B. of the preamble to this proposed rule, we discuss our proposal to implement section 947 of Public Law 108-173 under which hospitals not otherwise subject to the Occupational Safety and Health Act (OSHA) (or a State occupational safety and health plan that is approved under section 18(b) of that Act) must comply with the OSHA bloodborne pathogens standard as part of their Medicare provider agreements, effective July l, 2004.

Given that the Occupational Safety and Health Administration (OSHA) has already prepared a Regulatory Impact and Regulatory Flexibility Analysis for the Bloodborne Pathogens standard that was published December 6, 1991 (56 FR 64004), we have included relevant portions of their analyses in our estimate. However, we have pulled out the numbers that are relevant to this regulation and up-dated the numbers to make them current as of January, 2004. Thus, the impact of this proposed rule on the public hospitals included in the 26 States without state plans, as well as the District of Columbia, and Guam has been assessed.

OSHA noted that most hospitals perform a great variety of services, and there are many different exposure scenarios. One frequently reported exposure was needlestick, with the greatest potential for exposure occurring during needle recapping. Other hospital procedures that are associated with frequent exposure include phlebotomy, IV line placement, bronchoscopy, intubation, airway suction, endoscopy, colonoscopy, and proctosigmoidoscopy. Areas with the greatest potential for exposure include the emergency room, surgical suite, hemodialysis center, and intensive care unit. Laundry workers and janitors may also be exposed, particularly when handling soiled linen or refuse.

OSHA's standard for reducing worker exposure to bloodborne pathogens is based on the adoption of universal precautions as a method of infection control. This approach, which is fundamentally different from traditional procedures that isolate known infectious individuals and materials in the health care setting, assumes that all human blood and body fluids are potentially infectious for HIV, HBV, and other bloodborne pathogens. The rationale for this approach is that carriers of these diseases are not always identifiable in the health care setting, and that contaminated materials are not always properly labeled. Thus, the exposed worker can be at great risk without warning.

OSHA estimated that 6,197 hospitals with a total of 2,386,165 employees would be affected by the BBP standards. However, OSHA found that most hospitals had already implemented measures to protect workers from occupational exposure to blood and other potentially infectious materials, and that many were very close to full compliance with the standard. OSHA's estimates of the number of affected hospitals and the number of employees did not include state and local government hospitals located in states without occupational safety and health plans in place, that is, the hospitals that would be affected by our proposed rule.

Net compliance costs were estimated for each provision of the standard based on OSHA surveys and information submitted in response to the rulemaking docket. The costs represented the additional costs of fully complying with the requirements of the standard, after deducting from total cost the current baseline activities that already voluntarily occurred at affected facilities. Personal protective equipment accounted for

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the largest amount of net compliance costs. Training, vaccine and post-exposure follow-up, and housekeeping were also found to be significant cost components. One-time costs were annualized to reflect the opportunity cost of capital. OSHA estimated the total annual costs to the affected hospitals to be approximately $321,913,697 or $51,947 per hospital annually.

The magnitude of cost increases associated with the standard was estimated to be relatively small, and OSHA stated that they should not create significant economic hardship for most affected hospitals. OSHA predicted that the costs would be passed through the system, with resultant minor price increases to patients, customers and other downstream recipients of health services. However, OSHA noted that without the BBP standards, the economic impact of inadequate protections from BBP would fall on hospital employees and the general public.

OSHA stated that, in general, the economic impacts of the standard were not judged to be of sufficient magnitude to threaten the existence of any affected sector, nor were impacts judged sufficient to disrupt or otherwise adversely alter industry structure. OSHA did not believe that productivity of hospital employees would be significantly affected by the BBP requirements. OSHA stated that it believed familiarization with the requirements and techniques would restrict time lost and that any decrease in productivity would be offset by the peace of mind associated with a safer work setting.

Based on OSHA'S conclusions, we did not deem it necessary to update the 1989 cost data used in their analysis. Although the costs of meeting the BBP standards would have increased over time, we note that at the time, OSHA found most hospitals had already implemented measures to protect workers from exposure to blood and other potentially infectious materials and that many hospitals were very close to full compliance. We expect that hospitals not covered under the BBP standards (that is, hospitals that would be affected by our proposed rule) also had implemented measures to protect their employees from exposure to blood and other potentially infectious materials and that many hospitals were already close to full compliance with the BBP standards. We also expect that in the intervening years, hospitals that would be affected by this proposed rule would have further increased their worker protections. It is likely that many of the hospitals that would be affected by this proposed rule are already very close to full compliance with the BBP standards.

While smaller hospitals' limited ability to diversify could be a potential disadvantage in their attempts to pass compliance costs forward, OSHA concluded that it did not appear that they would lag behind larger hospitals to any significant extent in their ability to provide employees with protection against infectious hazards.

On January 18, 2001, OSHA published a final rule that added two new recordkeeping requirements to the BBP standards (66 FR 48250). First, the amended standard requires employers to ``establish and maintain a sharps injury log for the recording of percutaneous injuries''. Second, any employer ``who is required to establish an Exposure Control Plan'' must ``solicit input from non-managerial employees responsible for direct patient care who are potentially exposed to injuries from contaminated sharps in the identification, evaluation, and selection of effective engineering and work practice controls and shall document the solicitation in the exposure-control plan.

According to OSHA's analysis, the maximum total annual cost of the two requirements would be $33,892,653, consisting of $1,294,352 associated with maintaining a sharps injury log and $32,598,300 associated with soliciting and documenting employee input into the Exposure Control Plan. This would amount to $67 per hospital annually, which would not cause significant economic impact on either large or small affected establishments.

The requirements set forth in this proposed rule would place minimal burden on hospitals. A possible outcome of the implementation of all parts of the rule may be to influence hospitals' use of proper mechanisms and supplies necessary to ensure employee protection from BBPs.

The anticipated effects on employees would be the assurance that provisions are made to reduce the potential for contact with BBPs when performing work-related duties. Based on 2003 CMS data, there are approximately 6,000 Medicare-certified hospitals of which 849 are non-federal, government-owned hospitals located in states that do not have their own health and safety standards.

This proposed rule would improve the quality of working conditions for employees who care for Medicare beneficiaries in these non-federal, government-owned hospitals and would ensure hospital employee safety while performing their duties in Medicare participating hospitals while placing minimal burden on all affected entities directly and on entities that may be indirectly affected.

P. Impact of Proposed Fire Safety Requirements for Certain Health Care Facilities.

In section VIII. of the preamble of this proposed rule, we discuss our proposal to clarify that long-term care facilities must be in compliance with Chapter 19.2.9, Emergency Lighting, beginning March 13, 2006. In addition, we also specify that beginning March 13, 2006, Chapter 19.3.6.3.2, exception number 2 will no longer apply to these facilities.

In the January 10, 2003 final rule adopting the 2000 edition of the Life Safety Code, we examined the overall economic impact and the impact on small entities and rural hospitals as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 16, 1980 Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) and Executive Order 13132. We also examined the anticipated effects of the rule. We determined that the 2003 final rule did not meet the criteria to be considered economically significant or to be a major rule. Furthermore, we examined the Federalism implication of the 2003 final rule and determined that the rule would not have a substantial effect on State, local, or tribal governments. The correcting amendments in this proposed rule would merely bring the Code of Federal Regulations language into conformity with the analyses that we have already conducted and described in the Regulatory Impact Statement section of the 2003 final rule. (See 68 FR 1374, January 10, 2003).

VIII. Impact of Proposed Changes in the Capital PPS

A. General Considerations

Fiscal year 2001 was the last year of the 10-year transition period established to phase in the PPS for hospital capital-related costs. During the transition period, hospitals were paid under one of two payment methodologies: fully prospective or hold harmless. Under the fully prospective methodology, hospitals were paid a blend of the capital Federal rate and their hospital-specific rate (see Sec. 412.340). Under the hold-harmless methodology, unless a hospital elected payment based on 100 percent of the capital Federal rate, hospitals were paid 85 percent of reasonable costs for old capital costs (100 percent for SCHs) plus an amount for new capital costs based on a proportion of the capital Federal rate (see Sec. 412.344). As we state in section V. of the preamble of this proposed rule, with the 10-year transition period ending with hospital cost reporting periods beginning on or after October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective payment system payments for most hospitals are based solely on the capital Federal rate. Therefore, we no longer include information on obligated capital costs or projections of old capital costs and new capital costs, which were factors needed to calculate payments during the transition period, for our impact analysis.

In accordance with Sec. 412.312, the basic methodology for determining a capital prospective payment system payment is:

(Standard Federal Rate) x (DRG weight) x (Geographic Adjustment Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA adjustment for hospitals located in Alaska and Hawaii) x (1 + Disproportionate Share (DSH) Adjustment Factor + Indirect Medical Education (IME) Adjustment Factor, if applicable).

In addition, hospitals may also receive outlier payments for those cases that qualify under the threshold established for each fiscal year.

The data used in developing the impact analysis presented below are taken from the December 2003 update of the FY 2003 MedPAR file and the December 2003 update of the Provider Specific File that is used for payment purposes. Although the analyses of the changes to the capital prospective payment system do not incorporate cost data, we used the December 2003 update of the most recently available hospital cost report data (FY 2001) to categorize hospitals. Our analysis has several qualifications. First, we do not make adjustments for behavioral changes that hospitals may adopt in response

[[Page 28813]]

to policy changes. Second, due to the interdependent nature of the PPS, it is very difficult to precisely quantify the impact associated with each change. Third, we draw upon various sources for the data used to categorize hospitals in the tables. In some cases (for instance, the number of beds), there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available sources overall. However, for individual hospitals, some miscategorizations are possible.

Using cases from the December 2003 update of the FY 2003 MedPAR file, we simulated payments under the capital PPS for FY 2004 and FY 2005 for a comparison of total payments per case. Any short-term, acute care hospitals not paid under the general IPPS (Indian Health Service Hospitals and hospitals in Maryland) are excluded from the simulations.

As we explain in section III.A.4. of the Addendum of this proposed rule, payments will no longer be made under the regular exceptions provision under Sec. Sec. 412.348(b) through (e). Therefore, we are no longer using the actuarial capital cost model (described in Appendix B of the August 1, 2001 final rule (66 FR 40099)). We modeled payments for each hospital by multiplying the capital Federal rate by the GAF and the hospital's case-mix. We then added estimated payments for indirect medical education, disproportionate share, large urban add-on, and outliers, if applicable. For purposes of this impact analysis, the model includes the following assumptions:

We estimate that the Medicare case-mix index would increase by 1.0 percent in both FY 2004 and FY 2005.

We estimate that the Medicare discharges will be 14.5 million in FY 2004 and 14.0 million in FY 2005 for a 3.4 percent decrease from FY 2004 to FY 2005. (We are projecting a decrease in Medicare Part A fee-for-service admissions, in part, because we are projecting an increase in Medicare managed care enrollment as a result of the implementation of several provisions of Public Law 108-173.

The capital Federal rate was updated beginning in FY 1996 by an analytical framework that considers changes in the prices associated with capital-related costs and adjustments to account for forecast error, changes in the case-mix index, allowable changes in intensity, and other factors. The proposed FY 2005 update is 0.7 percent (see section III.A.1.a. of the Addendum to this proposed rule).

In addition to the proposed FY 2005 update factor, the proposed FY 2005 capital Federal rate was calculated based on a GAF/ DRG budget neutrality factor of 1.0015, an outlier adjustment factor of 0.9497, and a (special) exceptions adjustment factor of 0.9996.

Results

In the past, in this impact section we presented the redistributive effects that were expected to occur between ``hold- harmless'' hospitals and ``fully prospective'' hospitals and a cross-sectional summary of hospital groupings by the capital PPS transition period payment methodology. We are no longer including this information because all hospitals (except new hospitals under Sec. 412.324(b) and under Sec. 412.304(c)(2)) are paid 100 percent of the capital Federal rate in FY 2005.

We used the actuarial model described above to estimate the potential impact of our proposed changes for FY 2005 on total capital payments per case, using a universe of 3,871 hospitals. As described above, the individual hospital payment parameters are taken from the best available data, including the December 2003 update of the FY 2003 MedPAR file, the December 2003 update to the Provider-Specific File, and the most recent cost report data from the December 2003 update of HCRIS. In Table III, we present a comparison of total payments per case for FY 2004 compared to FY 2005 based on the proposed FY 2005 payment policies. Column 2 shows estimates of payments per case under our model for FY 2004. Column 3 shows estimates of payments per case under our model for FY 2005. Column 4 shows the total percentage change in payments from FY 2004 to FY 2005. The change represented in Column 4 includes the 0.7 percent update to the capital Federal rate, a 1.0 percent increase in case-mix, changes in the adjustments to the capital Federal rate (for example, the effect of the new hospital wage index on the geographic adjustment factor), and reclassifications by the MGCRB, as well as changes in special exception payments. The comparisons are provided by: (1) Geographic location; (2) region; and (3) payment classification.

The simulation results show that, on average, capital payments per case can be expected to increase 4.3 percent in FY 2005. In addition to the 0.7 percent increase due to the capital market basket update, this projected increase in capital payments per case is largely attributable to the proposed changes in the GAF values (which include the increase to hospital wage index values provided for by sections 505 and 508 of Pub. L. 108-173) and estimated increase in outlier payments in FY 2005. Our comparison by geographic location shows that urban hospitals are expected to experience a 4.6 percent increase in capital payments per case, while rural hospitals are only expected to experience a 2.1 percent increase in capital payments per case. This difference is mostly due to a projection that urban hospitals will experience a larger increase in payments due to changes in the proposed GAF values and larger projected increase in outlier payments from FY 2004 to FY 2005 compared to rural hospitals.

Most regions are estimated to receive an increase in total capital payments per case. Changes by region vary from a minimum increase of 0.7 percent (South Atlantic rural region) to a maximum increase of 5.5 percent (Pacific urban region). This relatively small increase in projected capital payments per discharge for hospitals located in the South Atlantic rural region is largely attributable to the proposed changes in the GAF values (that is, the proposed GAFs for most of these hospitals for FY 2005 are lower than the average of the GAFs for FY 2004) and a projected decrease in DSH payments (mostly because the rural hospitals that previously qualified for capital DSH payments because they reclassified for the purpose of the operating IPPS standardized amounts would no longer be eligible to receive capital DSH payments with the equalization of the operating IPPS standardized amounts, as discussed in section IV.D. of the preamble of this proposed rule). The relatively large increase in capital payments per discharge for hospitals located in the Pacific urban region is largely due to the proposed changes in the GAF values (that is, the proposed GAFs for most of these hospitals for FY 2005 are higher than the average of the GAFs for FY 2004) and an increase in projected outlier payments.

Hospitals located in Puerto Rico are expected to experience an increase in total capital payments per case of 8.0 percent. This relatively large increase in payment per case for hospitals located in Puerto Rico is largely due to the proposed change in the Federal portion (from 50 percent to 75 percent) of the blended payments to Puerto Rico hospitals beginning in FY 2005.

By type of ownership, proprietary hospitals are projected to have the largest rate of increase of total payment changes (4.7 percent). Similarly, payments to voluntary and government hospitals are expected to increase 4.3 percent. As noted above, this slightly larger projected increase in capital payments per case for proprietary hospitals is mostly due to the proposed changes in the GAF values for FY 2005.

Section 1886(d)(10) of the Act established the MGCRB. Previously, hospitals could apply for reclassification for purposes of the standardized amount, wage index, or both. Section 401(c) of Public Law 108-173 equalized the standardized amounts under the operating IPPS. Therefore, beginning in FY 2005, there is no longer reclassification for the purposes of the standardized amounts; hospitals may apply for reclassification for purposes of the wage index in FY 2005. Reclassification for wage index purposes also affects the geographic adjustment factor because that factor is constructed from the hospital wage index.

To present the effects of the hospitals being reclassified for FY 2005 compared to the effects of reclassification for FY 2004, we show the average payment percentage increase for hospitals reclassified in each fiscal year and in total. The reclassified groups are compared to all other nonreclassified hospitals. These categories are further identified by urban and rural designation.

Hospitals reclassified for FY 2005 as a whole are projected to experience a 2.8 percent increase in payments. Payments to nonreclassified hospitals in FY 2005 are expected to increase 4.5 percent. Hospitals reclassified during both FY 2004 and FY 2005 are projected to experience a slight increase in payments of 2.6 percent. Hospitals reclassified during FY 2005 only are projected to receive an increase in payments of 4.9 percent. This increase is primarily due to proposed changes in the GAF (wage index).

[[Page 28814]]

Table III.--Comparison of Total Payments Per Case [FY 2004 Payments Compared to Proposed FY 2005 Payments]

Average FY Average FY Number of 2004

2005 hospitals payments/ payments/ Change. case

case

By Geographic Location:.

All hospitals...........................................

3,871

709

740

4.3

Large urban areas (populations over 1 million)..........

1,411

790

838

6.1

Other urban areas (populations of 1 million of fewer)...

1,253

704

723

2.7

Rural areas.............................................

1,207

485

495

2.1

Urban hospitals.........................................

2,664

750

784

4.6 0-99 beds...........................................

674

540

563

4.4 100-199 beds........................................

945

642

670

4.2 200-299 beds........................................

499

736

766

4.2 300-499 beds........................................

415

812

851

4.8 500 or more beds....................................

131

934

982

5.2

Rural hospitals.........................................

1,207

485

495

2.1 0-49 beds...........................................

548

406

416

2.5 50-99 beds..........................................

393

452

462

2.2 100-149 beds........................................

163

492

501

1.9 150-199 beds........................................

57

536

545

1.6 200 or more beds....................................

46

610

622

2.0 By Region:

Urban by Region.........................................

2,664

750

784

4.6 New England.........................................

134

815

839

2.9 Middle Atlantic.....................................

390

813

848

4.2 South Atlantic......................................

407

720

752

4.4 East North Central..................................

442

742

777

4.8 East South Central..................................

175

677

709

4.7 West North Central..................................

160

752

786

4.5 West South Central..................................

344

698

734

5.2 Mountain............................................

140

746

772

3.5 Pacific.............................................

421

850

897

5.5 Puerto Rico.........................................

51

321

346

8.0

Rural by Region.........................................

1,207

485

495

2.1 New England.........................................

34

618

629

1.9 Middle Atlantic.....................................

57

511

516

1.0 South Atlantic......................................

176

479

483

0.7 East North Central..................................

160

514

522

1.4 East South Central..................................

192

446

457

2.6 West North Central..................................

206

500

517

3.3 West South Central..................................

228

434

446

2.7 Mountain............................................

92

486

500

2.9 Pacific.............................................

62

558

578

3.6 By Payment Classification:

All hospitals...........................................

3,871

709

740

4.3

Large urban areas (populations over 1 million)..........

1,399

791

839

6.1

Other urban areas (populations of 1 million or fewer)...

1,216

707

726

2.7

Rural areas.............................................

1,256

484

494

2.0

Teaching Status: Non-teaching........................................

2,759

588

610

3.8 Fewer than 100 Residents............................

911

750

782

4.3 100 or more Residents...............................

201

1,090

1,151

5.6 Urban DSH: 100 or more beds................................

1,457

786

822

4.7 Less than 100 beds..............................

335

494

517

4.7 Rural DSH: Sole Community (SCH/EACH).......................

478

440

451

2.4 Referral Center (RRC/EACH)......................

149

548

558

1.8 Other Rural: 100 or more beds............................

64

464

470

1.3 Less than 100 beds..........................

241

411

419

1.9

Urban teaching and DSH: Both teaching and DSH...............................

800

862

903

4.9 Teaching and no DSH.................................

250

773

808

4.5 No teaching and DSH.................................

992

631

658

4.3 No teaching and no DSH..............................

573

642

669

4.3

Rural Hospital Types: Non special status hospitals........................

394

439

446

1.6 RRC/EACH............................................

129

559

565

1.2 SCH/EACH............................................

451

454

465

2.5 Medicare-dependent hospitals (MDH)..................

209

408

419

2.7 SCH, RRC and EACH...................................

70

551

566

2.9

[[Page 28815]]

Hospitals Reclassified by the Medicare Geographic Classification Review Board:

Reclassification Status During FY 2004 and FY 2005: Reclassified During Both FY 2004 and FY 2005........

423

615

631

2.6 Reclassified During FY 2005 Only................

62

547

574

4.9 Reclassified During FY 2004 Only................

186

672

687

2.2 FY 2005 Reclassifications: All Reclassified Hospitals......................

485

610

627

2.8 All Nonreclassified Hospitals...................

3,325

724

757

4.5 All Urban Reclassified Hospitals................

118

748

773

3.4 Urban Nonreclassified Hospitals.................

2,486

752

787

4.7 All Reclassified Rural Hospitals................

367

536

548

2.3 Rural Nonreclassified Hospitals.................

839

433

441

1.8 Other Reclassified Hospitals (Section 1886(D)(8)(B))

61

487

490

0.7

Type of Ownership: Voluntary...........................................

2,322

727

758

4.3 Proprietary.........................................

717

647

677

4.7 Government..........................................

764

676

705

4.3

Medicare Utilization as a Percent of Inpatient Days: 0-25................................................

226

888

939

5.7 25-50...............................................

1,122

772

809

4.8 50-65...............................................

1,428

630

654

3.8 Over 65.............................................

922

630

654

3.7

Appendix B: Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

[If you choose to comment on issues in this section, please include the caption ``Update Factors'' at the beginning of your comment.]

I. Background

Section 1886(e)(4)(A) of the Act requires that the Secretary, taking into consideration the recommendations of the Medicare Payment Advisory Commission (MedPAC), recommend update factors for inpatient hospital services for each fiscal year that take into account the amounts necessary for the efficient and effective delivery of medically appropriate and necessary care of high quality. Under section 1886(e)(5) of the Act, we are required to publish the proposed update factors recommended by the Secretary in the proposed rule, and the final update factors recommended by the Secretary in the final rule. Accordingly, this Appendix provides the recommendations of appropriate update factors for the IPPS standardized amount, the hospital-specific rates for SCHs and MDHs, and the rate-of-increase limits for hospitals and hospital units excluded from the IPPS. We also discuss our update framework and respond to MedPAC's recommendations concerning the update factors.

II. Secretary's Recommendations

Section 1886(b)(3)(B)(i)(XIX) of the Act sets the FY 2005 percentage increase in the operating cost standardized amount equal to the rate of increase in the hospital market basket for IPPS hospitals in all areas. Based on the Office of the Actuary's first quarter 2004 forecast of the FY 2005 market basket increase, the proposed update to the standardized amount is 3.3 percent (that is, the market basket rate of increase) for hospitals in all areas.

Section 1886(b)(3)(B)(iv) of the Act sets the FY 2005 percentage increase in the hospital-specific rates applicable to SCHs and MDHs equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same update factor as all other hospitals subject to the IPPS, or the rate of increase in the market basket). Therefore, the proposed update to the hospital-specific rate applicable to SCHs and MDHs is also 3.3 percent.

Section 1886(b)(3)(B)(ii) of the Act sets the FY 2005 percentage increase in the rate-of-increase limits for hospitals and hospital units excluded from the IPPS (psychiatric hospitals and units (now referred to as inpatient psychiatric facilities (IPFs)), rehabilitation hospitals and units (now referred to as IRFs), LTCHs, cancer hospitals, and children's hospitals) equal to the market basket percentage increase. In the past, hospitals and hospital units excluded from the IPPS have been paid based on their reasonable costs subject to limits as established by TEFRA. However, some of these categories of excluded hospitals and units have begun to be paid under their own prospective payment systems. Hospitals and units that receive any hospital-specific payments will have those payments subject to TEFRA limits for FY 2005. For these hospitals, the proposed update is the percentage increase in the excluded hospital market basket (currently estimated at 3.3 percent).

IRFs are paid under the IRF PPS for cost reporting periods beginning on or after January 1, 2002. For cost reporting periods beginning during FY 2004, the Federal prospective payment for IRFs is based on 100 percent of the adjusted Federal IRF prospective payment amount, updated annually.

Effective for cost reporting periods beginning during FY 2003, LTCHs are paid under the LTCH PPS under which they receive payment based on a 5-year transition period (see the August 30, 2002 final rule (67 FR 55954)). A LTCH may elect to be paid on 100 percent of the Federal prospective rate at the start of any of its cost reporting periods during the 5-year transition period. For purposes of the update factor, the portion of the LTCH PPS transition blend payment based on reasonable costs for inpatient operating services is determined by updating the LTCH's TEFRA limit by the current estimate of the excluded hospital market basket (or 3.3 percent).

CMS recently published a proposed regulation regarding inpatient psychiatric facilities (IPFs) in which CMS would compute a Federal per diem base rate to be paid to all IPFs based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF adjusted for budget neutrality. The Federal per diem base rate would be adjusted to reflect certain patient characteristics such as age, specified DRGs, and selected high-cost comorbidities, and certain facility characteristics such as a wage index adjustment, rural location, and indirect teaching costs. The November 28, 2003 proposed rule assumed an April 1, 2004 effective date for the purpose of ratesetting and calculating impacts. However, we are still in the process of analyzing public comments and developing a final rule for publication. The effective date of the IPF PPS would occur 5 months following publication of the final rule.

[[Page 28816]]

III. Update Framework

Consistent with current law, we are proposing an update recommendation equal to the full market basket percentage increase for the IPPS operating cost standardized amounts for FY 2005. We also have analyzed changes in hospital productivity, scientific and technological advances, practice pattern changes, changes in case- mix, the effect of reclassification on recalibration, and forecast error correction. A discussion of this analysis is below.

A. Productivity

Service level labor productivity is defined as the ratio of total service output to full-time equivalent employees (FTEs). While we recognize that productivity is a function of many variables (for example, labor, nonlabor material, and capital inputs), we use the portion of productivity attributed to direct labor since this update framework applies to operating payment. To recognize that we are apportioning the short-run output changes to the labor input and not considering the nonlabor inputs, we weight our productivity measure by the share of direct labor services in the market basket to determine the expected effect on cost per case.

Our recommendation for the service productivity component is based on historical trends in productivity and total output for both the hospital industry and the general economy, and projected levels of future hospital service output. MedPAC's predecessor, the Prospective Payment Assessment Commission (ProPAC), estimated cumulative service productivity growth to be 4.9 percent from 1985 through 1989 or 1.2 percent annually. At the same time, ProPAC estimated total output growth at 3.4 percent annually, implying a ratio of service productivity growth to output growth of 0.35.

Absent a productivity measure specific to Medicare patients, we examined productivity (output per hour) and output (gross domestic product) for the economy. Depending on the exact time period, annual changes in productivity range from 0.30 to 0.35 percent of the change in output (that is, a 1.0 percent increase in output would be correlated with a 0.30 percent to a 0.35 percent change in output per hour).

Under our framework, the recommended update is based in part on expected productivity--that is, projected service output during the year, multiplied by the historical ratio of service productivity to total service output, multiplied by the share of direct labor in total operating inputs, as calculated in the hospital market basket. This method estimates an expected productivity improvement in the same proportion to expected total service growth that has occurred in the past and assumes that, at a minimum, growth in FTEs changes proportionally to the growth in total service output. Thus, the recommendation allows for unit productivity to be smaller than the historical averages in years during which output growth is relatively low and larger in years during which output growth is higher than the historical averages. Based on the above estimates from both the hospital industry and the economy, we have chosen to employ the range of ratios of productivity change to output change of 0.30 to 0.35.

The expected change in total hospital service output is the product of projected growth in total admissions (adjusted for outpatient usage), projected real case-mix growth, expected quality- enhancing intensity growth, and net of expected decline in intensity due to reduction of cost-ineffective practice. Case-mix growth and intensity numbers for Medicare are used as proxies for those of the total hospital, since case-mix increases (used in the intensity measure as well) are unavailable for non-Medicare patients. Normally, the expected FY 2005 hospital output growth would be simply the sum of the expected change in intensity (zero percent), projected admissions change (0.9 percent), and projected real case- mix growth (1.0 percent--a definition of real case mix growth appears below), or 1.9 percent. As discussed below and in relation to the proposed capital update, we believe our intensity estimate is skewed by hospitals' charge data. We are including only the projected changes in admissions and real case-mix in our calculation of productivity gains. However, the expected change in intensity is zero. Therefore, excluding the intensity estimate has no effect on the result. This results in an estimate of 1.9 percent.

The share of direct labor services in the market basket (consisting of wages, salaries, and employee benefits) is 61.7 percent. Multiplying the expected change in total hospital service output (1.9 percent) by the ratio of historical service productivity change to total service growth of 0.30 to 0.35 and by the direct labor share percentage of 61.7 provides our productivity standard of -0.8 to -0.7 percent. Because productivity gains hold down the rate of increase in hospitals' costs, this factor is applied as a negative offset to the market basket increase.

B. Intensity

The intensity factor for the operating update framework reflects how hospital services are utilized to produce the final product, that is, the discharge. This component accounts for changes in the use of quality-enhancing services, changes in within-DRG severity, and expected modification of practice patterns to remove non-cost- effective services. Under the capital IPPS framework, we also make an adjustment for changes in intensity. We calculate this adjustment using the same methodology and data that are used in the framework for the operating IPPS.

We calculate case-mix constant intensity as the change in total Medicare charges per admission, adjusted for price level changes (the Consumer Price Index (CPI) for hospital and related services) and changes in real case-mix. The use of total charges in the calculation of the intensity factor makes it a total intensity factor, that is, charges for both operating and capital services are already built into the calculation of the factor.

However, as discussed above in relation to the proposed capital update, because our intensity calculation relies heavily upon charge data and we believe that this charge data may be inappropriately inflated due to manipulation of charges to maximize outlier payments, we are proposing a zero percent adjustment for intensity in FY 2005. In past fiscal years (1996 through 2000) when we found intensity to be declining, we believed a zero (rather than negative) intensity adjustment was appropriate. Similarly, we believe that it is appropriate to propose a zero intensity adjustment for FY 2005 until we determine that any increase in charges can be tied to intensity, rather than to attempts to maximize outlier payments.

C. Change in Case-Mix

Our analysis takes into account projected changes in real case- mix, less the changes attributable to improved coding practices. We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients, as opposed to changes in coding behavior that result in assignment of cases to higher- weighted DRGs but do not reflect greater resource requirements. For our FY 2005 update recommendation, we are projecting a 1.0 percent increase in the case-mix index. We do not believe changes in coding behavior will impact the overall case-mix in FY 2005. As such, for FY 2005, we estimate that real case-mix is equal to projected change in case-mix. Thus, we are recommending a 1.0 percent adjustment for case-mix.

D. Effect of FY 2003 DRG Reclassification and Recalibration

We estimate that DRG reclassification and recalibration for FY 2003 (GROUPER version 20.0) resulted in a zero percent change in the case-mix index when compared with the case-mix index that would have resulted if we had not made the reclassification and recalibration changes to the GROUPER (version 19.0). Therefore, we are recommending a zero percent adjustment for the effect of FY 2003 DRG reclassification and recalibration.

E. Forecast Error Correction

We make a forecast error correction if the actual market basket changes differ from the forecasted market basket by 0.25 percentage points or more. There is a 2-year lag between the forecast and the measurement of forecast error. The estimated market basket percentage increase used to update the FY 2003 payment rates was 3.5 percent. Our most recent data indicates the actual FY 2003 increase was 3.9 percent. The resulting forecast error in the FY 2003 market basket rate of increase is 0.4 percentage points. This underestimate was due largely to an underestimation of increases in the compensation components in the market basket. More specifically, the burden for benefit costs was expected to shift more to workers, given the soft job market. However, not as much of a shift occurred as was expected, and the measure for benefits increased faster than originally forecast. In addition, higher than expected growth in natural gas prices, mainly due to higher than expected demand last winter that depleted surplus reserves, caused the energy component to be underestimated.

The following is a summary of the update range supported by our analyses:

[[Page 28817]]

HHS's FY 2005 Update Recommendation

.

Projected FY 2005 Market Basket Increase..............

3.3. Policy Adjustment Factors.............................

0.0.

Productivity...................................... -0.8 to -0.7

Intensity.........................................

0.0.

Subtotal...................................... -0.8 to -0.7. Case-Mix Adjustment Factors:.

Projected Case-Mix Change.........................

1.0

Real Across DRG Change............................

-1.0.

Subtotal......................................

0.0. Effect of FY 2003 DRG Reclassification and

0.0. Recalibration........................................ Forecast Error Correction.............................

0.4. Total Recommendation Update........................... 2.9 to 3.0

IV. MedPAC Recommendations for Assessing Payment Adequacy and Updating Payments in Traditional Medicare

In the past, MedPAC has suggested specific adjustments to its update recommendation for each of the factors discussed under section III. of this Appendix. In its March 2004 Report to Congress, MedPAC assesses the adequacy of current payments and costs and the relationship between payments and an appropriate cost base, utilizing an established methodology used by the Commission in the past few years. MedPAC stresses that the issue at hand is whether payments are too high or too low, and not how they became either too high or too low.

In the first portion of MedPAC's analysis on the assessment of payment adequacy, the Commission reviews the relationship between costs and payments (typically represented as a margin). Based on the latest cost report data available, MedPAC estimated an inpatient hospital Medicare operating margin for FY 2002 of 4.7 percent (down from 8.1 percent and 10.7 percent for FY 2001 and FY 2000, respectively).

MedPAC also projects margins through FY 2003, making certain assumptions about changes in payments and costs. On the payment side, MedPAC applied the annual payment updates (as specified by law for FYs 2001 through 2003) and then modeled the effects of other policy changes that have affected the level of payments. On the cost side, MedPAC estimated the increases in cost per unit of output over the same time period at the rate of inflation as measured by the applicable market basket index generated by CMS, adjusted downward, anticipating improvements in productivity.

In addition to considering the relationship between estimated payments and costs, MedPAC also considered the following three factors to assess whether current payments are adequate:

Changes in access to or quality of care,

Changes in the volume of services or number of providers; and

Change in providers access to capital.

MedPAC s assessment of aggregate Medicare payments finds that payments were at least adequate as of FY 2004.

MedPAC's recommendation is to update payments under the IPPS by the full rate of increase in the hospital market basket for FY 2005. MedPAC focuses on the fact that it is extremely difficult to determine the status of cost growth among hospitals, given the complexity of ascertaining the impact of the implementation of provisions of Pub. L. 108-173. MedPAC believes it is sensible to refrain from applying their expected net effect based on their standard model, as there is a great deal of uncertainty regarding the costs and payments faced by providers. MedPAC is not abandoning its methodology regarding the update framework, but it has concluded that, under the circumstances, the current market conditions and factors that determine the cost behavior and outcomes of hospitals are too uncertain to rely on current trends for estimation.

Response: As described above, we are recommending a full market basket update for FY 2005 consistent with current law. We believe this will appropriately balance incentives for hospitals to operate efficiently with the need to provide sufficient payments to maintain access to quality care for Medicare beneficiaries.

Because the operating and capital prospective payment systems remain separate, CMS continues to use separate updates for operating and capital payments. The proposed update to the capital payment rate is discussed in section III. of the Addendum to this proposed rule.

[FR Doc. 04-10932 Filed 5-11-04; 1:00 pm]

BILLING CODE 4120-01-P