Medicare: Hospital inpatient prospective payment systems and 2008 FY rates,

 
CONTENT

[Federal Register: August 22, 2007 (Volume 72, Number 162)]

[Rules and Regulations]

[Page 47129-48175]

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

[DOCID:fr22au07-11]

[[Page 47129]]

Part II

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates; Final Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

[CMS-1533-FC]

RIN 0938-AO70

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates

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

ACTION: Final rule with comment period.

SUMMARY: We are revising 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 certain provisions made by the Deficit Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All Hazards Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to this final rule with comment period, we describe the changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth the rate of increase limits for certain hospitals and hospital units excluded from the IPPS that are paid on a reasonable cost basis subject to these limits, or that have a portion of a prospective payment system payment based on reasonable cost principles. These changes are applicable to discharges occurring on or after October 1, 2007.

In this final rule with comment period, as part of our efforts to further refine the diagnosis related group (DRG) system under the IPPS to better recognize severity of illness among patients, for FY 2008, we are adopting a Medicare Severity DRG (MS DRG) classification system for the IPPS. We are also adopting the structure of the MS-DRG system for the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 2008.

Among the other policy decisions and changes that we are making, we are making changes related to: limited revisions of the reclassification of cases to MS-DRGs, the relative weights for the MS- LTC-DRGs; applications for new technologies and medical services add-on payments; the wage data, including the occupational mix data, used to compute the FY 2008 wage indices; payments to hospitals for the indirect costs of graduate medical education; submission of hospital quality data; provisions governing the application of sanctions relating to the Emergency Medical Treatment and Labor Act of 1986 (EMTALA); provisions governing the disclosure of physician ownership in hospitals and patient safety measures; and provisions relating to services furnished to beneficiaries in custody of penal authorities.

DATES: Effective Date: This final rule with comment period is effective October 1, 2007 and applies to discharges occurring on or after that date.

Comment Date: We will consider public comments only on the provisions of section V., Changes to the IPPS for Capital Related Costs, of the preamble of this final rule with comment period, if we receive them at one of the addresses provided below, no later than 5 p.m. on November 20, 2007.

ADDRESSES: In commenting on the provisions of section V. of the preamble of this final rule with comment period, please refer to file code CMS-1533-FC.

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

You may submit comments in one of three ways (no duplicates, please):

1. Electronically. You may submit electronic comments on specific issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click

on the link ``Submit electronic comments on CMS regulations with an open comment period''. (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.)

2. By regular mail. You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1533-FC, P.O. Box 8011, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3. By express or overnight mail. You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1533-FC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the Hubert H. 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 persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriately for hand or courier delivery may be delayed and received after the comment period.

Submitting Comments: You can assist us by referencing the file code CMS-1533-FC and the specific ``issue identifier'' that precedes section V., Changes to the IPPS for Capital Related Costs.

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on

CMS Regulations'' on that Web site to view public comments.

Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4:00 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

FOR FURTHER INFORMATION CONTACT: Marc Hartstein, (410) 786-4548, Operating Prospective Payment, Diagnosis Related Groups (DRGs), Wage Index, New Medical Services and Technology Add-On Payments, and Hospital Geographic Reclassifications Issues.

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

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

Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment Update Issues.

Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues.

Jacqueline Proctor, (410) 786-8852, Disclosure of Physician Ownership in Hospitals.

Marilyn Dahl, (410) 786-8665, Patient Safety Measures Issues.

Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody of Penal Authorities Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

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Acronyms

ACGME--Accreditation Council for Graduate Medical Education AMGA--American Medical Group Association AHA--American Hospital Association AHIMA--American Health Information Management Association AHRQ--Agency for Health Care Research and Quality AMI--Acute myocardial infarction AOA--American Osteopathic Association APR DRG--All Patient Refined Diagnosis Related Group System ASC--Ambulatory surgical center ASP--Average sales price AWP--Average wholesale price BBA--Balanced Budget Act of 1997, Pub. L. 105-33 BBRA--Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113 BIPA--Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 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 CCR--Cost-to-charge ratio CDAC--Clinical Data Abstraction Center CIPI--Capital input price index CPI--Consumer price index CMI--Case-mix index CMS--Centers for Medicare & Medicaid Services CMSA--Consolidated Metropolitan Statistical Area COBRA--Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99- 272 CoP--[Hospital] Condition of participation CPI--Consumer price index CY--Calendar year DRA--Deficit Reduction Act of 2005, Pub. L. 109-171 DRG--Diagnosis-related group DSH--Disproportionate share hospital ECI--Employment cost index EMR--Electronic medical record EMTALA--Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-272 FDA--Food and Drug Administration FIPS--Federal information processing standards FQHC--Federally qualified health center FTE--Full-time equivalent FY--Fiscal year GAAP--Generally Accepted Accounting Principles GAF--Geographic Adjustment Factor GME--Graduate medical education GMEC--Graduate Medical Education Committee HCAHPS--Hospital Consumer Assessment of Healthcare Providers and Systems HCFA--Health Care Financing Administration HCRIS--Hospital Cost Report Information System HHA--Home health agency HHS--Department of Health and Human Services HIC--Health insurance card HIPAA--Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 HIPC--Health Information Policy Council HIS--Health information system HIT--Health information technology HMO--Health maintenance organization HSA--Health savings account HSCRC--Maryland Health Services Cost Review Commission HSRV--Hospital-specific relative value HSRVcc--Hospital-specific relative value cost center HQA--Hospital Quality Alliance HQI--Hospital Quality Initiative ICD-9-CM--International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS--International Classification of Diseases, Tenth Edition, Procedure Coding System IHS--Indian Health Service IME--Indirect medical education IOM--Institute of Medicine IPF--Inpatient psychiatric facility IPPS--Acute care hospital inpatient prospective payment system IRF--Inpatient rehabilitation facility JCAHO--Joint Commission on Accreditation of Healthcare Organizations LAMCs--Large area metropolitan counties LTC-DRG--Long-term care diagnosis-related group LTCH--Long-term care hospital MAC--Medicare Administrative Contractor MCC--Major complication or comorbidity MCE--Medicare Code Editor MCO--Managed care organization MCV--Major cardiovascular condition 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 MIEA-TRHCA--Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432 MMA--Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173 MPN--Medicare provider number MRHFP--Medicare Rural Hospital Flexibility Program MSA--Metropolitan Statistical Area NAICS--North American Industrial Classification System NCD--National coverage determination NCHS--National Center for Health Statistics NCQA--National Committee for Quality Assurance NCVHS--National Committee on Vital and Health Statistics NECMA--New England County Metropolitan Areas NQF--National Quality Forum NTIS--National Technical Information Service 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) PMSAs--Primary metropolitan statistical areas PPI--Producer price index PPS--Prospective payment system PRA--Per resident amount PRM--Provider Reimbursement Manual ProPAC--Prospective Payment Assessment Commission PRRB--Provider Reimbursement Review Board PSF--Provider Specific File PS&R--Provider Statistical and Reimbursement (System) QIG--Quality Improvement Group, CMS QIO--Quality Improvement Organization RCE--Reasonable compensation equivalent RHC--Rural health clinic RHQDAPU--Reporting hospital quality data for annual payment update RNHCI--Religious nonmedical health care institution

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RRC--Rural referral center RUCAs--Rural-urban commuting area codes RY--Rate year SAF--Standard Analytic File SCH--Sole community hospital SFY--State fiscal year SIC--Standard Industrial Classification 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, Pub. L. 97- 248 UHDDS--Uniform hospital discharge data set VBP--Value-based purchasing

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. Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs)

3. Critical Access Hospitals (CAHs)

4. Payments for Graduate Medical Education (GME)

B. Provisions of the Deficit Reduction Act of 2005 (DRA)

C. Provisions of the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006

D. Provisions of the Pandemic and All-Hazards Preparedness Act

E. Issuance of a Notice of Proposed Rulemaking

1. DRG Reclassifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index

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

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

5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages

6. Services Furnished to Beneficiaries in Custody of Penal Authorities

7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate of Increase Limits

8. Impact Analysis

9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

10. Discussion of Medicare Payment Advisory Commission Recommendations

F. Public Comments Received on the Proposed Rule II. Changes to DRG Classifications and Relative Weights

A. Background

B. DRG Reclassifications

1. General

2. Yearly Review for Making DRG Changes

C. MedPAC Recommendations for Revisions to the IPPS DRG System

D. Refinement of DRGs Based on Severity of Illness

1. Evaluation of Alternative Severity-Adjusted DRG Systems

a. Overview of Alternative DRG Classification Systems

b. Comparative Performance in Explaining Variation in Resource Use

c. Payment Accuracy and Case-Mix Impact

d. Other Issues for Consideration

2. Development of the Medicare Severity DRGs (MS DRGs)

a. Comprehensive Review of the CC List

b. Chronic Diagnosis Codes

c. Acute Diagnosis Codes

d. Prior Research on Subdivisions of CCs into Multiple Categories

e. Medicare Severity DRGs (MS-DRGs)

3. Dividing MS DRGs on the Basis of the CCs and MCCs

4. Conclusion

5. Impact of the MS-DRGs

6. Changes to Case-Mix Index (CMI) from the MS-DRGs

7. Effect of the MS-DRGs on the Outlier Threshold

8. Effect of the MS-DRGs on the Postacute Care Transfer Policy

E. Refinement of the Relative Weight Calculation

1. Summary of RTI's Report on Charge Compression

2. RTI Recommendations

a. Short-Term Recommendations

b. Medium-Term Recommendations

c. Long-Term Recommendations

F. Hospital-Acquired Conditions, Including Infections

1. General

2. Legislative Requirement

3. Public Input

4. Collaborative Effort

5. Criteria for Selection of the Hospital-Acquired Conditions

6. Selection of Hospital-Acquired Conditions

7. Other Issues

G. Changes to Specific DRG Classifications

1. Pre-MDCs: Intestinal Transplantation

2. MDC 1 (Diseases and Disorders of the Nervous System)

a. Implantable Neurostimulators

b. Intracranial Stents

3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat)--Cochlear Implants

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

a. Hip and Knee Replacements

b. Spinal Fusions

c. Spinal Disc Devices

d. Other Spinal DRGs

5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly Differentiated Neoplasm): Endoscopic Procedures

6. Medicare Code Editor (MCE) Changes

a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessel(s))

b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. Procedures Edit 10

c. Limited Coverage Edit 17

d. Revision to Part 1, Pancreas Transplant Edit A

7. Surgical Hierarchies

8. CC Exclusions List

a. Background

b. CC Exclusions List for FY 2008

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

a. Moving Procedure Codes from CMS DRG 468 (MS-DRGs 981 through 983) or CMS DRG 477 (MS-DRGs 987 through 989) to MDCs

b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 (MS-DRGs 981 through 983, 984 through 986, and 987 through 989)

c. Adding Diagnosis or Procedure Codes to MDCs

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

11. Other DRG Issues Addressed in the FY 2008 IPPS Proposed Rule

a. Seizures and Headaches

b. Devices That are Replaced Without Cost or Where Credit for a Replaced Device is Furnished to the Hospital

12. Other MS-DRG Issues Raised in the Public Comments on the Proposed Rule

a. Heart Transplants or Implants of Heart Assist System and Liver Transplants (Pre-MDC)

b. Gliadel[reg] Wafer (MDC 1)

c. Myasthenia Gravis and Acute and Chronic Inflammatory Demyelinating Neuropathies (AIDP-CIDP) (MDC 1)

d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)

e. Stroke and Administration of Tissue Plasminogen Activator (tPA) (MDC 1)

f. Gliasite[reg] Radiation Therapy System (RTS) (MDC 1)

g. Noninvasive Ventilation (MDC 4)

h. Heart Assist Devices (MDC 5)

i. Automatic Implantable Cardioverter-Defibrillators (ACID) Lead and Generator Procedures (MDC 5)

j. Artificial Heart (MDC 5)

k. Vascular Procedures (MDC 5)

l. Coronary Artery Stents (MDC 5)

m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)

n. O.R. Procedures for Obesity (MDC 10)

o. Penile Restorative Procedures (MDC 12)

p. Female Reproductive System Reconstruction Procedures (MDC 13)

q. Urological and Gynecological Disorders with Grafts or Prosthesis (MDCs 13 and 14)

r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)

s. Computer Assisted Surgery

13. Changes to MS-DRG Logic As a Result of Public Comments

H. Recalibration of DRG Weights

I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2008

1. Background

2. Changes in the LTC-DRG Classifications

a. Background

b. Patient Classifications into DRGs

3. Development of the FY 2008 MS-LTC-DRG Relative Weights

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

b. Data

c. Hospital-Specific Relative Value Methodology

d. Treatment of Severity Levels in Developing Relative Weights

e. Low-Volume MS-LTC-DRGs

4. Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights

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J. Add-On Payments for New Services and Technologies

1. Background

2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments

3. FY 2008 Status of Technologies Approved for FY 2007 Add-On Payments

a. Endovascular Graft Repair of the Thoracic Aorta

b. Restore[reg] Rechargeable Implantable Neurostimulators

c. X STOP Interspinous Process Decompression System

4. FY 2008 Application for New Technology Add-On Payments

5. Technical Correction III. Changes to the Hospital Wage Index

A. Background

B. Core-Based Statistical Areas for the Hospital Wage Index

C. Occupational Mix Adjustment to the FY 2008 Wage Index

1. Development of Data for the FY 2008 Occupational Mix Adjustment

2. Timeline for the Collection, Review, and Correction of the Occupational Mix Data

3. Calculation of the Occupational Mix Adjustment for FY 2008

4. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index

D. Worksheet S-3 Wage Data for the FY 2008 Wage Index

1. Included Categories of Costs

2. Contract Labor for Indirect Patient Care Services

3. Excluded Categories of Costs

4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals under the IPPS

E. Verification of Worksheet S-3 Wage Data

F. Wage Index for Multicampus Hospitals

G. Computation of the FY 2008 Unadjusted Wage Index

1. Method for Computing the FY 2008 Unadjusted Wage Index

2. Expiration of the Imputed Floor

3. CAHs Reverting Back to IPPS Hospitals and Raising the Rural Floor

4. Application of Rural Floor Budget Neutrality

H. Analysis and Implementation of the Occupational Mix Adjustment and the FY 2008 Occupational Mix Adjusted Wage Index

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General

2. Effects of Reclassification/Redesignation

3. FY 2008 MGCRB Reclassifications

4. Hospitals That Applied for Reclassification Effective in FY 2008 and Reinstating Reclassifications in FY 2008

5. Clarification of Policy on Reinstating Reclassifications

6. ``Fallback'' Reclassifications

7. Geographic Reclassification Issues for Multicampus Hospitals

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

9. Reclassifications under Section 1886(d)(8)(B) of the Act

10. New England Deemed Counties

11. Reclassifications under Section 508 of Pub. L. 108-173

12. Other Issues

J. FY 2008 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

K. Process for Requests for Wage Index Data Corrections

L. Labor-Related Share for the Wage Index for FY 2008

M. Wage Index Study Required under Pub. L. 109-432

N. Proxy for the Hospital Market Basket IV. Other Decisions and Changes to the IPPS for Operating Costs and GME Costs

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

1. Background

2. FY 2008 Quality Measures

3. New Quality Measures and Program Requirements for FY 2009 and Subsequent Years

a. New Quality Measures for FY 2009 and Subsequent Years

b. Data Submission

4. Retiring or Replacing RHQDAPU Program Quality Measures

5. Procedures for the RHQDAPU Program for FY 2008 and FY 2009

a. Procedures for Participating in the RHQDAPU Program

b. Procedures for Participating in the RHQDAPU Program for FY 2009

c. Chart Validation Requirements

d. Data Validation and Attestation

e. Public Display

f. Reconsideration and Appeal Procedures

g. RHQDAPU Program Withdrawal Requirements

6. Electronic Medical Records

7. New Hospitals

B. Development of the Medicare Hospital Value-Based Purchasing Plan

C. Rural Referral Centers (RRCs)

1. Annual Update of RRC Status Criteria

a. Case-Mix Index

b. Discharges

2. Acquired Rural Status of RRCs

D. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2008

3. Time Spent by Residents on Vacation or Sick Leave and in Orientation

a. Background

b. Vacation and Sick Leave Time

c. Orientation Activities

d. Regulation Changes

E. Payments to Disproportionate Share Hospitals (DSHs): Technical Correction

1. Background

2. Technical Correction: Inclusion of Medicare Advantage Days in the Medicare Fraction of the Medicare DSH Calculation

F. Hospital Emergency Services under EMTALA

1. Background

2. Recent Legislation Affecting EMTALA Implementation

a. Secretary's Authority to Waive Requirements During National Emergencies

b. Provisions of the Pandemic and All-Hazards Preparedness Act

c. Revisions to the EMTALA Regulations

G. Disclosure of Physician Ownership in Hospitals and Patient Safety Measures

1. Disclosure of Physician Ownership in Hospitals

2. Patient Safety Measures

H. Rural Community Hospital Demonstration Program V. Changes to the IPPS for Capital-Related Costs

A. Background

B. Policy Change VI. Changes for Hospitals and Hospital Units Excluded from the IPPS

A. Payments to Existing and New Excluded Hospitals and Hospital Units

B. Separate PPS for IRFs

C. Separate PPS for LTCHs

D. Separate PPS for IPFs

E. Determining LTCH Cost-to-Charge Ratios (CCRs) under the LTCH PPS

F. Report of Adjustment (Exceptions) Payments VII. Services Furnished to Beneficiaries in Custody of Penal Authorities VIII. MedPAC Recommendations IX. Other Required Information

A. Requests for Data from the Public

B. Collection of Information Requirements

C. Waiver of Notice of Proposed Rulemaking

Regulation Text

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate- of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2007

I. Summary and Background II. Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2008

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

2. Computing the Average Standardized Amount

3. Updating the Average Standardized Amount

4. Other Adjustments to the Average Standardized Amount

a. Recalibration of DRG Weights and Updated Wage Index Budget Neutrality Adjustment

b. Reclassified Hospitals--Budget Neutrality Adjustment

c. Imputed Rural Floor--Budget Neutrality Adjustment

d. Case-Mix Budget Neutrality Adjustment

e. Outliers

f. Rural Community Hospital Demonstration Program Adjustment (Section 410A of Pub. L. 108-173)

5. FY 2008 Standardized Amount

B. Adjustments for Area Wage Levels and Cost-of-Living

1. Adjustment for Area Wage Levels

2. Adjustment for Cost-of-Living in Alaska and Hawaii

C. DRG Relative Weights

D. Calculation of the Prospective Payment Rates

1. Federal Rate

2. Hospital Specific Rate (Applicable Only to SCHs and MDHs)

a. Calculation of Hospital Specific Rate

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b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital Specific Rates for FY 2008

3. General Formula for Calculation of Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2007 and Before October 1, 200

a. Puerto Rico Rate

b. National Rate III. Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2008

A. Determination of Federal Hospital Inpatient Capital Related Prospective Payment Rate Update

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

b. MedPAC Update Recommendation

2. Outlier Payment Adjustment Factor

3. Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF

4. Exceptions Payment Adjustment Factor

5. Capital Standard Federal Rate for FY 2008

6. Special Capital Rate for Puerto Rico Hospitals

B. Calculation of the Inpatient Capital-Related Prospective Payments for FY 2008

C. Capital Input Price Index

1. Background

2. Forecast of the CIPI for FY 2008 IV. Changes to Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages V. Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/ Nonlabor (69.7 Percent Labor Share/30.3 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 2006; Hospital Wage Indexes for Federal Fiscal Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years 2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage Data); and 3-Year Average of Hospital Average Hourly Wages

Table 3A--FY 2008 and 3-Year Average Hourly Wage for Urban Areas by CBSA

Table 3B--FY 2008 and 3-Year Average Hourly Wage for Rural Areas by CBSA

Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA--FY 2008

Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA--FY 2008

Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA--FY 2008

Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA--FY 2008

Table 4J--Out-Migration Wage Adjustment--FY 2008

Table 5--List of Medicare Severity Diagnosis-Related Groups (MS- DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay

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 6I--Complete List of Complication and Comorbidity (CC) Exclusions

(Available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov / AcuteInpatientPPS/)

Table 7A--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 GROUPER V24.0 CMS DRGs

Table 7B--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 GROUPER V25.0 CMS DRGs

Table 8A--Statewide Average Operating Cost-to-Charge Ratios-- July 2007

Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 2007

Table 8C--Statewide Average Total Cost-to-Charge Ratios for LTCHs--July 2007

Table 9A--Hospital Reclassifications and Redesignations--FY 2008

Table 9C--Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act--FY 2008

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 Medicare Severity Diagnosis-Related Groups (MS-DRGs)--July 2007

Table 11--FY 2008 MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, Short-Stay Outlier Threshold, and IPPS Comparable Threshold

Appendix A--Regulatory Impact Analysis

I. Overall Impact II. Objectives III. Limitations on Our Analysis IV. Hospitals Included In and Excluded From the IPPS V. Effects on Excluded Hospitals and Hospital Units VI. Quantitative Effects of the Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

B. Analysis of Table I

C. Effects of the Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 2)

D. Effects of Wage Index Changes (Column 3)

E. Combined Effects of DRG and Wage Index Changes (Column 4)

F. Effects of the Expiration of the 3-Year Provision Allowing Urban Hospitals That Were Converted to Rural as a Result of the FY 2005 Labor Market Area Changes to Maintain the Wage Index of the Urban Labor Market Area in Which They Were Formerly Located (Column 5)

G. Effects of MGCRB Reclassifications (Column 6)

H. Effects of the Adjustment to the Application of the Rural Floor (Column 7)

I. Effects of Application of the Imputed Floor (Column 8)

J. Effects of the Expiration of Section 508 of Pub. L. 108-173 (Column 9)

K. Effects of the Wage Index Adjustment for Out-Migration (Column 10)

L. Effects of All Changes with CMI Adjustment Prior to Estimated Growth (Column 11)

M. Effects of All Changes with CMI Adjustment and Assumed Estimated (Column 12)

N. Effects of Policy on Payment Adjustments for Low-Volume Hospitals

O. Impact Analysis of Table II VII. Effects of Other Policy Changes

A. Effects of Policy on Hospital-Acquired Conditions, Including Infections

B. Effects of MS-LTC-DRG Reclassifications and Relative Weights for LTCHs

C. Effects of New Technology Add-On Payments

D. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update

E. Effects of Policy on Cancellation of Classification of Acquired Rural Status and Rural Referral Centers

F. Effects of Policy Change on Payment for IME and Direct GME

G. Effects of Policy Changes Relating to Emergency Services under EMTALA During an Emergency Period

H. Effects of Policy on Disclosure of Physician Ownership in Hospitals and Patient Safety Measures

I. Effects of Implementation of the Rural Community Hospital Demonstration Program

J. Effects of Policy Changes on Services Furnished to Beneficiaries in Custody of Penal Authorities VIII. Impact of Changes in the Capital IPPS

A. General Considerations

B. Results IX. Alternatives Considered X. Overall Conclusion XI. Accounting Statement XII. Executive Order 12866

Appendix B--Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

I. Background II. Inpatient Hospital Update for FY 2008 III. Secretary's Final Recommendation IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare

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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, FY 1996, or FY 2002) 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. (Until FY 2007, an MDH has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital- specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital- specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, 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 IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments 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: rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. 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)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), as discussed below. Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system.

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413. a. Inpatient Rehabilitation Facilities (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 the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P. b. Long-Term Care Hospitals (LTCHs)

Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, the LTCH PPS was effective for a LTCH's first cost reporting period beginning on or after October 1, 2002. LTCHs that do not meet the definition of ``new'' under Sec. 412.23(e)(4) are paid, during a 5-year

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transition period, a LTCH prospective payment that is comprised of an increasing proportion of the LTCH Federal rate and a decreasing proportion based on reasonable cost principles. Those LTCHs that did not meet the definition of ``new'' under Sec. 412.23(e)(4) could elect to be paid based on 100 percent of the Federal prospective payment rate instead of a blended payment in any year during the 5-year transition. For cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O. c. Inpatient Psychiatric Facilities (IPFs)

Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005. For cost reporting periods beginning on or after January 1, 2008, all IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR 412, Subpart N. 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 based on 101 percent of reasonable cost. 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.

B. Provisions of the Deficit Reduction Act of 2005 (DRA)

The Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. The final rule implements amendments made by (1) section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting; and (2) section 5001(c), which requires the Secretary to select, by October 1, 2007, at least two hospital-acquired conditions that meet certain specified criteria that will be subject to a quality adjustment in DRG payments during FY 2008.

In this final rule with comment period, we also discuss our development of a plan to implement, beginning with FY 2009, a value- based purchasing plan for section 1886(d) hospitals, in accordance with the requirements of section 5001(b) of Pub. L. 109-171.

C. Provisions of the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006

In this final rule with comment period, we discuss the provisions of section 106(b)(1) of the Medicare Improvements and Extensions Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA), Pub. L. 109-432, which requires MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare wage index classification system applied under the Medicare Prospective Payment System. Section 106(b) of the MIEA-TRHCA requires the report to include any alternatives that MedPAC recommends to the method to compute the wage index under section 1886(d)(3)(E) of the Act.

In addition, we discuss the provisions of section 106(b)(2) of the MIEA-TRHCA, which instructs the Secretary of Health and Human Services, taking into account MedPAC's recommendations on the Medicare wage index classification system, to include in the FY 2009 IPPS proposed rule one or more proposals to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS.

We note that we published a notice in the Federal Register on March 23, 2007 (72 FR 13799) that addressed the provisions of section 106(a) of the MIEA-TRHCA relating to the extension of geographic reclassifications of hospitals under section 508 of Pub. L. 108-173 (that expired on March 31, 2007) through September 30, 2007.

D. Provisions of the Pandemic and All-Hazards Preparedness Act

On December 19, 2006, Congress enacted the Pandemic and All-Hazards Preparedness Act, Pub. L. 109-417. Section 302(b) of Pub. L. 109-417 makes two specific changes that affect EMTALA implementation in emergency areas during an emergency period. Specifically section 302(b)(1)(A) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that sanctions may be waived for the direction or relocation of an individual for screening where, in the case of a public health emergency that involves a pandemic infectious disease, that direction or relocation occurs pursuant to a State pandemic preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that, if a public health emergency involves a pandemic infectious disease (such as pandemic influenza) the duration of a waiver or modification under section 1135(b)(3) of the Act (relating to EMTALA) shall be determined in accordance with section 1135(e) of the Act as that subsection applies to public health emergencies.

In this final rule with comment period, we are making changes to the EMTALA regulations to conform them to the sanction waiver provisions of section 302(b) of Pub. L. 109-417.

E. Issuance of a Notice of Proposed Rulemaking

On May 3, 2007, we issued in the Federal Register (72 FR 24680) a notice of proposed rulemaking that set forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2008. We also set forth proposed changes relating to payments for GME and IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis that would be effective for discharges occurring on or after October 1, 2007. Below is a summary of the major changes that we proposed to make: 1. DRG Reclassifications and Recalibrations of Relative Weights

We proposed to adopt a Medicare Severity DRG (MS-DRG) classification system for the IPPS to better recognize severity of illness. We presented the methodology we used to establish the MS-DRGs and discussed our efforts to

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further analyze alternative severity-adjusted DRG systems and to refine the relative weight calculations for DRGs.

We presented a proposed listing and discussion of hospital-acquired conditions, including infections, which were evaluated and proposed to be subject to the statutorily required quality adjustment in DRG payments for FY 2008.

We proposed limited annual revisions to the DRG classification system in the following areas: Intestinal transplants, neurostimulators, intracranial stents, cochlear implants, knee and hip replacements, spinal fusions and spinal disc devices, and endoscopic procedures.

We presented our reevaluation of certain FY 2007 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of the FY 2008 applicant (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).

We proposed 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 2008. We proposed that the LTC-DRGs would be revised to mirror the proposed MS-DRGs for the IPPS. 2. Proposed Changes to the Hospital Wage Index

In section III. of the preamble to the proposed rule, we proposed revisions to the wage index and the annual update of the wage data. Specific issues addressed included the following:

The FY 2008 wage index update, using wage data from cost reporting periods that began during FY 2004.

Analysis and implementation of the proposed FY 2008 occupational mix adjustment to the wage index.

Proposed changes relating to expiration of the imputed rural floor for the wage index and application of budget neutrality for the rural floor.

Proposed changes in the determination of the wage index for multicampus hospitals.

The proposed revisions to the wage index based on hospital redesignations and reclassifications, including reclassifications for multicampus hospitals.

The proposed adjustment to the wage index for FY 2008 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.

The timetable for reviewing and verifying the wage data that were in effect for the FY 2008 wage index.

The labor-related share for the FY 2008 wage index, including the labor-related share for Puerto Rico. 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

In section IV. of the preamble to the proposed rule, we discussed a number of the provisions of the regulations in 42 CFR Parts 412, 413, and 489, including the following:

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

Development of the Medicare value-based purchasing plan and reports on the ``listening sessions'' held.

The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status and a proposed policy change relating to the acquired rural status of RRCs.

The statutorily-required IME adjustment factor for FY 2008 and a proposed policy change relating to determining counts of residents on vacation or sick leave and in orientation for IME and direct GME purposes.

Proposed changes relating to the waiver of sanctions for requirements for emergency services for hospitals under EMTALA during national emergencies.

Proposed policy changes relating to the disclosure to patients of physician ownership of hospitals and patient safety measures.

Discussion of the fourth year of implementation of the Rural Community Hospital Demonstration Program. 4. Proposed Changes to the IPPS for Capital-Related Costs

In section V. of the preamble to the proposed rule, we discussed the payment policy requirements for capital-related costs and capital payments to hospitals and proposed changes relating to adjustments to the Federal capital rate to address continuous large positive margins. 5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages

In section VI. of the preamble to the proposed rule, we discussed payments to excluded hospitals and hospital units, and proposed changes for determining LTCH CCRs under the LTCH PPS. 6. Services Furnished to Beneficiaries in Custody of Penal Authorities

In section VII. of the preamble to the proposed rule, we clarified when individuals are considered to be in ``custody'' for purposes of Medicare payment for services furnished to beneficiaries who are under penal authorities. 7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2008 prospective payment rates for operating costs and capital-related costs. We also established the proposed threshold amounts for outlier cases. In addition, we addressed the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2008 for hospitals and hospital units excluded from the PPS. 8. 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. 9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

In Appendix B of the proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2008 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. 10. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2007 recommendations concerning hospital inpatient payment policies addressed 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. We addressed these recommendations in Appendix B of the proposed rule. For further information relating specifically to the MedPAC March 2007 reports or to obtain a copy of the reports, contact

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MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

F. Public Comments Received on the Proposed Rule

We received approximately 900 timely pieces of correspondence in response to the FY 2008 IPPS proposed rule issued in the Federal Register on May 3, 2007. These public comments addressed issues on multiple topics in the proposed rule. We present a summary of the public comments and our responses to them in the applicable subject matter sections of this final rule with comment period.

II. 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.

B. DRG Reclassifications

1. General

As discussed in the preamble to the FY 2007 IPPS final rule (71 FR 47881 through 47971), we are focusing our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its ``Report to the Congress, Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking into account severity of illness and applying hospital-specific relative value (HSRV) weights to DRGs.\1\ We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 others across 13 different clinical areas involving nearly 1.7 million cases. As described below in more detail, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system that is occurring as we undertook further study.

\1\ Medicare Payment Advisory Commission: Report to the Congress, Physician-Owned Specialty Hospitals, March 2005, page viii.

Currently, cases are classified into CMS 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).

The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different 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)). For FY 2007, cases are assigned to one of 538 DRGs in 25 MDCs. 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.

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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, under the most recent version of the CMS GROUPER (Version 24.0), there are 9 DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow transplants, lung transplants, simultaneous pancreas/kidney transplants, pancreas transplants, and for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs.

Pre-Major Diagnostic Categories [Pre-MDCs]

DRG 103...................... Heart Transplant or Implant of Heart Assist System. DRG 480...................... Liver Transplant and/or Intestinal Transplant. DRG 481...................... Bone Marrow Transplant. DRG 482...................... Tracheostomy for Face, Mouth, and Neck Diagnoses. DRG 495...................... Lung Transplant. DRG 512...................... Simultaneous Pancreas/Kidney Transplant. DRG 513...................... Pancreas Transplant. DRG 541...................... ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R. DRG 542...................... Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R.

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially 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 (0 to 17 years of age 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 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. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones.

Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications, comorbidities, or the patient's age would consistently affect the consumption of hospital resources. Physician panels classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial CC. A substantial CC was defined as a condition which, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least one day in at least 75 percent of the patients. Each medical and surgical class within an MDC was tested to determine if the presence of any substantial CC would consistently affect the consumption of hospital resources.

A patient's diagnosis, procedure, discharge status, and demographic information is entered 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, the PRICER software calculates a base DRG payment. The PRICER calculates the payment 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 payment 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 FY 2000 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

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date 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.

As we proposed in the FY 2008 IPPS proposed rule, for FY 2008, we are adopting significant changes to the current DRGs. As described in detail below, we proposed significant improvement in the DRG system to recognize severity of illness and resource usage by proposing to adopt Medicare Severity DRGs (MS-DRGs). The changes we proposed (and are adopting in this final rule with comment period) will be reflected in the FY 2008 GROUPER, Version 25.0, and will be effective for discharges occurring on or after October 1, 2007. As noted in the proposed rule, our DRG analysis was based on data from the December 2006 update of the FY 2006 MedPAR file, which contained hospital bills received through December 31, 2006, for discharges occurring in FY 2006. For this final rule with comment period, our analysis is based on more recent data from the March 2007 update of the FY 2006 MedPAR file, which contains hospital bills received through March 31, 2007, for discharges occurring in FY 2006. 2. Yearly Review for Making DRG Changes

Many of the changes to the DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. As we indicated in the proposed rule, 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 annual proposed rule and, if included, 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 actual process of forming the DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. We describe in detail below the process we used to develop the MS-DRGs that we proposed and are adopting in this final rule with comment period. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS- DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new DRG unless it would include a substantial number of cases.

C. MedPAC Recommendations for Revisions to the IPPS DRG System

In the FY 2006 and FY 2007 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482 and 71 FR 47881 through 47939).

In Recommendations 1-3 in the 2005 Report to Congress on Physician Owned Specialty Hospitals, MedPAC recommended that CMS:

Refine the current DRGs to more fully capture differences in severity of illness among patients.

Base the DRG relative weights on the estimated cost of providing care.

Base the weights on the national average of the hospital- specific relative values (HSRVs) for each DRG (using hospital-specific costs to derive the HSRVs).

Adjust the DRG relative weights to account for differences in the prevalence of high-cost outlier cases.

Implement the case-mix measurement and outlier policies over a transitional period.

As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule.

For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). However, based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. Rather, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system's recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represent a number of body systems. In creating these 20 new DRGs, we deleted 8 and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008. In the FY 2007 IPPS final rule, we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness based on the work that CMS (then HCFA) did in the mid-1990's to adopt severity DRGs. We describe in detail below the progress we have made on these two initiatives, our actions for FY 2008, and our plans for continued analysis of reform of the DRG system for FY 2009. We note that revising the DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications in more detail in the following sections.

In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology beginning with the FY 2007 IPPS

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proposed rule. Although we proposed to adopt HSRV weights for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the hospital-specific portion of the methodology. The cost-based weights are being adopted over a 3-year transition period in \1/3\ increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the hospital-specific methodology as well as other issues brought to our attention with respect to the cost-based weights. There was significant concern in the public comments that we account for charge compression--the practice of applying a higher charge markup over costs to lower cost than higher cost items and services--if we are to develop relative weights based on cost. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost report to determine departmental level cost-to- charge ratios (CCRs) to apply to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International to study both charge compression and to what extent our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost report and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation is analyzing the HSRV cost-weighting methodology.

As we present below, we believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution that any system that groups cases will always present some opportunities for providers to specialize in cases they believe to have higher margins, we believe that the changes we have adopted and the continuing reforms we proposed, and are adopting in this final rule with comment period, for FY 2008 will improve payment accuracy and reduce financial incentives to create specialty hospitals.

D. Refinement of DRGs Based on Severity of Illness

For purposes of the following discussions, the term ``CMS DRGs'' means the DRG system we currently use under the IPPS; the term ``Medicare-Severity DRGs (MS-DRGs)'' means the revisions that we proposed to make (and are adopting in this final rule with comment period) to the current CMS DRGs to better recognize severity of illness and resource use based on case complexity. Although we have found the terms ``CMS DRGs'' and ``MS-DRGs'' useful to distinguish the current DRG system from the DRGs that we proposed to adopt for FY 2008, we invited public comments on how to best refer to both the current DRGs and the proposed DRGs to avoid confusion and improve clarity.

Comment: One commenter responded to our request for name suggestions for the new DRG system. The commenter agreed that the name should differentiate which DRG scheme is being referenced. The commenter did not provide an alternative suggestion.

Response: We agree with the importance of being able to differentiate between the current and the revised DRG system. We believe the name ``Medicare Severity DRGs (MS-DRGs)'' is an appropriate name for this revised system. Therefore, we are adopting as final our reference to the revised DRG system as the ``Medicare Severity DRGs (MS DRGs).'' 1. Evaluation of Alternative Severity-Adjusted DRG Systems

In the FY 2007 IPPS final rule, we stated our intent to engage a contractor to assist us with an evaluation of alternative DRG systems that may better recognize severity than the current CMS DRGs. We noted it was possible that some of the alternative systems would better recognize severity of illness and are based on the current CMS DRGs. We further stated that if we were to develop a clinical severity concept using the current CMS DRGs as the starting point, it was possible that several of the issues raised by commenters (in response to the CS DRGs, which, in the FY 2007 IPPS proposed rule, we proposed to adopt for FY 2008 or earlier) would no longer be a concern. We noted that if we were to propose adoption of severity DRGs for FY 2008, we would consider the issues raised by commenters on last year's proposed rule as we continued to make further refinements to account for complexity as well as severity to better reflect relative resource use. We stated that we believed it was likely that at least one of several alternative severity-adjusted DRG systems suggested for review (or potentially a system we would develop ourselves) would be suitable to achieve our goal of improving payment accuracy beginning in FY 2008.

On September 1, 2006, we awarded a contract to the RAND Corporation to perform an evaluation of alternative severity-adjusted DRG classification systems. RAND is evaluating several alternative DRG systems based on how well they are suited to classifying and making payments for hospital inpatient services provided to Medicare patients. Each system is being assessed on its ability to differentiate among severity of illness. A final report is due on or before September 1, 2007.

RAND's draft interim report focused on the following criteria:

Severity-adjusted DRG classification systems. How well does each classification system explain variation in resource use? How would the classification system affect a hospital's patient mix? Are the groupings manageable, administratively feasible and understandable?

Payment accuracy--What are the payment implications of selected models?

In response to our request, several vendors of DRG systems submitted their products for evaluation. The following products were evaluated by RAND:

3M/Health Information Systems (HIS)

CMS DRGs modified for AP-DRG Logic (CMS+AP-DRGs)

Consolidated Severity-Adjusted DRGs (CS DRGs)

Health Systems Consultants (HSC)

Refined DRGs (HSC-DRGs)

HSS/Ingenix

All-Payer Severity DRGs with Medicare modifications (MM- APS-DRGs)

Solucient

Solucient Refined DRGs (Sol-DRGs)

Vendors submitted their commercial (off-the-shelf) software to RAND in late September 2006. The five systems were compared to the CMS DRGs that were in effect as of October 1, 2006 (FY 2007). RAND assigned FY 2004 and FY 2005 Medicare discharges from acute care hospitals to the FY 2007 CMS DRGs and

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to each of the alternative severity-adjusted DRG systems. RAND's initial analysis provided an overview of each alternative DRG classification system, their comparative performance in explaining variation in resource use, differences in DRG grouping logic, and case mix change.

A Technical Expert Panel comprised of individuals representing academic institutions, hospital associations, and MedPAC was formed in October 2006. The members received the preliminary draft report of RAND's alternative severity-adjusted DRG systems evaluation in early January 2007. The panel met with RAND and CMS on January 18, 2007, to discuss the preliminary draft report and to provide additional comments. RAND incorporated items raised by the panel into its preliminary draft report and submitted a revised interim report to CMS in mid-March 2007. CMS posted RAND's interim report on the CMS Web site in late March 2007. Interested individuals can view RAND's interim report on the CMS Web site at: http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The report may also be viewed on

RAND's Web site at http://www.rand.org/pubs/online/health.

At this time, RAND has completed its evaluation of the alternative severity adjusted DRG systems. RAND's interim report reflects its evaluation of five alternative DRG systems using the criteria described above. Since the proposed rule, RAND evaluated the Medicare Severity DRG (MS-DRG) system using the same criteria applied to the other DRG systems. We are continuing to work with RAND to evaluate alternate methodologies for establishing relative weights using the MS-DRGs. Once RAND completes its work on the alternate methodologies for establishing relative weights, we will be in a better position to evaluate the issue of charge compression and potential improvements to our methodology to determine cost-based relative weights. We plan to review RAND's analysis of these issues and determine if it will be appropriate to propose additional adjustments to the MS-DRGs or the relative weight methodology in the FY 2009 IPPS proposed rule.

We instructed RAND to evaluate the MS-DRGs using the same criteria that it applied to the other DRG systems. Consistent with conclusions we made in the IPPS proposed rule, RAND's findings demonstrate that MS- DRGs explain 43 percent of the cost variation; a 9.1 percent improvement over the CMS DRGs. RAND reports that the explanatory power of the MS-DRGs is higher than the CMS+AP-DRGs, but lower than the other systems analyzed. The MS-DRGs have the lowest adjusted R\2\ values among the severity-adjusted systems in seven MDCs. In three of these MDCs, the R\2\ values are actually lower than under the CMS DRGs: MDC 19 (Mental Diseases and Disorders), MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders) and MDC 22 (Burns). RAND attributes the reduction in R\2\ values to how the CMS DRGs were collapsed to form the base DRGs and recommends future examination. We agree that RAND's findings provide us with potential issues to examine to further improve the MS-DRGs for FY 2009.

Although RAND's findings related to R2in certain MDCs are of concern, we believe the MS-DRGs remain an improvement over the current CMS DRGs and have significant advantages over the other DRG systems being evaluated. Specifically, they are more up-to-date because of our review of secondary diagnoses and classification into MCCs and CCs. Further, they are understandable, available in the public domain, and will have fewer transition issues than the other systems. As MS- DRGs are a modification of the current CMS DRGs, they allow for updates and maintenance to continue using the same process as under the current CMS DRGs.

Depending on the criteria being evaluated, the relative merits of each system being evaluated by RAND are different. For instance, the CS DRGs performed well in explaining resource variation but have the highest potential for case-mix growth. Other than the MS-DRGs, the CMS+AP-DRGs did the poorest among the systems evaluated in explaining variation in resource usage but did the best on producing reliable and stable results. The remaining systems generally performed somewhere in between on most of the measures that RAND used in its comparative analysis. The MS-DRGs are the result of modifications to the CMS DRGs to better account for severity. Unlike the other systems, the MS-DRGs are available in the public domain, and as a result, systems implementation and other costs are likely to be at a minimum. As suggested above, RAND found that the MS-DRGs are an improvement over the CMS DRGs and compare favorably to the alternative DRG systems being evaluated on some criteria and not as well on others.

As RAND has completed its evaluation of the alternative DRG systems, including the MS-DRGs, consistent with RAND's findings, we believe it is appropriate at this time to adopt the MS-DRG system for the Medicare IPPS in FY 2008. While there will be an opportunity for the public to comment on RAND's findings, we expect to permanently adopt the MS-DRGs for the IPPS. We do not think it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems being evaluated by RAND is clearly superior. In our view, none of the systems appears to be clearly superior or inferior to the other systems based on the criteria RAND used for the evaluation. Given the strong support in the public comments for the MS- DRGs and the fact they compare well overall to the alternative DRG systems being evaluated by RAND, we believe it is likely that the MS- DRGs will be the system that Medicare uses permanently for the IPPS. However, because we are interested in public input on this issue, we are making RAND's final report available on the CMS Web Site at: http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The

report may also be viewed on RAND's Web site at http://www.rand.org/pubs/online/health .

Interested members of the public can write to the following address to make their views known to us about the RAND Report:

Division of Acute Care, Center for Medicaid Management, 7500 Security Boulevard, C4-08-06, Baltimore, MD 21244, Attn: Mady Hue.

In the FY 2008 IPPS proposed rule, we proposed to adopt the MS-DRGs for FY 2008. We are providing the following update on RAND's progress in evaluating the MS-DRGs against the alternative DRG systems. In the proposed rule, we also invited public comment regarding RAND's preliminary analysis of each vendor-supplied alternative severity- adjusted DRG system described below. A summary of any public comments that we received and our responses to those comments are presented under each subject area. a. Overview of Alternative DRG Classification Systems

Analysis of how each of the six severity adjusted DRG systems performs began by using the current CMS DRGs as a baseline. Two of the six systems (CS DRGs and MM-APS-DRGs) are derivatives of all-patient severity-adjusted DRG systems that have been modified by their developers for the Medicare population and two of the systems (HSC-DRGs and Sol-DRGs) are all-patient systems that incorporate severity levels into the CMS DRGs. The CMS+AP-DRGs are a combination of CMS DRGs and a modification for the Medicare population of the major CC

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(MCC) severity groupings used in the AP-DRG system. (The AP-DRG system was developed by 3M/HIS specifically for the State of New York to capture the non-Medicare population.) The MS-DRG system modifies the current CMS DRGs by collapsing any paired DRGs (DRGs distinguished by the presence or absence of CCs and/or age) into base DRGs and then splits the base DRGs into MCC/CC-severity levels.

Table A below shows how each of the six alternative severity- adjusted systems classifies patients into base DRGs and their corresponding severity levels.

Table A.--Logic of CMS and Alternative DRG Systems

CMS-DRG CMS+AP-DRG HSC-DRG Sol-DRG MM-APS-DRG CS DRG MS-DRG

Number of MDCs................ 25

25

25

25

25

25

25 Number of base DRGs........... 379

379

391

393

328

270

335 Total number of DRGs.......... 538

602

1,293 1,261 915

863

745 Number of DRGs Four systems add severity levels to the base CMS DRGs; the CS DRGs add severity levels to the base APR DRGs, which are comparable but not identical to the base CMS DRGs. Both the CS DRGs and MM-APS- DRGs collapse some base DRGs with low Medicare volume. The MS-DRGs collapse the current CMS DRG splits and either leave the base DRG undivided or divide it into two or three severity levels.

The HSC-DRGs and the Sol-DRGs use uniform severity levels for each base DRG (three for medical and four for surgical). The general structure of the MS-DRG logic establishes three severity levels for each base DRG: With MCC, with CC, and without CC. However, CMS consolidated severity levels for the same base DRG if they do not meet specific statistical criteria. The general structure of the MM-APS-DRG logic includes three severity levels for each base DRG, but some severity levels for the same base DRG are consolidated to address Medicare low-volume DRGs and nonmonotonicity issues. Monotonicity is when the average costs for a severity group consistently rise as the severity level of the group increases. For example, in a monotonic system, if within a base DRG there are three severity groups and level 1 severity is less than level 2 severity and level 2 severity is less than level 3 severity, the average costs for a level 3 case would be greater than the average costs for a level 2 case, which would be greater than the average costs for a level 1 case. When a DRG is nonmonotonic, the mean cost in the higher severity level is less than the mean cost in the lower severity level. The general structure of the CS DRGs includes four severity levels for each base DRG. However, severity level consolidations occur to address Medicare low-volume DRGs and nonmonotonicity. The CS DRGs consolidate both adjacent severity levels for the same base DRG and the same severity level across multiple base DRGs (especially for severity level 4).

Under the CMS+AP-DRGs and MM-APS-DRGs, each diagnosis is assigned a uniform CC-severity level across all base DRGs (other than CCs on the exclusion list for specific principal diagnoses). The remaining systems assign diagnoses to CC-severity level classifications by groups of DRGs.

Under the grouping logic used by all systems other than the CS DRGs, each discharge is assigned to the highest severity level of any secondary diagnosis. The MS-DRGs assign discharges with no CC but certain high cost devices to a higher severity level. The CS DRGs adjust the initial severity level assignment based on other factors, including the presence of additional CCs. None of the other systems adjusts the severity level classification for additional factors or CCs. However, the MM-APS-DRG system handles additional CCs through an enhanced relative weight.

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The HSC-DRGs and the Sol-DRGs have a medical ``early death'' DRG within each MDC. The CS DRGs do not use death in the grouping logic. In addition, most complications of care do not affect the DRG assignment. The MS-DRGs use death in making an assignment in selected DRGs and do not count certain conditions as MCCs and CCs (such as cardiac arrest) in patients who die during the inpatient stay. b. Comparative Performance in Explaining Variation in Resource Use

In evaluating the comparative performance of each alternative DRG system, RAND used MedPAR data from FY 2004 and FY 2005. RAND excluded data from CAHs, Indian Health Service hospitals, and hospitals that have all-inclusive rate charging practices. Consistent with CMS practice, RAND did not exclude data from Maryland hospitals, which operate under an IPPS waiver. Records that failed edits for data consistency or that had missing variables that were needed to determine standardized costs were also excluded.

RAND reported that evaluation of each alternative severity-adjusted DRG system is a complex process due to differences in how each of the severity levels are applied, the number of severity-adjusted DRGs in each system, and the average number of discharges assigned to each DRG. In addition, the manner in which the DRGs for patients 0 to 17 years of age are assigned in the severity-adjusted systems affects the number of low volume DRGs using Medicare discharges. Low-volume, severity- adjusted DRGs can affect the relative performance of a classification system. However, the percentage of Medicare discharges assigned to these DRGs is small--approximately 0.7 percent in the HSC-DRG and Sol- DRG systems compared to 0.1 percent in the CMS DRGs.

To facilitate compatrisons across the severity-adjusted DRG system, RAND assigned a severity level to each MS-DRG consistent with the method used for the other DRG systems. The severity level is based on the lowest severity level. If a base MS-DRG divided into two DRGs, one for both discharges with no CC and discharges with CCs and the other for discharges with MCCs, RAND assigned Level 0 to the DRG for discharges with no MCC and Level 2 to the DRG for discharges with MCCs. RAND also assigned Severity Level 0 to base DRGs that do not split by CC level. Table B summarizes the distribution of DRGs and discharges across severity levels by classification system, exclusive of MDC 15, ungroupable discharges, and statistical outliers. In comparison to the other severity-adjusted systems, the MS-DRGs have a much higher percentage of discharges assigned to the lowest severity level. This includes base DRGs that are not divided into severity subgroups, the no CC severity level, and the no MCC severity level in those base DRGs that are split based on the presence of a MCC only. Sixty percent of discharges are assigned to Severity Level 0 DRGs compared to only 20 percent in the CS DRG system. There are several reasons for the higher percentage, including the reassessment of CC assignments, the collapsing of the no CC and CC severity levels in 43 base MS-DRGs, and no severity subgroups in 53 base MS-DRGs.

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[GRAPHIC] [TIFF OMITTED] TR22AU07.001

Severity-adjusted DRGs are designed to reduce the amount of cost variation within DRGs. To compare how much within-DRG variation occurs in each DRG system, RAND computed the mean standardized cost, standard deviation, and coefficient of variation (CV) for each DRG across the various systems. Each severity-adjusted system has a smaller proportion of DRGs with a CV >100 percent than the CMS DRGs. Seventeen percent of the 511 CMS DRGs to which Medicare patients were assigned in 2005 had a CV >100 percent. In contrast, 8 percent of the 736 MS-DRGs have a CV >100 percent. This is a slightly lower percentage than in the CMS+AP DRGs but slightly higher percentage than the other four severity- adjusted DRG systems. Only 1.7 percent of discharges are assigned to MS-DRGs with a CV >100 percent, which is comparable to the percentage of discharges assigned to DRGs with a CV >100 percent in the CS DRGs and the CMS+AP DRGs. The MM-APS DRGs and CMS+AP DRGs have slightly lower and higher percentages, respectively, of discharges assigned to DRGs with a CV >100 percent.

RAND utilized a general linear regression model to evaluate how well each severity-adjusted DRG system explains variation in costs per case. The initial results demonstrate that all six severity-adjusted DRG systems predict cost better than the CMS DRGs. The CS DRGs have higher adjusted R\2\ values (explanatory power) than the other severity-adjusted systems in nearly every MDC. In general, the adjusted R\2\ value for the CS DRGs is 0.4458, a 13-percent improvement over the adjusted R\2\ value for the CMS DRGs. The HSC-DRGs demonstrate an 11- percent improvement, while the adjusted R\2\ values for the MM-APS-DRGs and Sol-DRGs are 10.0 percent and 9.7 percent higher, respectively, than the CMS DRG R\2\ value. The adjusted R\2\ value for the MS-DRGs is 0.4300, a 9.1 percent improvement over the CMS DRGs. The CMS+AP-DRGs show the smallest improvement, nearly 8 percent.

Another aspect of RAND's evaluation was to identify the validity of each alternative DRG system as a measurement for resource costs. For a base DRG, the severity levels should be monotonic; that is, the mean cost per discharge should increase simultaneously with an increase in the severity level. A distinction between patient groups and varying treatment costs should be accomplished by the severity levels. When a DRG is nonmonotonic, the mean cost in the higher severity level is less than the mean cost in the lower severity level. RAND studied the percentage differences and absolute differences in cost between the severity levels within the base DRGs for each system under evaluation. For the analysis, RAND assigned the severity levels for discharges assigned to the CMS+AP-

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DRGs and CS DRGs that include several base DRGs to the base DRG to which they would have been assigned at a lower severity level.

Table C shows the percentage difference between the mean standardized cost for discharges with severity levels 1 through 3 as applicable to the adjacent lower severity level within the base DRG (for example, Base DRG 1 Severity Level 1 compared with Base DRG 1 Severity Level 0). The first column of the table shows the number of DRGs with severity level 0 and the proportion of discharges assigned to those DRGs. The ``Other DRGs'' column, which is not applicable to the MS-DRGs, includes DRGs for age 0 to 17 years and any DRGs for which there was no base DRG with severity level 0 that could be used in the comparison, for example, no Medicare discharges were assigned to the base DRG severity level 0. For severity level 1 and higher, RAND computed the ratio of the mean cost for that level to the mean cost for the adjacent lower level (for example, mean costDRG!Level!2/ mean costDRG!Level!1) and reported the results by the magnitude of the ratio. RAND used the number of discharges assigned to the higher severity level to calculate the percentage of discharges assigned to each ratio category.

For the two systems (CMS+AP-DRGs and CS DRGs) that include several base DRGs, RAND assigned those discharges to the lower severity level base DRG. Following that methodology, RAND was able to calculate how much more costly the discharges assigned to the consolidated or lower severity levels were than the discharges in the base DRG assigned to the next higher severity level. Results demonstrate that, overall, nonmonotonicity is not a factor across the alternative DRG systems. There are only a small percentage of discharges that are assigned to nonmonotonic DRGs. Unlike the other systems, all severity level 1 or level 2 MS-DRGs were monotonic.

Using the data from severity of illness levels 1 through 3 (except for the MM-APS-DRGs, which do not have a severity of illness level 3), RAND calculated the discharge-weighted mean cost difference between severity levels and the mean ratio of the cost per discharge for the higher severity level to the adjacent lower severity level. The greatest cost discrimination was present in the higher severity levels versus the lower severity levels across all the systems. Unlike the other systems, each MS-DRG was at least 20 percent more costly than the adjacent lower severity DRG. The remaining systems demonstrated equivalent percentage cost differences between the severity levels as shown in Table C below.

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[GRAPHIC] [TIFF OMITTED] TR22AU07.002

In examining whether each of the alternative DRG systems provided stability in the relative weights from year to year, RAND compared the relative weights derived from the MedPAR data in FY 2004 to the relative weights data from FY 2005. RAND's results demonstrate that generally, across all the systems, only a small percentage of DRGs had greater than a 5-percent change in relative weights. RAND did not repeat this analysis for the MS-DRGs. However, RAND had no reason to expect that the results would be substantially different for this system. For further details and discussion, we encourage readers to view RAND's full interim report on the CMS Web site at: http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The

report may also be viewed on RAND's Web site at http://www.rand.org/pubs/online/health .

c. Payment Accuracy and Case-Mix Impact

Similar to how CMS established the relative weights in the FY 2007 IPPS final rule, RAND used standardized costs as determined by the national CCR and the FY 2005 MedPAR data to construct relative weights for each of the DRG systems being evaluated. RAND analyzed the effect of variations in the explanatory power on the distribution of Medicare payments for each system under evaluation. The preliminary findings indicate payment accuracy is improved by each severity-adjusted system by redistributing payment from lower-cost discharges to higher-cost discharges. However, the total payment redistribution across systems differs and reflects the payment impact of improved explanatory power. Although these findings are estimates, the percent of total payment redistributed was the least under the CMS+AP-DRGs (7.1 percent) and the most under the CS DRGs (11.9 percent). The total payment redistribution under the MS-DRGs is 8.4 percent of the total payment. The redistribution is less than the CS DRG system, the same as the HSC-DRG system, and more than in the other systems, even though some of these systems have higher explanatory power.

Table D shows changes in case-mix index (CMI) by hospital category across alternative severity-adjusted DRG

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systems. Results demonstrate that, under the severity-adjusted systems, urban hospitals have a higher average CMI than under the CMS DRGs, and rural hospitals have a lower CMI. The analysis suggests that any system adopted to better recognize severity of illness with a budget neutrality constraint will result in payment redistribution that can be expected to benefit urban hospitals at the expense of rural hospitals. This impact occurs because patients treated in urban hospitals are generally more severely ill than patients in rural hospitals and the CMS DRGs are not currently recognizing the full extent of these differences. For purposes of the study, RAND assumed no behavioral changes in coding practice or the types of patients treated.

On average, the CMI for urban hospitals increases under the severity-adjusted systems, and that for rural hospitals decreases. The change is greatest in the CS DRGs, where the CMI for rural hospitals is 2.4 percent lower than that under the CMS DRGs. The CMI for large urban hospitals (those located in metropolitan areas with more than 1 million population) and other urban hospitals is 0.6 and 0.1 percent higher, respectively, under the CS DRGs. Under the MS-DRGs, there is a slightly larger increase in the average CMI for large urban hospitals, a reduction in the CMI for other urban hospitals, and a smaller reduction for rural hospitals.

The CMI for larger hospitals increases, while that for smaller hospitals decreases across the systems. This result is consistent with a severity-adjusted DRG system shifting payment from less expensive cases to more expensive cases. Larger hospitals tend to have relatively more complex cases and severely ill patients than smaller hospitals do. Teaching hospitals also tend to treat more complex cases, but the impact on these facilities differs by severity-adjusted DRG system. Across all the severity-adjusted systems, nonteaching hospitals have a lower CMI, ranging from a 0.2 percent reduction under the HSC-DRGs and Sol-DRGs to a 0.5 percent reduction under the CS DRGs. In three of the systems (CMS+AP-DRG, HSC-DRG, and MM-APS-DRG), hospitals with large teaching programs (100 or more residents) would experience a larger increase than hospitals with smaller teaching programs. Under the Sol- DRG system, hospitals with large teaching programs would have a 0.1 percent increase, compared with a 0.2 percent increase for hospitals with smaller teaching programs. Under the CS DRG system, the CMI for hospitals with large teaching programs would be about the same, but that for hospitals with smaller teaching programs would increase 0.7 percent relative to the CMS DRGs.

Table D.--CMI Change in Alternative DRG Systems Relative to the CMS DRG CMI

Percentage change from CMS-DRG CMI CMS- ----------------------------------------------------------------- Number of Number of DRG CMS+AP-

MM-APS- hospitals discharges CMI DRG HSC-DRG Sol-DRG DRG CSDRG MS-DRG (Percent) (Percent) (Percent) (Percent) (Percent) (Percent)

ALL.................................................

3,890 12,165,763 1.00 0.0

0.0

0.0

0.0

0.0

0.0 By Geographic Location:

Large urban areas (pop>1 million)...............

1,485 5,715,356 1.02 0.5

0.4

0.3

0.6

0.6

0.7

Other urban areas (popAlthough CMS' chief concern is Medicare patients, it is shortsighted to ignore non-Medicare patients in the proposed MS-DRG system, as the health care industry often focuses its attention on the Medicare relative value system for all of its hospital patients.

The DRG system has always been comprehensive, including all possible ICD-9-CM diagnoses and procedures. Consolidating low- volume procedures and procedures now performed primarily in an outpatient setting creates confusion in the MS-DRG classification system. Procedures such as tonsillectomies, carpal tunnel release, and cataract extractions are different MDCs and are treated by different medical specialists. They are similar

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only with respect to historical cost data and only for the time being.

Eliminating newborns, maternity, and congenital anomalies from the usual MS-DRG severity level approach does not provide a comprehensive severity system.

Lastly, the commenter indicated that whatever software system is chosen for the public, it should be provided in a modern and accessible software language and format. The commenter recommended a ``C'' version, on CDs or DVDs, and suggested that continuing to place CMS software into the public domain written in IBM assembler and distributed through the National Technical Information Service (NTIS) on 9-track tapes or 3480 cartridges seems difficult to imagine, as this technology is over 40 years old.

Response: We disagree that we are implementing a ``completely new and untested severity system.'' While the MS-DRGs constitute a major reform to better recognize severity of illness, they are a refinement of the current CMS DRGs that have been in use for Medicare payment for over 20 years. Further, our proposed rule analysis--subsequently validated by RAND--suggested that they are major improvement over the current CMS DRGs. Most of the other systems represent less updated refinements of the CMS DRGs. While these systems have been in use for other purposes, we note that (other than the APR DRGs that are used for payment in Maryland and the AP DRGs that were used in New York's all payer ratesetting system in the 1990s), the other systems being evaluated have never been used for Medicare payment.

We stated in the FY 2008 IPPS proposed rule that we developed the MS-DRG system in response to public comments received as a result of the FY 2007 proposed rule (in response to the proposed CS DRGs). We also stated we submitted the MS-DRG system to RAND for evaluation and the final report was expected on or before September 1, 2007. At this time RAND has completed the evaluation of alternative severity-adjusted DRG systems, including the MS-DRGs. In the near future, we will post RAND's analysis of the MS-DRG system to the following CMS Web site: http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The report may also be viewed on

RAND's Web site at http://www.rand.org/pubs/online/health. This report

is referred to as an Addendum to RAND's interim report that was released in March 2007. A completed final report incorporating the evaluation of all six severity adjusted DRG systems into one document will be posted to the CMS Web site after September 1, 2007.

As noted above, we share the commenter's concern about adopting one DRG system this year and potentially another one next year. We believe the MS-DRGs should be the system that is adopted for long-term use by Medicare for IPPS payment. However, we are interested in obtaining further public input on RAND's findings. We do not believe it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems evaluated by RAND is clearly superior to the MS-DRGs.

We appreciate the commenter's support of our efforts in the review of 13,549 secondary diagnosis codes. We agree that a new, updated CC list greatly improves the ability of a DRG GROUPER to reflect severity of illness and distribute payments more accurately. The intent of RAND's evaluation was to compare each of the alternative DRG systems in its current form. The fact that delays would be necessary to allow the other systems to adopt the improvements that CMS made to the CC list for the MS-DRGs suggests that the other systems would not be ready for implementation as soon. As noted elsewhere, we are interested in adopting comprehensive improvements to the DRG system for severity of illness at the earliest possible date. We do not believe it is in the public interest to delay adopting these improvements to wait for the alternative DRG systems to incorporate refinements to the CC list. Further, we note that CMS first discussed performing a comprehensive review of the CC list over 2 years ago. Each vendor could have undertaken a similar review of the CC list to improve its DRG product at any time.

We disagree with the commenter's assertion that our decision should turn on how the MS-DRGs can be used for non-Medicare payers. As we have stated many times in the past, we encourage private insurers and other non-Medicare payers to make refinements to Medicare's DRG system to better suit the needs of the patients they serve. With respect to the maternity and newborn DRGs, we cannot adopt the same approach to refine these DRGs that we did with the rest of the MS-DRGs because of the extremely low volume of Medicare patients there are in these DRGs. Medicare simply does not have enough cases in these DRGs to apply the same approach we did in the other MDCs. Whether we made revisions to these DRGs or not, private insurers and other private payers would have to develop their own DRGs or relative weights to address the needs of these patients that are not well-represented in the Medicare population. With respect to other pediatric patients, in our view, a significant advantage of the MS-DRGs over the prior CMS DRGs is the fewer number of low volume DRGs. By eliminating pediatric (ages 0 to 17 years) splits, the MS-DRGs will have fewer low-volume DRGs and less instability in the DRG relative weights for the cases paid using these DRGs.

With regards to the software, undere CMS' agreement with its contractor, the software provided by NTIS is the same public domain software that is provided to CMS for use by our system maintainers, regional offices, and fiscal intermediaries.MAC. We will consider this comment as we make updates to our information systems and related contracts.

As stated elsewhere in this final rule with comment period, we are adopting the MS-DRGs for implementation on October 1, 2007 (FY 2008). A detailed discussion summarizing the public comments received in response to the MS-DRG proposal is described in section II.D.2. of the preamble of this final rule with comment period. 2. Development of the Medicare Severity DRGs (MS-DRGs)

As discussed previously, we are committed to continuing our efforts of making refinements to the current CMS DRGs to better recognize severity of illness. In the FY 2007 IPPS final rule, we stated that we had begun a comprehensive review of over 13,000 diagnosis codes to determine which codes should be classified as CCs when present as a secondary diagnosis. We stated that we would also build on the severity DRG work we performed in the mid-1990's. We received a number of public comments on last year's proposed rule that supported the refinement of the current CMS DRGs so that they better recognize severity of illness for FY 2007.

We also committed to performing a more thorough reform of the entire DRG system to better recognize severity of illness for FY 2008. As a result of this broad based analysis, we developed the MS-DRGs that we proposed and are adopting in this final rule with comment period. The MS-DRGs represent a comprehensive approach to applying a severity of illness stratification for Medicare patients throughout the DRGs. As discussed in proposed rule and in section II.D.5. of the preamble of this final rule with comment period, the MS-DRGs maintain the significant advancements in identifying medical technology made

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to the DRGs in past years. At the same time, they greatly improve our ability to identify groups of patients with varying levels of severity using secondary diagnoses. Further, they improve our ability to assign patients to different DRG severity levels based on resource use that is independent of the patient's secondary diagnosis--referred to in this discussion as ``complexity.'' We proposed to adopt the MS-DRGs for FY 2008 and also submitted the system to RAND to be considered as part of its evaluation of alternative DRG systems. In the proposed rule, we encouraged comments on our proposed methodology to establish a severity DRG system and the resulting DRGs. a. Comprehensive Review of the CC List

Our efforts to better recognize severity of illness began with a comprehensive review of the CC list. Currently, 115 DRGs are split based on the presence or absence of a CC. For these DRGs, the presence of a CC assigns the discharge to a higher weighted DRG. The list of diagnoses designated as a CC was initially created at Yale University in 1980-1981 as part of the project to develop an ICD-9-CM version of the DRGs. The researchers at Yale University developed the ICD-9-CM DRGs using national hospital data with diagnoses and procedures coded in ICD-9-CM from the second half of 1979. Because hospitals only began reporting ICD-9-CM codes in 1979, discharge abstracts at that time were much less likely to fully report all secondary diagnoses. As a result, the Yale University researchers developed a liberal definition of a CC as any secondary diagnosis that ``would cause an increase in length of stay by at least 1 day in at least 75 percent of the patients.'' Because of the likely underreporting of secondary diagnoses in the 1979 data, the Yale University researchers also used age as a surrogate for identifying patients with a CC. The original version of the ICD-9-CM DRGs assigned patients to a CC DRG if they had a secondary diagnosis on the CC list or if the patient was 70 years or older.

With the implementation of the IPPS in FY 1984, the coding of secondary diagnoses by hospitals dramatically improved. During the first 4 years of the IPPS, the CC definition included the age 70 criterion. With the improved coding and reporting of diagnoses associated with the implementation of the IPPS, the use of age as a surrogate for CCs was no longer necessary. Thus, beginning in FY 1988, the age 70 criterion was removed from the CC definition and a CC DRG was defined exclusively by the presence of a secondary diagnosis on the CC list.

Except for new diagnosis codes that were added to ICD-9-CM after FY 1984 (for example, HIV), the CC list of diagnoses currently used in the CMS DRGs is virtually identical to the CC list created at Yale University. However, there have been dramatic changes not only in the accuracy and completeness of the coding of secondary diagnoses but also in the characteristics of patients admitted to hospitals and the practice patterns within hospitals as well.

Since the implementation of the IPPS, Medicare average length of stay has dropped dramatically from 9.8 days in 1983 to 5.7 days in 2005. The economic incentives inherent in DRGs motivated a change in practice patterns to discharge patients earlier from the hospital. These changes were facilitated by the increased availability of postacute care services, such as nursing homes and home health services, which allowed problems previously requiring continued hospitalization to be effectively treated outside the acute care hospital. Furthermore, there has also been a dramatic shift to outpatient surgery that avoids costly inpatient stays. Many surgical procedures formerly performed in the hospital are now routinely performed on an outpatient basis. As a result, patients admitted to the hospital today are on average more likely to have a CC than when the IPPS was implemented. The net effect of better coding of secondary diagnoses, reductions in hospital length of stay, increased availability of postacute care services, and the shift to outpatient care is that most patients (nearly 80 percent) admitted to a hospital now have a CC. As a result of the changes that have occurred during the 22 years since the implementation of the IPPS, the CC list as currently defined has lost much of its capacity to discriminate hospital resource use.

Currently, 115 CMS DRGs have a CC subdivision. Up until FY 2002, the number of DRGs with a CC subdivision remained essentially unchanged from the original FY 1984 version of the DRGs. As a means of improving the payment accuracy of the DRGs, beginning with the FY 2002 DRG update, each base CMS DRG without a CC subdivision was evaluated to determine if a CC subdivision was warranted. Over the past five DRG updates, only seven base CMS DRGs have had a CC subdivision added. The primary constraint preventing a significant increase in the number of base CMS DRGs with a CC subdivision is the low number of patients who would be assigned to the non-CC group. Thus, the expansion of the number of CMS DRGs subdivided based on a CC is constrained because the vast majority of patients would be assigned to the CC group and few patients would be assigned to the non CC group. To remedy these problems, we reviewed each of the 13,549 secondary diagnosis codes to evaluate their assignment as a CC or non-CC using statistical information from the Medicare claims data and applying medical judgment based on current clinical practice. We refer to this list in this section as the ``revised CC list.''

The need for a revised CC list prompted a reexamination of the secondary diagnoses that qualify as a CC. Our intent was to better distinguish cases that are likely to result in increased hospital resource use based on secondary diagnoses. Using a combination of mathematical data and the judgment of our medical advisors, we included the condition on the CC list if it could demonstrate that its presence would lead to substantially increased hospital resource use.

Diagnoses may require increased hospital resource use because of a need for such services as:

Intensive monitoring (for example, an intensive care unit (ICU) stay).

Expensive and technically complex services (for example, heart transplant).

Extensive care requiring a greater number of caregivers (for example, nursing care for a quadriplegic).

There are 3,326 diagnosis codes on the current CC list. Our 2006 review of the CC list reduced the number of diagnosis codes on the CC list to 2,583. Based on the current CC list, 77.66 percent of patients have at least one CC present. Based on the revised CC list from our 2006 review, the percent of patients having at least one CC present would be reduced to 40.34 percent. b. Chronic Diagnosis Codes

The 1979 data used in the original formation of the CC list often did not have the manifestations of a chronic disease fully coded. As a result, the CC list included many chronic diseases with a broad range of manifestations. Such chronic illness diagnoses usually do not cause a significant increase in hospital resource use unless there is an acute exacerbation present or there is a significant deterioration in the underlying chronic condition. Therefore, in the revised CC list, we removed chronic diseases without a significant acute manifestation. Recognition of the impact of the chronic disease is accomplished by separately coding the acute manifestation. For example, the mitral valve disease codes

[[Page 47154]]

(codes 396.0 through 396.9) are assigned to the current CC list. However, unless the mitral valve abnormalities are associated with other diagnoses indicating acute deterioration, such as acute congestive heart failure, acute pulmonary edema, or respiratory failure, they would not be expected to significantly increase hospital resource use. Therefore, the revised CC list did not include the mitral valve codes. Recognition of the contribution of mitral valve disease to the complexity of hospital care would be accomplished by separately coding those diseases on the CC list that are associated with an acute exacerbation or deterioration of the mitral valve disease.

The revised CC list applied the criterion that chronic diagnoses having a broad range of manifestations are not assigned to the CC list as long as there are codes available that allow the acute manifestations of the disease to be coded separately. For some diseases, there are ICD-9-CM codes that explicitly include a specification of the acute exacerbation of the underlying disease. For example, for congestive heart failure, the following codes specify an acute exacerbation of the congestive heart failure:

428.21, Acute systolic heart failure

428.41, Acute systolic and diastolic heart failure

428.43, Acute on chronic systolic heart failure

428.31, Acute diastolic heart failure

428.33, Acute on chronic diastolic heart failure

These congestive heart failure codes are included on the revised CC list. However, the following congestive heart failure codes do not indicate an acute exacerbation and are not included in the revised CC list:

428.0, Congestive heart failure not otherwise specified

428.1, Left heart failure

428.20, Systolic heart failure not otherwise specified

428.22, Chronic systolic heart failure

428.32, Chronic diastolic heart failure

428.40, Systolic and diastolic heart failure

428.9, Heart failure not otherwise specified

As a result of this approach, most chronic diseases were not assigned to the revised CC list. In general, a significant acute manifestation of the chronic disease must be present and coded for the patient to be assigned a CC. We made exceptions for diagnosis codes that indicate a chronic disease in which the underlying illness has reached an advanced stage or is associated with systemic physiologic decompensation and debility. The presence of such advanced chronic diseases, even in the absence of a separately coded acute manifestation, significantly adds to the treatment complexity of the patient. Thus, the presence of the advanced chronic disease inherently makes the reason for admission more difficult to treat. For example, under the revised CC list, stage IV, V, or end-stage chronic renal failure (codes 585.4 through 585.6) are designated as a CC, but stage I through III chronic renal failure (codes 585.1 through 585.3) are not. For obesity, a body mass index over 35 (codes V85.35 through V85.4) is a CC, but a body mass index between 19 and 35 is not. End-stage renal failure and extreme obesity are examples of chronic diseases for which the advanced stage of the disease is clearly specified.

However, for most major chronic diseases, the stage of the disease is not clearly specified in the code. These codes were evaluated based on the consistency and intensity of the physiologic decompensation and debility associated with the chronic disease. For example, quadriplegia (codes 344.00 through 344.09) requires extensive care with a substantial increase in nursing services and more intensive monitoring. Therefore, quadriplegia is considered a CC in the revised CC list. c. Acute Diagnosis Codes

Examples of acute diseases included on the revised CC list included acute myocardial infarction (AMI), cerebrovascular accident (CVA) or stroke, acute respiratory failure, acute renal failure, pneumonia, and septicemia. These six diseases are representative of the types of illnesses we included on the revised CC list. Other acute diseases were designated as a CC if their impact on hospital resource use would be expected to be comparable to these representative acute diseases. For example, acute endocarditis was included on the CC list but urinary tract infection was not.

The revised CC list is essentially comprised of significant acute disease, acute exacerbations of significant chronic diseases, advanced or end stage chronic diseases and chronic diseases associated with extensive debility. Compared to the existing CC list, the revised CC list requires a secondary diagnosis to have a consistently greater impact on hospital resource use.

The following Table E compares the current CC list and the revised CC list. There are 3,326 diagnosis codes on the current CC list. The CC revisions reduce the number of diagnosis codes on the CC list to 2,583. Based on the current CC list, 77.66 percent of patients have at least one CC present, using FY 2006 MedPAR data. Based on the revised CC list, the percent of patients having at least one CC present is reduced to 40.34 percent. The revised CC list increases the difference in average charges between patients with and without a CC by 56 percent ($15,236 versus $9,743).

Table E.--Comparison of Current CC List and Revised CC List

Current CC Revised CC list

list

Codes designated as a CC......................

3,326

2,583 Percent of patients with one or more CCs......

77.66

40.34 Percent of patients with no CC................

22.34

59.66 Average charge of patients with one or more

$24,538 $31,451 CCs.......................................... Average charge of patients with no CCs........ $14,795 $16,215

The analysis above suggests that merely reviewing and updating the CC list can lead to significant improvements in the ability of the CMS DRGs to recognize severity of illness. Although we could potentially adopt this one change to better recognize severity of illness in the CMS DRGs, we have undertaken additional analyses that further refine secondary diagnoses into MCCs, CCs and non-CCs as described below. d. Prior Research on Subdivision of CCs into Multiple Categories (1) Refined DRGs

During the mid-1980s, CMS (then HCFA) funded a project at Yale University to revise the use of CCs in the CMS DRGs. The Yale University project mapped all secondary diagnoses that were considered a CC in the CMS DRGs into 136 secondary diagnosis groups, each of which was assigned a CC complexity level. For surgical patients, each of the 136 secondary diagnosis groups was assigned to 1 of 4 CC complexity levels (non-CC, moderate CC, MCC, and catastrophic CC). For medical patients, each of the 136 secondary diagnosis groups was assigned to 1 of 3 CC complexity levels (non-CC, moderate/MCC, and catastrophic CC). All age subdivisions and CC subdivisions in the DRGs were

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eliminated and replaced by the four CC subgroups for surgical patients, or the three CC subgroups for medical patients. The Yale University project did not reevaluate the categorization of secondary diagnosis as a CC versus a non-CC. Only the diagnoses on the standard CC list were used to create the moderate, major, and catastrophic subgroups. All secondary diagnoses in a secondary diagnosis group were assigned the same level, and a patient was assigned to the subgroup corresponding to the highest level secondary diagnosis. The number of secondary diagnoses had no effect on the subgroup assigned to the patient (that is, multiple secondary diagnoses at one level did not cause a patient to be assigned to a higher subgroup). The DRG system developed by the Yale University project demonstrated that a subdivision of the CCs into multiple subclasses would improve the predictability of hospital costs. (2) 1994 Severity DRGs

We also examined the work we performed in the mid-1990's to revise the CMS DRGs to better recognize severity. In 1993, we reevaluated the use of CCs within the CMS DRGs. The reevaluation excluded the CMS DRGs associated with pregnancy, newborn, and pediatric patients (MDCs 14 and 15 and DRGs defined based on age 0-17). The major CC list from the AP- DRGs that are used for Medicaid payment by New York and other States was used to identify an initial list of MCCs. Using Medicare data, we reevaluated the categorization of each secondary diagnosis as a non-CC, CC, or an MCC. The end result was that 111 diagnoses that were non-CCs in the standard CMS DRGs were made a CC, 220 diagnoses that were a CC were made a non-CC, and 395 CCs were considered an MCC.

All CC splits in the CMS DRGs were eliminated, and an additional 24 DRGs were merged together. The resulting base CMS DRGs were then subdivided into three, two, or no subgroups based on an analysis of Medicare data. The result was 84 DRGs with no subgroups, 124 DRGs with two subgroups, and 85 DRGs with three subgroups. An additional 63 pregnancy, newborn, and pediatric DRGs not evaluated resulted in a total of 652 DRGs.

A patient was assigned to the CC subgroup corresponding to the highest level secondary diagnosis. Multiple secondary diagnoses at one level did not cause a patient to be assigned to a higher subgroup. The categorization of a diagnosis as non-CC, CC, or MCC was uniform across the CMS DRGs, and there were no modifications for specific DRGs. As part of the FY 1995 IPPS proposed rule, we made a complete file of the revised DRG descriptions available to the public. However, we never adopted the revised DRGs (55 FR 27756). e. Medicare Severity DRGs (MS-DRGs)

We had several options in developing a refinement to the current CMS DRGs to better recognize increased resource use due to severity of illness. One option would involve simply taking the work performed in 1994 and then updating it with all the code changes that have taken place since then. We were reluctant to do this because of changes in medical practices as well as the substantial changes in ICD-9-CM codes since that time. Another option would have been to build on current CMS DRGs which include a number of advancements that better identify medical practices and technologies. Many commenters on the FY 2007 IPPS proposed rule urged us to take the latter approach because they believed the current base CMS DRGs clearly differentiate between the complexities of varying surgical procedures and medical devices. Therefore, we chose the option of developing a new severity DRG system based on the current CMS DRGs.

The development of the 1994 Severity DRGs involved three steps:

Consolidation of existing DRGs into base DRGs.

Categorization of each diagnosis as an MCC, CC, or non-CC.

Subdivision of each base DRG into subclasses based on CCs.

We reviewed and revised each of the three steps and applied them to our current CMS DRGs to develop DRGs that better identify severity of illness among Medicare patients. We refer to this system that we proposed (and are adopting in this final rule with comment period) as the Medicare Severity DRGs (MS-DRGs). The purpose of the MS-DRGs is to more accurately stratify groups of Medicare patients with varying levels of severity.

(1) Consolidation of Existing CMS DRGs into Base MS-DRGs

The first step in our process was the consolidation of existing CMS DRGs into new proposed base MS-DRGs. We combined together the 115 pairs of CMS DRGs that are subdivided based on the presence of a CC. We further consolidated the CMS DRGs that are split on the basis of a major cardiovascular condition, AMI with and without major complication (CMS DRGs 121 and 122), and cardiac catheterization with and without complex diagnoses (CMS DRGs 124 and 125). We also consolidated the three pairs of burn CMS DRGs that were defined based on the presence of a CC or a significant trauma (CMS DRGs 506 and 507; 508 and 509; and 510 and 511). Next, we consolidated the 43 pediatric CMS DRGs that are defined based on age less than or equal to 17. These pediatric CMS DRGs contain a very low volume of Medicare patients. As shown in Table 10 of the FY 2007 IPPS final rule (71 FR 48318), only two of these pediatric CMS DRGs contained more than 100 patients (CMS DRGs 298 and 333). Seventeen of these pediatric DRGs had no patients (CMS DRGs 30, 33, 41, 48, 54, 58, 137, 252, 255, 282, 330, 340, 343, 393, 405, 446, and 448). As we have stated frequently, our primary focus in maintaining the CMS DRGs is to serve the Medicare population. We do not have the data or the expertise to maintain the DRGs in clinical areas that are not relevant to the Medicare population. We continue to encourage users of the CMS DRGs (or MS-DRGs that are being adopted) to make relevant adaptations if they are being used for a non-Medicare patient population.

In addition to the pediatric CMS DRGs defined by the age of the patient, there are a number of CMS DRGs that relate primarily to the pediatric or adult population that have very low volume in the Medicare population, such as male sterilization, tubal interruptions, circumcisions, tonsillectomies, and myringotomies. These CMS DRGs were consolidated into the most clinically similar MS-DRG.

Over the past two decades, the site of service for some elective procedures such as carpal tunnel release, cataract extraction, and laparoscopy has shifted from the inpatient to the outpatient setting, resulting in the CMS DRGs associated with these procedures having very low volume. These CMS DRGs were also consolidated into the most clinically similar MS-DRG. In addition, there were some clinically related CMS DRGs that had significant Medicare patient volume but had no significant difference in resource use. For example, thyroid (CMS DRG 290) and parathyroid (CMS DRG 289) procedures were virtually identical in terms of hospital resource use and were, therefore, consolidated. In total, 34 of these CMS DRGs were consolidated. The DRG consolidations are summarized in Table F below.

Four pairs of MS-DRGs (223 and 224; 228 and 229; 323 and 324; and 551 and 552) were defined based on the presence of a CC or some other condition. For example, MS-DRG 323 is defined based on the presence of a CC or the performance of extracorporeal shock

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wave lithotripsy. For these MS-DRGs, the CC condition was removed and the pair of DRGs remains separate but defined based only on the other condition (that is, MS-DRG 323 became urinary stones with extracorporeal shock wave lithotripsy). As was done in the 1994 severity DRG work, we did not consolidate any of the CMS DRGs for maternity or newborn cases.

Before proceeding further, we made one additional change to a base DRG assignment after completing these consolidations. We assigned cranial-facial bone procedures to a new base DRG (Cranial/Facial Bone Procedures). These cases were previously assigned to DRGs 52 and 55 through 63. We also created a new base DRG, MS-DRG 245 (Automatic Implantable Cardiac Defibrillator (ACID) Lead and Generator Procedures). This DRG was created by removing automatic implantable cardiac defibrillator leads and generator procedures from the pacemaker DRG (CMS DRG 551; now new MS-DRGs 242 through 244).

Table F below shows how DRGs in the CMS DRGs (Version 24.0) were consolidated into new base MS DRGs. We refer readers to section II.D.2. of the preamble of the proposed rule and this final rule with comment period for a detailed discussion of CCs and MCCs under the MS-DRG system.

Table F.--DRG Consolidation

MS-DRGs CMS-DRG version 24.0

DRG description

version 25.0 New base MS-DRG description

6................................... Carpal Tunnel Release.......

40 Peripheral & Cranial Nerve & 41 Other Nervous System 42 Procedure with MCC, with CC, and without CC/MCC. 7, 8................................ Peripheral & Cranial Nerve & Other Nervous System Procedure.

36.................................. Retinal Procedures..........

116 Intraocular Procedures with 117 and without CC/MCC. 38.................................. Primary Iris Procedures. 39.................................. Lens Procedures with or without Vitrectomy. 42.................................. Intraocular Procedures Except Retina, Iris & Lens.

43.................................. Hyphema.....................

124 Other Disorders of the Eye 125 with and without MCC. 46, 47, 48.......................... Other Disorders of the Eye.

50.................................. Sialoadenectomy.............

139 Salivary Gland Procedures. 51.................................. Salivary Gland Procedures Except Sialoadenectomy.

52.................................. Cleft Lip & Palate Repair...

133 Other Ear, Nose, Mouth & Throat O.R. Procedures with and without CC/MCC. 55.................................. Miscellaneous Ear, Nose, Mouth & Throat Procedures.

56.................................. Rhinoplasty.................

131 New DRG--Cranial/Facial Bone 132 Procedures with and without CC/MCC. 57, 58.............................. Tonsillectomy & Adenoidectomy Procedure, Except Tonsillectomy &/or Adenoidectomy Only. 59, 60.............................. Tonsillectomy &/or Adenoidectomy Only. 61, 62.............................. Myringotomy with Tube Insertion. 63.................................. Other Ear, Nose, Mouth & Throat O.R. Procedures.

67.................................. Epiglottitis................

152 Otitis Media & Upper 153 Respiratory Infection with and without MCC. 68, 69, 70.......................... Otitis Media & Upper Respiratory Infection. 71.................................. Laryngotracheitis.

72.................................. Nasal, Trauma & Deformity...

154 Other Ear, Nose, Mouth & 155 Throat Diagnoses with MCC, 156 with CC, without CC/MCC. 73, 74.............................. Other Ear, Nose, Mouth & Throat Diagnoses.

185, 186............................ Dental & Oral Diseases

157 Dental & Oral Diseases with Except Extractions &

158 MCC, with CC, without CC/ Restorations.

159 MCC. 187................................. Dental Extractions & Restorations.

199................................. Hepatobiliary Diagnostic

420 Hepatobiliary Diagnostic Procedure for Malignancy.

421 Procedures with MCC, with 422 CC, without CC/MCC. 200................................. Hepatobiliary Diagnostic Procedure for Non- Malignancy.

[[Page 47157]]

244, 245............................ Bone diseases & Specific

553 Bone Diseases & Arthropathies.

554 Arthropathies with and without MCC. 246................................. Non-Specific Arthropathies.

259, 260............................ Subtotal Mastectomy for

584 Breast Biopsy, Local Malignancy *.

585 Excision & Other Breast Procedures with and without CC/MCC. 261................................. Breast Procedures for Non- Malignancy Except Biopsy & Local Excision. 262................................. Breast Biopsy & Local Excision for Non- Malignancy.

267................................. Perianal & Pilonidal

579 Other Skin, Subcutaneous Procedures.

580 Tissue & Breast Procedures 581 with MCC, with CC, without CC/MCC. 268................................. Skin, Subcutaneous Tissue & Breast Plastic Procedures. 269, 270............................ Other Skin, Subcutaneous Tissue & Breast Procedure.

289................................. Parathyroid Procedures......

625 Thyroid, Parathyroid & 626 Thyroglossal Procedures 627 with MCC, with CC, without CC/MCC. 290................................. Thyroid Procedures. 291................................. Thyroglossal Procedures.

294................................. Diabetes > 35...............

637 Diabetes with MCC, with CC, without CC/MCC. 295................................. Diabetes 427.41, Ventricular fibrillation

427.5, Cardiac arrest

785.51, Cardiogenic shock

785.59, Other shock without mention of trauma

799.1, Respiratory arrest

Resource use for patients with these diagnoses who were discharged alive was consistent with an MCC. Resource use for patients with these diagnoses who died was consistent with a non-CC. Further, most patients who died could legitimately have one of these diagnoses coded. As a result, these diagnoses are assigned an MCC subclass for patients who lived and a non-CC subclass for patients who died.

For some secondary diagnoses assigned to the CC subclass, our medical advisors identified specific clinical situations in which the diagnosis should not be considered a CC. In such clinical situations, the CC exclusion list was used to exclude the secondary diagnosis from consideration in determining the CC subgroup, essentially making the secondary diagnosis a non-CC. For example, primary cardiomyopathy (code 425.4) is designated as a CC. However, for patients admitted for congestive heart failure, our medical advisors believed that primary cardiomyopathy should be treated as a non-CC. In order to accomplish that, the congestive heart failure principal diagnoses were added to the CC exclusion list for primary cardiomyopathy as a secondary diagnosis.

The list of diagnosis codes that we proposed to classify as an MCC (which we are adopting in this final rule with comment period) was included in Table 6J in the Addendum to FY 2008 IPPS proposed rule. The diagnosis codes that we proposed to classify as a CC (which are adopting in this final rule with comment period) were included in Table 6K in the Addendum to the proposed rule. The E-codes, which are diagnosis codes used to classify external causes of injury and poisoning, are not included in this list. All E codes are designated as non-CCs under the current CMS DRG system and our evaluation supports this non-CC designation as appropriate. We are including a list of changes to the MCC and CC lists as a result of public comments on the proposed rule later in section II.G.13. of the preamble of this final rule with comment period. We will post a complete final list of the MCC and CC codes on the CMS Web site at: http://www/cms/hhs/gov/AcuteInpatientPPS/ under the Files for Download section.

Comment: One commenter supported the basic methodology used to identify MCCs and CCs. The commenter's analysis of discharge data generally confirms the notion that the presence of chronic disease does not usually have material impact on the expected cost of care. The commenter agreed that the emphasis on acute manifestations of chronic diseases is both clinically and financially appropriate. The commenter stated that the current CC list is nearly 25 years old and does not reflect the extent to which clinical practice has changed during that period, with concomitant changes in expected resource use. The commenter further stated that the current CC list also does not reflect the nature of changes in coding practices during that period, changes that have undermined the value of the current CC list. The commenter stated that the elimination of common secondary diagnoses such as code 428.0 (Congestive heart failure, unspecified)

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and code 427.31 (Atrial fibrillation) from the CC list will help to restore CC status as a meaningful indicator of differential expected resource use. The commenter also believed that elimination of these diagnosis codes will address the current situation in which nearly 80 percent of Medicare discharges contain one or more CCs.

Response: We agree that it was important to perform a careful review of the CC list to develop lists that more accurately identify patients with significantly different severity levels. We believe that by using both statistical data as well as input from our medical advisors, we were able to develop the MCCs and CCs that do a much better job of classifying Medicare patients with varying levels of severity. We also agree that is important to remove chronic diagnoses from the CC list that do not have a significant impact on severity. We also believe that nonspecific codes such as code 428.0 should not be included on the CC list. The ICD-9-CM coding system has more specific codes to identify the specific type of heart failure. These more specific codes have data supporting their inclusion on the MCC and CC list. Our medical advisors also supported the inclusion of the more specific heart failure codes on the MCC and CC list. We also agree that patients with atrial fibrillation (code 427.31) do not necessarily have a higher level of severity. The Medicare data suggest that when this condition appears on the claim and the patient has no other secondary diagnosis that is a CC, the charge data suggest the condition produces an expected value for a non-CC rather than a CC case. Further in the judgment of our medical advisors, the condition should not be on the CC list. When the atrial fibrillation leads to additional cardiac problems, the additional problems may be represented by codes that are on the MCC or CC list. We agree that by removing codes from the CC list that do not contribute to significantly higher levels of severity, we can better recognize severity of illness and more accurately reimburse hospitals.

We spent extensive time carefully reviewing the ICD-9-CM diagnosis codes to develop the MCC and CC list. Our current CC list for Version 24.0 of the CMS DRGs contains 3,326 codes. The MS-DRGs have 3,342 codes on the MCC list and 4,922 codes on CC list. While we did remove codes from the CC list and add others to the list, we believe that the end result is a better classification of conditions for identifying differences in severity of illness. We appreciate the commenter's support for our efforts.

Comment: Several commenters supported the MCC and CC lists as a better means of identifying severity. The commenters recommended that CMS consider adopting the revised CC list in FY 2008 as an interim step toward IPPS reform. The commenters recommended that CMS delay implementation of the new severity system until FY 2009 but adopt the revised CC list in FY 2008. The commenters stated that by implementing the revised CC list in FY 2008, CMS could move forward in its goal of utilizing a system that more accurately recognizes the severity of illness of patients. The commenters believed this option would allow a more accurate DRG system to be in place while CMS is evaluating the final RAND report to determine which severity-based DRG system to propose for implementation in FY 2009.

Another commenter who supported the move to MS-DRGS and CMS' efforts in creating the MCC and CC lists stated that it had been working with CMS for years to develop a mechanism to appropriately account for the resources involved in the care of patients with severe sepsis. The commenter believed that the MS-DRGs in which severe sepsis is recognized as a major complication, along with acute respiratory distress syndrome, organ failure, and other conditions where resource use is more intense, will go a long way towards better recognition of severity of illness.

One commenter applauded CMS for the work it has put into developing a system that will consider complexity of care as well as severity of illness in determining Medicare payment for hospital inpatient services. The commenter particularly supported the recognition of hemophilia and end-stage renal disease as MCCs. The commenter stated that these conditions clearly meet the criteria for treatment as MCCs because they often require ``expensive and technologically complex'' services that lead to substantially increased resource use and reflect the highest level of severity. The commenter encouraged CMS to add other diagnoses as the evidence warrants.

Response: Comments and responses on whether to implement MS-DRGs in FY 2008 or at a later date are discussed in detail in section II.D. of the preamble of this final rule with comment period. We appreciate the support for our efforts in creating the MCC and CC lists and agree that it is important to examine data using the system and continue to refine the MCC and CC lists.

Comment: One commenter commended CMS on the systematic way it reviewed 13,549 secondary diagnosis codes to evaluate their assignment as a CC or non-CC using a combination of mathematical data and the judgment of its medical advisors. The commenter stated that, as part of the effort to better recognize severity of illness, CMS conducted the most comprehensive review of the CC list since the creation of the DRG classification. However, the commenter disagreed with the classification of many common secondary diagnoses as non-CCs. Specifically, the commenter questioned threshold levels that were used and at what point in the analysis CMS decided that a code was not a CC. For example, the commenter asked what was considered ``intensive monitoring,'' inquiring whether intensive monitoring refers to additional nursing care on a daily basis, additional testing, intensive care unit care, extended length of stay, all of these factors, or some other factor. In some instances, the commenter noted that similar or comparable codes within the same group have remained a CC/MCC, while other clinically similar codes or codes requiring similar resources may have been omitted. Without greater transparency, and a code-by-code explanation, the commenter was unable to determine why significant secondary diagnoses requiring additional resources have been removed from the CC list. For the most part, the commenter's analysis concentrated on reviewing current CCs that have been omitted from the revised CC list.

The commenter made the following overall recommendations with regard to the CC list:

CMS should make the final revised CC list publicly available as quickly as possible so that hospitals may focus on understanding the impact of the revised CC list, training and educating their coders, and working with physicians for any documentation improvements required to allow the reporting of more specific codes where applicable.

CMS should consider additional refinements to the revised CC list and, in particular, address issues where the ICD-9-CM codes may need to be modified to provide the distinction between different levels of severity.

In situations where a new code is required, CMS should default to leaving the codes as CCs until new codes can be created.

Response: The process of evaluating both claims data and clinical issues is a challenging one. Our medical advisors performed an extensive evaluation of codes for the MCC and CC lists, combining their medical judgment and claims data. We have reviewed a number of specific codes raised by

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commenters and considered whether or not the codes should be a MCC or CC. These numerous code requests are discussed below. Also, as mentioned earlier, we plan to post the data we used to evaluate each code on the CMS Web site. These data may assist the public in making recommendations for additional changes to the MCC and CC lists. Any revisions made to the MS-DRGs or the MCC and CC lists are being made available with this final rule with comment period. As suggested by the commenter, we plan to evaluate further refinements to the MCC and CC lists each year as we obtain additional recommendations and data under the MS-DRG system.

Comment: One commenter acknowledged the significant effort and consideration CMS has given to developing both the mathematical and clinical judgment criteria in determining severity classifications. However, the commenter did not believe it was possible to fully assess the assignment of diagnosis codes in the severity classification because there was an incomplete description of the process in the proposed rule.

Response: As stated earlier, we plan to post on the CMS Web site the data used in analyzing how to classify each ICD-9-CM code as an MCC, CC, or non-CC. Our process for making CC/MCC decisions was an iterative one involving data review and clinical analysis. In the FY 2008 IPPS proposed rule (72 FR 24702 through 24705), we explained in detail our methodology for determining whether a secondary diagnosis qualified as an MCC, CC, or non-CC. Although posting these data results on the CMS Web site may be helpful in illustrating for commenters the data we used in classifying conditions as MCCs, CCs or non-CCs, we note that these data were combined with clinical judgment to make the final determinations. That is, the data were used as an adjunct to the judgment of our medical advisors. Clinical judgment may differ by individual physician. Thus, the data alone may be helpful but not definitive in helping commenters understand the reasons for some of our decisions. Nevertheless, we welcome further public input on potential revisions to the MCC and CC lists for FY 2009. We anticipate making updates to the MCC and CC lists each year as we receive additional recommendations and data. Again, below we respond to comments about specific codes.

Comment: One commenter commended CMS for undertaking a long-overdue comprehensive review and revision of the CC list. However, the commenter stated that more industry input is needed regarding the revised CC and MCC designations in the MS-DRG system. The commenter stated that the brevity of the public comment period, in combination with insufficient detail associated with the process and rationale for categorization of diagnoses as MCCs, CCs, and non-CCs, made it very difficult to conduct a thorough analysis of all of the codes on the MCC and CC lists. Another commenter stated that its members have only had an opportunity to do a cursory comparison of the current CMS CC list to the MS-DRG MCC and CC lists. The commenter stated that it should have the ability to do a complete analysis prior to implementation. The commenter believed such a review would be time intensive and likely to take a number of months of information exchange before it could be completed. Although the commenter acknowledged that the MCC and CC lists were included in the Federal Register notice and posted on the CMS Web site, the commenter believed the review was hampered by a lack of GROUPER software and a GROUPER Definitions Manual from being able to complete their review. The commenter also expressed concern that the analysis of secondary diagnoses was based on charges instead of costs. The commenter stated that if CMS' intent is to convert to a cost-based structure, a determination of the impact of secondary diagnoses should not be based on charges. The commenter added that this analysis appeared to be inconsistent with the evolution to a cost-based DRG weight system.

Response: We recognize the extensive time that is required by the public in order to perform a review of the MCC and CC lists. However, we note that a DRG Definitions Manual and GROUPER have never been made available until after completion of the final rule in past years and public commenters never before suggested that we need to delay implementation of proposed changes to the IPPS. While we acknowledge that the changes proposed for FY 2008 are significantly more comprehensive than the changes we propose in a typical year, the base DRG assignments under the MS-DRGs are largely unchanged from the prior CMS DRGs. The major changes result from assignment of a case to a DRG severity level using the new classification of secondary diagnoses as MCCs, CCs or non-CCs. For this reason, we made extensive information available to allow public commenters to perform a variety of analyses. The proposed rule included comprehensive lists of the codes that we classified as MCCs and CCs, and we made this information available electronically on the CMS Web site. The FY 2006 MedPAR data that were used to simulate proposed rule policies were made available simultaneous with public display of the FY 2008 proposed rule. This data file included both the CMS DRG assigned to the case using the Version 24.0 GROUPER and the proposed MS-DRG assignment. Further, we provided--at no extra cost to the purchaser--an FY 2005 version of the MedPAR that also included the CMS and MS-DRG assignment at the case level. For these reasons, we do not believe the lack of availability of a GROUPER or a DRG Definitions Manual should have precluded commenters from being able to analyze the revised MCC and CC lists. In fact, we note that a number of public commenters did provide suggestions for further revisions to these lists, suggesting there was ample time to be able to do these analyses.

We have considered the suggestion that we analyze changes to the MCC and CC lists using average costs instead of charges. We adopted a cost-based weighting methodology because of our concern that differential markups among routine and ancillary services made charges a poor proxy for costs when setting relative weights for dissimilar types of cases. That is, different types of cases would use very different mixes of routine and ancillary services with variable markups and could create distortions in relative weights that are based on charges. However, we are less concerned about using charges when comparing cases that share the same primary diagnosis, which are likely to use similar mixes of services when deciding whether to make a DRG change. In these cases, we believe charges may provide a reasonable proxy for costs because the cases use similar services with similar markups.

The methodology that we use to develop cost-based weights is very complex and works well to give us a measure of relative average resource use when combining a high number of cases together in a single DRG. We would need to analyze whether a methodology that tries to determine average costs at the case or code level would provide reliable results for making decisions about MCCs and CCs or DRG changes. Nevertheless, we appreciate this comment and will continue to give it further consideration as we evaluate alternative approaches to updating the MCC and CC lists and the MS-DRGs in the future.

Comment: One commenter stated that CMS should address the inconsistencies

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within the CC list identified by its physician and hospital reviewers. The commenter also recommended that, where necessary, CMS should obtain additional input from physicians in the appropriate specialties to determine the standard of care and consequent increased hospital resource use of some of the conditions. The commenter provided a list of conditions that were removed from the revised CC list and urged CMS to maintain them on the CC list.

Response: We agree that the review of codes for the MCC and CC list was a daunting task requiring careful review by our panel of medical advisors. We used a number of physicians in this process, including internists and surgeons, to evaluate the effect of specific codes on a patient's severity levels. When necessary, our panel contacted other medical specialists, such as orthopedists and oncologists, to obtain additional input. We appreciate the CC issues brought to our attention. We reexamined specific codes brought to our attention below. We expect that we will continue to revise and update both the CC list and MCC list as we gain experience and data under the MS-DRG system. We anticipate making additional changes in the future with this added information.

Comment: One commenter stated that, in some cases, the current ICD- 9-CM classification system does not adequately distinguish between acute and chronic forms of a condition. In the MS-DRG system, this distinction appears to be critical in predicting resources utilized at the patient level. The commenter recommended that CMS work with the NCHS to make ICD-9-CM code modifications to improve this acute and chronic distinction. Additionally, the commenter suggested that CMS and HHS should take immediate steps for the adoption of ICD-10-CM, as this system is much better than ICD-9-CM at distinguishing clinical severity, which is a key aspect of any severity-adjusted DRG system. The commenter believed that continued use of ICD-9-CM severely limits the ability of a severity-adjusted DRG system to recognize severity of illness.

Response: We encourage anyone with specific recommendations for revisions to the ICD-9-CM diagnosis codes to contact Donna Pickett, National Center for Health Statistics, Centers for Disease Control and Prevention at: (301) 458-4434. Information on requesting changes to the ICD-9-CM diagnosis codes can be found on the Web site at: http://www.cdc.gov/nchs/icd9.htm. The Department is continuing to evaluate

whether to move to ICD-10.

Comment: One comment disagreed with CMS' elimination of many chronic conditions from the CC list. The commenter stated that patient care resources are utilized to prevent acute exacerbation of a chronic condition. The commenter believed that to not include these conditions on a CC list is a major flaw in the logic. The commenter supported inclusion of chronic conditions on the CC list as means to recognize the resources utilized to manage these conditions effectively, whether they are currently in an acute phase. The commenter did not mention specific chronic conditions that should be added to the MCC and CC lists.

Response: We address comments on specific conditions below. However, as a general matter, we found the Medicare data do not generally support that chronic or ``unspecified'' conditions are more resource intensive than conditions with an acute manifestation of a chronic disease that are described by specific codes. After carefully considering this issue, our medical advisors agreed that unspecified or chronic conditions generally are not suggestive of a higher level of severity of illness in and of themselves when there are more specific codes available to further describe the patient's specific condition or an acute manifestation of a chronic disease. We note that unspecified and chronic conditions are very commonly found in the Medicare patient population. The purpose of the MS-DRGs is to identify those conditions that lead to higher severity of illness and resource use relative to the average Medicare patient. These conditions suggest average or less than average resource use across the entire Medicare population. If we were to classify chronic and unspecified conditions as MCCs and CCs, the MS-DRGs ability to better recognize severity of illness would be significantly diminished.

Condition-Specific Comments

We received a number of recommendations of codes to be added to the CC list and the MCC list. We have divided these recommendations into three general categories and will address them accordingly. The three categories are:

Nonspecific codes

Symptoms, chronic conditions, and low severity conditions

High severity codes that were erroneously left off of the CC or MCC list.

The first category of recommendations includes a number of codes that are nonspecific. For instance, one frequent recommendation for addition to the CC list is the nonspecific code 428.0 (Congestive heart failure, unspecified). This code is one of several codes that identify patients who have heart failure. Depending on the degree of certainty by the physician of the exact nature of the heart failure, a code can be assigned to indicate a very specific and acute form of heart failure, or a more general, nonspecific code can be assigned to represent a patient with heart failure, but the exact nature of the heart failure is unknown. Other nonspecific conditions include disorders of a heart valve. If the exact nature of the disorder of a heart valve is known, a specific code can be assigned. If the exact nature or degree of the disorder of the valve is not known, a more general, nonspecific code can be assigned. As discussed earlier in this final rule with comment period, our claims data and the clinical analysis of our medical advisors indicate that patients described by the more general, nonspecific codes are not at a higher severity level. If a patient's condition worsens and develops additional diagnoses or complications, these more specific conditions may be on the CC list or MCC list. The most frequently mentioned, nonspecific code by commenters was code 428.0. Therefore, we will provide a detailed summary of these comments and our response. There were a number of other nonspecific conditions suggested for additions to the CC list. We will address these conditions after summarizing the comments on congestive heart failure.

The second category includes a variety of codes representing symptoms, chronic conditions, and other conditions that do not describe a high level of severity. These conditions do not themselves indicate a high severity level using our mathematical analysis of the claims data combined with the clinical analysis by our medical advisors. As stated earlier, we did not include most chronic conditions on the CC list or the MCC list unless the code also indicates an acute exacerbation that would raise the severity level. If a patient has a chronic condition that deteriorates or develops into an acute complication, the more acute condition or complication may be on the CC list or the MCC list.

The third category of codes includes codes that commenters suggested should have been included on the CC list or the MCC list because they clearly describe a high level of severity. Upon further review, we agree that this third group of codes meet the criteria for being included on the CC list or MCC list. The claims data and our medical advisors' clinical analysis clearly support the addition of these codes to the CC list or the MCC list.

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(a) Codes Representing Nonspecific Conditions

Congestive Heart Failure--Code 428.0

Comment: One commenter endorsed the implementation of the revised CC list. The commenter stated that CMS used new criteria for refining the CC and MCC lists, which led to the removal of codes currently on the CC list. The commenter compared the old and revised CC lists and found that the revision added 2,002 codes and dropped 425 codes, for a net increase of 1,577 codes. The commenter stated that, even though the number of added codes far exceeds the number of dropped codes, in the last three MedPAR files, the dropped codes were used an average of 40,864 times, while the added codes were used an average of only 887 times. The commenter stated that many of the dropped codes pertain to unspecified conditions for which more specific codes are available and included on the revised CC list. The highest volume code, code 428.0, was applied to an average of 2.3 million Medicare fee-for-service cases a year during the past 3 years. This code is the most widely used secondary diagnosis code, despite the fact that 12 more specific codes were added in FY 2003. The additional codes are shown in the Table L below.

Table L.--Incidence of Secondary Diagnosis Coding for Heart Failure FY 2004-FY 2006

New in ICD-9-CM code

Description

FY 2003

428.0............................. Congestive heart failure, unspecified. 428.1............................. Left heart failure....... 428.20............................ Systolic heart failure;

x unspecified. 428.21............................ Systolic heart failure;

x acute. 428.22............................ Systolic heart failure;

x chronic. 428.23............................ Systolic heart failure;

x acute on chronic. 428.30............................ Diastolic heart failure;

x unspecified. 428.31............................ Diastolic heart failure;

x acute. 428.32............................ Diastolic heart failure;

x chronic. 428.33............................ Diastolic heart failure;

x acute on chronic. 428.40............................ Combined systolic and

x diastolic heart failure; unspecified. 428.41............................ Combined systolic and

x diastolic heart failure; acute. 428.42............................ Combined systolic and

x diastolic heart failure; chronic. 428.43............................ Combined systolic and

x diastolic heart failure; acute on chronic. 428.9............................. Heart failure, unspecified.

The commenter stated that, by making code 428.0 a non-CC, hospitals will react by coding more precisely using the more definitive heart failure codes, raising the CMI, which results in documentation and coding-related overpayments. The commenter argued that, if the revised CC list were implemented before hospitals had a chance to improve their coding to accommodate the revisions, ``case-mix creep and IPPS overpayments would ensure.''

Response: This commenter suggests reasons why Medicare should adopt the MS-DRGs over a transition period and does not appear to be opposed to our decision not to classify congestive heart failure as either an MCC or a CC. The commenter also suggests how hospitals will respond to the coding incentives that will be presented by revisions to the MCC and CC lists as well as the MS-DRGs. The issue of adopting the MS-DRGs over a transition is addressed in detail in section II.E. of the preamble of this final rule with comment period. We further address the implications of the coding incentives raised in this public comment in section II.D.6. of the preamble of this final rule with comment period that discusses an adjustment to IPPS rates for improvements in documentation and coding.

Comment: A number of other commenters urged CMS to classify the condition under code 428.0 as a CC. The commenters indicated that code 428.0 identifies an acute condition, not a benign or a chronic condition. Some commenters stated that any inpatient with congestive heart failure requires increased nursing care to closely monitor and assess physical symptoms and vital signs for indications of increased congestion. Patients often need to undergo repeated laboratory studies.

Another commenter stated that the proposed rule incorrectly characterized the diastolic and systolic heart failure codes as congestive heart failure. The commenter pointed out that according to the Fourth Quarter 2002 issue of Coding Clinic for ICD-9-CM, congestive heart failure is not an inherent component of the codes in category 428 for systolic and diastolic heart failure. Therefore, according to Coding Clinic, the commenter stated that code 428.0 should be assigned as an additional code when the patient has systolic or diastolic congestive heart failure. The commenter added that code 428.0 may appropriately be assigned by itself when congestive heart failure is documented, but there is no documentation of systolic or diastolic heart failure. The commenter stated that, in ICD-9-CM, there is no distinction between an acute exacerbation of congestive heart failure and chronic congestive heart failure. Code 428.0 is assigned for both. The commenter added that codes 402.11 (Benign hypertensive heart disease with congestive heart failure) and 402.91 (Unspecified hypertensive heart disease with congestive heart failure) are on the CC list. The commenter suggested that code 428.0 be included on the revised CC list as well.

Another commenter who objected to the removal of code 428.0 from the CC list stated that, currently, ICD-9-CM codes do not distinguish between acute, chronic, or acute exacerbation of chronic congestive heart failure. All forms of this condition are assigned to code 428.0. The commenter indicated that medical record documentation may not typically include information on whether the congestive heart failure is systolic or diastolic (acute versions of heart failure with this specificity are considered MCCs). The commenter requested that code 428.0 be added as an MCC until a new code can be created to identify acute exacerbation of congestive heart failure. The commenter stated that the fact that there is ``congestion'' is medically more problematic and more resource intensive and may necessitate care in the intensive care unit and a prolonged

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hospital stay. The commenter stated that coding guidelines necessitate that acute pulmonary edema of cardiac origin be assigned code 428.0.

Response: Given the number of public comments on this one condition, our medical advisors reviewed the data and clinical issues surrounding code 428.0 again. They strongly recommend that we not change this code to a CC. There are three reasons for this recommendation. First, as stated earlier, we developed a policy of classifying nonspecific codes as non-CCs when a more specific code was available that identified the more specific nature of the patient's illness. Second, data for this and other nonspecific codes do not support assigning it to a higher severity level. Third, in the clinical judgment of our medical advisors, the use of a nonspecific code means that the physician had not identified a medical condition that indicates the patient is at a higher severity level or requires greater resources. This code is vague and does not provide any description of the exact nature of the heart failure. Data for this very commonly reported code clearly indicate that these patients are at a low severity level. However, claims data and our general policy of assigning nonspecific codes to a lower severity level were not the only factors that we used to classify a code as an MCC, CC, or non-CC. As stated above, the data were only used as an adjunct to the judgment of our medical advisors. In the judgment of our medical advisors, the condition described by code 428.0 does not suggest an increase in patient severity of illness. In this case, 12 more specific codes are available to indicate the more severe forms of heart failure. If the physician includes more precise information in the medical record that would allow the coder to identify a more specific code to describe the type of heart failure, the documentation will reflect that the hospital treated a more severely ill patient and the case will be assigned to a higher severity level.

While we decided to classify code 428.0 as a non-CC based on our policy concerning nonspecific codes, the data, and the judgment of our medical advisors, we note that heart failure is an important national health issue. We believe it is very important for hospitals and physicians to use the most specific codes that describe the incidence of heart failure in their patients. In order to accurately and completely evaluate health care outcomes for the treatment of heart failure, detailed and accurate information is needed on patients with this condition. Physicians and hospitals will undermine efforts to obtain more information on patients with this disease when they use a nonspecific code when there is a more detailed code to describe their patient. We highly encourage physicians and hospitals to work together to use the most specific codes that describe their patients'' conditions. Such an effort will not only result in more accurate payment by Medicare but will provide better information on the incidence of this disease in the Medicare patient population.

Comment: As stated earlier, a number of commenters requested CMS to add additional nonspecific codes to the CC list. These codes represent a variety of nonspecific conditions affecting multiple body systems. The commenters stated that the following nonspecific codes may increase the severity level for a patient, and should, therefore, be added to the CC list.

070.70, Unspecified viral hepatitis C

287.30, Primary thrombocytopenia, unspecified

287.5, Thrombocytopenia, unspecified

303.00, Acute alcohol intoxication, unspecified

345.90, Epilepsy, unspecified, without intractable epilepsy

403.90, Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage I through stage IV, or unspecified

424.0, Mitral valve disorders

424.1, Aortic valve disorders

426.13, Other second degree atrioventricular block

426.6, Other heart block

426.9, Conduction disorder, unspecified

447.6, Arteritis, unspecified

458.9, Hypotension, unspecified

451.2, Thrombophlebitis of lower extremities, unspecified

459.0, Hemorrhage, unspecified

585.5, Chronic kidney disease, unspecified

707.0, Decubitus ulcer, unspecified

780.39, Other convulsions

Response: As previously stated, we did not classify nonspecific codes to the MCC list or the CC list when more specific codes were available to identify the condition of the patient. In general, we found that the data did not support classifying unspecified codes as either MCCs or CCs. Further, after detailed discussions of potential clinical scenarios among our medical advisors, there was a consensus that a specified condition for the patient generally signals higher degree of severity of illness. If the physician was to diagnose additional information about the patient's condition or should the patient's condition worsen, a more precise code would be assigned that may be a CC or an MCC. As a result of these comments, our medical advisors again reviewed these codes and determined that their original decisions were correct. That is, they do not believe that these nonspecific codes should be classified as MCCs or CCs when more specific codes are available that provide more information about patient severity of illness. For these reasons, we are not adding the codes listed above to the CC list. (b) Symptoms, Chronic Conditions, and Low Severity Conditions

Comment: Commenters requested that we add a number of codes to the CC list that describe symptoms, chronic conditions, and low severity conditions. These conditions include the following codes:

070.54, Chronic viral hepatitis C

250.4x, Diabetes mellitus with renal manifestations

250.5x, Diabetes mellitus with ophthalmic manifestations

250.6x, Diabetes mellitus with neurological manifestations

250.7x, Diabetes mellitus with peripheral circulatory disorders

250.8x, Diabetes mellitus with other specified manifestations

263.0, Moderate Malnutrition

263.1, Mild malnutrition

276.51, Dehydration

276.52, Hypovolemia

276.6, Fluid overload

276.7, Hyperpotassemia

276.9, Electrolyte and fluid disorders

280.0, Iron deficiency anemias, secondary to blood loss (chronic)

284.8, Aplastic anemias, not elsewhere classified

287.39 Other primary thrombocytopenia

287.4 Secondary thrombocytopenia

303.01 Acute alcohol intoxication, continuous

303.02 Acute alcohol intoxication, episodic

306.00, Blindness

389.9, Deafness

413.9, Angina pectoris

427.31, Atrial fibrillation

428.1, Left heart failure (change from CC to MCC)

451.0, Thrombophlebitis of superficial vessels of lower extremities;

492.8, Other emphysema

496, Chronic airway obstruction, not elsewhere classified

585.3, Chronic kidney disease, stage III (moderate)

599.7, Hematuria

710.0, Systemic lupus erythematosus

731.3, Major osseous defects

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786.03, Apnea

788.20, Urinary retention

799.02, Hypoxemia

V45.1, Renal dialysis status

Response: As discussed earlier, we did not assign chronic conditions to the CC list or the MCC list. These conditions do not themselves indicate a high severity level using our mathematical analysis of the claims data combined with the clinical judgment by our medical advisors. As stated earlier, we did not include most chronic conditions on the CC list or the MCC list unless the code also indicates an acute exacerbation that would raise the severity level. If the chronic condition worsens and the patient develops an acute complication, the more specific code for the acute exacerbation would identify the increased level of severity of illness and, if warranted, would be on the CC or the MCC list. We also did not include general symptoms on the CC list because, alone, they do not suggest a high level of severity of illness. Codes identifying symptoms such as hematuria, apnea, or hypoxemia that are found in many patients may indicate a wide range of patient severity and describe a transient finding. Should the physician diagnose a more specific condition that led to the symptoms, more information about the patient and their severity of illness would be known. The specific diagnosis may indicate higher severity of illness and the code that describes it may be included on the CC list or the MCC list. We also did not include conditions on the CC list or the MCC list that do not generally raise the severity level of a patient. If the code describes patients who range from mild to severe, we believe it is best to use additional secondary diagnosis codes that would be reported to better describe the true nature of the patient's condition. These more precise codes may be on the CC list or the MCC list.

Our clinical advisors reviewed claims data and the clinical issues surrounding patients who had the symptoms, chronic diagnoses, and less severe conditions listed above. They recommend that we not add the codes listed above to the CC list because these conditions do not significantly increase a patient's severity of illness. Therefore, we are not adding the codes listed above to the CC list. (c) High Severity Codes That Were Erroneously Left Off of the CC List or the MCC List

As stated earlier, a number of commenters recommended the addition of codes to the CC list or the MCC list for conditions that the commenters stated clearly represented a high severity level. The commenters provided information on the degree to which these conditions are life threatening and require extensive amounts of resources. The commenters questioned why these conditions were left off of the CC and MCC lists. Commenters recommended the removal of two codes from the CC list because the commenters believed they do not increase the patient's severity level or lead to more resource use. We discuss these conditions below.

Comment: Commenters requested that we add the following five codes to the CC list. The commenters stated that these conditions clearly increase the severity level and lead to more resource use.

285.1, Acute posthemorrhagic anemia

403.91, Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage V or end stage renal disease

426.53, Other bilateral bundle branch block

426.54, Trifascicular block

451.11, Phlebitis and thrombophlebitis, femoral vein (deep) (superficial)

Response: We agree with the commenters that the five codes listed above should have been included on the CC list. Upon further review of our data and discussions among our medical advisors, there was consensus that these codes describe patients with a higher severity level. Therefore, we are adding them to the CC list.

Comment: Commenters requested that we remove the following two codes from the CC list and make them non-CCs. The commenters indicated that there are more specific heart failure codes that would be assigned along with these codes that would indicate whether or not the patient had a severe form of heart failure. The commenters stated that these two codes do not indicate the exact nature of the heart failure and therefore should not be on the CC list.

402.11, Hypertensive heart disease, benign, with heart failure

402.91, Hypertensive heart disease, unspecified, with heart failure

Response: We agree with the commenters. Upon further review, we do not believe the codes meet the criteria to be considered CCs. The codes do not describe the exact nature of the heart failure. The more specific heart failure codes that would be reported along with these codes would be used to justify the assignment to a high severity level. Therefore, we are removing the two codes from the CC list.

Comment: Commenters requested that we add the following four codes to the MCC list. The commenters indicated that these four codes describe patients at the highest level of severity. Patients with these conditions would use an extensive amount of resources. Furthermore, the commenters added, codes that describe similar conditions are currently on the MCC list. The commenters believed these codes were erroneously excluded from the MCC list.

282.69, Other sickle-cell disease with crisis

345.2, Petit mal status

345.71, Epilepsia partialis continua, with intractable epilepsy

780.01, Coma

Response: We agree that we made an error in excluding these four codes from the MCC list. Therefore, we are adding the four codes to the MCC list. We provide a summary of all the additions and deletions to the CC list and the MCC list at the end of this section. Additional Comments on CC List

We received several additional comments concerning the CC and MCC lists which we summarize below. Some of the comments involved the commenter's confusion about our proposed CC and MCC lists. Others involved a disagreement with our proposal of not making significant changes to the DRGs to better distinguish severity of illness in pregnancies and newborns, even though they are not a significant part of the Medicare population. We also received recommendations for alternative ways to classify conditions as CCs that do not meet our current criteria. In addition, we received comments on our proposal of not classifying specific conditions as a CC/MCC when the patient dies. We discuss these issues below.

Other Myelopathy--Code 336.8

Comment: One commenter requested that we add code 336.8 (Other myelopathy) to the CC list.

Response: Code 336.8 is already on the CC list. Therefore, we are not making any further change for code 336.8.

Ascites--Code 789.5

Comment: One commenter requested that we add the code 789.5 (Ascites) to the CC list

Response: We note that code 789.5 is being deleted as of October 1, 2007, when two new codes are being created, code 789.51 (Malignant ascites) and code 789.59 (Other ascites). Both of these new codes are on the CC list. Therefore no additional change is required for ascites.

Aplastic Anemias, Not Elsewhere Classified--Code 284.8

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Comment: One commenter objected to the removal of code 284.8 (Aplastic anemias, not elsewhere classified (NEC)) from the CC list.

Response: Code 284.8 was placed on the MCC list. Thus, while it is not classified as a CC as the comment suggested, it is an MCC. We are maintaining code 284.8 on the MCC list, as we agree that this is a condition that places a patient at a high severity level.

Complications of Pregnancy, Childbirth and Puerperium-- Codes 630 through 677

Comment: One commenter objected to the removal of codes from category 630 through 677 (Complications of pregnancy, childbirth and puerperium) of the CC list. The commenter was concerned about the number and wide breadth of codes from Chapter 11 of the ICD-9-CM, Complications of pregnancy, childbirth and puerperium (categories 630- 677), that are being removed from the CC list . The commenter acknowledged CMS'' position that, due to the low volume in the Medicare population, diagnoses related to newborns, maternity and congenital anomalies codes in this section were not reviewed. Of special concern to the commenter were conditions such as infections, acute renal failure, air and pulmonary embolism, cardiac arrest, shock, among others, that are MCCs or CCs and would be coded as such if not for the fact that the ICD-9-CM classification considers problems associated with pregnancy, childbirth and the puerperium to be so clinically significant that they require special combination codes. The combination codes are intended to identify that the presence of the pregnancy complicates the condition. For example, code 415.19 (Other pulmonary embolism and infarction) is an MCC, while code 673.20 (Obstetrical blood-clot embolism, unspecified) is not even a CC.

The commenter recommended that codes in Chapter 11 be carefully evaluated and validated with clinical experts, similar to the process to which the codes in other chapters were submitted. The commenter believed that combination codes should be treated consistently. If the condition is considered a CC or MCC in a nonpregnant patient, the corresponding pregnancy-related combination code also should be a CC or MCC.

Response: As we stated in our proposed rule and elsewhere in this final rule with comment period, we focused our attention in developing the MS-DRGs for the Medicare population. We did not conduct a detailed review of Chapter 11 codes. We encourage other payers who want to use MS-DRG to update the system for their own population. Diagnoses related to newborns, maternity, and congenital anomalies are very low volume in the Medicare population and were not reviewed for purposes of creating the MCC and CC lists. We used the APR DRGs to categorize these diagnoses. This DRG system is used for the all payer ratesetting system in Maryland and will be based on data that better reflects the newborn and maternity population than Medicare. For newborn, obstetric, and congenital anomaly diagnosis, we classified severity level 3 (major) and 4 (extreme) diagnoses as an MCC. We designated default severity level 2 (moderate) diagnoses as a CC and all other diagnoses as a non- CC. We encourage the commenter to review the MCC and CC lists in on the CMS Web site. Many codes in the 630 to 677 range appear on the MCC list.

Extreme Immaturity--Code 765.0

Comment: One commenter objected to codes in category 765.0 (Extreme immaturity) not being classified as CCs. The commenter stated that codes in category 765.0 represent infants with a birth weight of less than 1000 gm. The commenter indicated that common problems with very low birthweight babies are low oxygen levels at birth; inability to maintain body temperature; difficulty feeding and gaining weight; infection; breathing problems, such as respiratory distress syndrome; neurological problems, such as intraventricular hemorrhage; gastrointestinal problems, such as necrotizing enterocolitis; and sudden infant death syndrome (SIDS). The commenter stated that while some of these problems have unique ICD-9-CM codes that could be reported, not all of them do (for example, inability to maintain body temperature).

Response: While we appreciate the commenter's concern about the CC classifications for newborns, we state again that we did not examine these newborn codes as part of our development of the MS-DRGs. We focused our efforts on the Medicare population and used the APR DRG classification for newborn diagnoses for Medicare. If the APR DRG classification of this condition were to change, we would also adopt the same designation for Medicare.

Exclusion of MCCs and CC When a Patient Dies

Comment: Several commenters addressed codes that represent diagnoses associated with patient mortality. The commenter indicated that, in the proposed rule, CMS noted that diagnoses that were closely associated with patient mortality were assigned different CC subclasses, depending on whether the patient lived or died.

These diagnoses are:

427.41, Ventricular fibrillation;

427.5, Cardiac arrest;

785.51, Cardiogenic shock;

785.59, Other shock without mention of trauma; and

799.1, Respiratory arrest.

The commenters agreed that these diagnoses should be considered MCCs for patients who are discharged alive. However, the commenters disagree with CMS'' proposal to make these diagnoses non-CCs when a patient dies. The commenters urged CMS to consider the patient's length of stay or other factors when these codes are reported and count them as an MCC when a patient dies during the admission. The commenters agreed that a patient who expires soon after admission may not have significant resources associated with these conditions. However, the commenters believed that this is not true when a patient has been hospitalized longer, such as for a week.

Response: Our medical advisors examined this issue again and continue to believe it is not appropriate to classify a case as an MCC based on one of the codes above if the patient dies. While we understand the concern of the commenters, we do not believe that a long length of stay patient will necessarily lead to the conclusion that it is appropriate to code these conditions in a patient that dies in the hospital. It is a possible that a terminally ill patient with a long length of stay required no special resuscitation efforts that would suggest higher resource use associated with coding of these conditions. We are concerned that changing our policy to allow use of these codes for a patient that died in the hospital could lead to accurate and widespread coding of the conditions when they are not indicative of a higher patient resource costs. Therefore, we are continuing our policy of classifying the diagnoses listed above as MCCs only if the patient is discharged alive. We will evaluate alternative approaches such as looking at the length of stay and other factors for these patients and make future DRG revisions, as needed.

Selected Conditions in Joint Replacement Patients

Comment: One commenter asked that we classify certain codes as MCCs or CCs for patients having a joint replacement. The commenter specifically requested that the following codes be made either MCCs or CCs when occurring in a joint replacement patient:

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731.3, Major osseous defect

278.0, Obesity

278.01, Morbid obesity

V85.35, Body mass index 35.0-35.9, adult

V85.37, Body mass index 37.0-37.9, adult

Response: We do not believe that we should make further changes to the MS-DRG assignments based on combinations of selected diagnoses. These types of analyses could be done with virtually any MS-DRG and would add significant complexity to the DRG system that we do not believe is warranted at this time. Our medical advisors reviewed both the data and clinical issues surrounding these codes and determined that they would not significantly increase the severity level for Medicare patients on average across all patients. Therefore, they are not CCs. We are not changing these codes to CCs. They will remain non- CC for all cases.

The following table summarizes changes to the proposed MCC (Table 6J) and CC (Table 6K) lists published in the proposed rule. These changes are a result of review of comments and were discussed in detail above. A complete, updated CC and MCC list will be posted on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/ under Downloads.

We will continue to evaluate our criteria for the development of the CC and MCC list to determine if refinements to these criteria are needed. As we gain data and experience under MS-DRGs, we believe that there may be refinements to these criteria.

Changes to MCC and CC List as a Result of Comments

Add to CC list:

285.1.............................. Acute posthemorrhagic anemia.

403.91............................. Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage V or end stage renal disease.

426.53............................. Other bilateral bundle branch block.

426.54............................. Trifascicular block.

451.11............................. Phlebitis and thrombophlebitis, femoral vein (deep) (superficial). Remove from CC list:

345.2.............................. Petit mal status.

345.71............................. Epilepsia partialis continua, with intractable epilepsy.

402.11............................. Hypertensive heart disease, benign, with heart failure.

402.91............................. Hypertensive heart disease, unspecified, with heart failure.

780.01............................. Coma. Add to MCC list:

282.69............................. Other sickle-cell disease with crisis.

345.2.............................. Petit mal status.

345.71............................. Epilepsia partialis continua, with intractable epilepsy.

780.01............................. Coma. Remove from MCC list:

None...............................

3. Dividing MS-DRGs on the Basis of the CCs and MCCs

In developing the MS-DRGs, two of our major goals were to create DRGs that would more accurately reflect the severity of the cases assigned to them and to create groups that would have sufficient volume so that meaningful and stable payment weights could be developed. As noted above, we excluded the CMS DRGs in MDCs 14 and 15 from consideration because these DRGs are low volume. As stated previously, we do not have the expertise or data to maintain the CMS DRGs for newborns, pediatric, and maternity patients. We continue to maintain MDCs 14 and 15 without modification in order to have MS-DRGs available for these patients in the rare instance where there is a Medicare beneficiary admitted for maternity or newborn care.

In designating an MS-DRG as one that will be subdivided into subgroups based on the presence of a CC or MCC, we developed a set of criteria to facilitate our decision-making process. In order to warrant creation of a CC or major CC subgroup within a base MS-DRG, the subgroup had to meet all of the following five criteria:

A reduction in variance of charges of at least 3 percent.

At least 5 percent of the patients in the MS-DRG fall within the CC or MCC subgroup.

At least 500 cases are in the CC or MCC subgroup.

There is at least a 20-percent difference in average charges between subgroups.

There is a $4,000 difference in average charges between subgroups.

Our objective in developing these criteria was to create homogeneous subgroups that are significantly different from one another in terms of resource use, that have enough volume to be meaningful, and that improve our ability to explain variance in resource use. These criteria are essentially the same criteria we used in our 1994 severity analysis. In developing the MS-DRGs, we continued to apply our longstanding policy that each DRG should contain patients who are similar from a clinical perspective.

To begin our analysis, we subdivided each of the base MS-DRGs into three subgroups: non-CC, CC, and MCC. Each subgroup was then analyzed in relation to the other two subgroups using the volume, charge, and reduction in variance criteria. The criteria were applied in the following hierarchical manner:

If a three-way subdivision met the criteria, we subdivided the base MS-DRG into three CC subgroups.

If only one type of two-way subdivisions met the criteria, we subdivided the base MS-DRG into two CC subgroups based on the type of two-way subdivision that met the criteria.

If both types of two-way subdivisions met the criteria, we subdivided the base MS- DRG into two CC subgroups based on the type of two-way subdivision with the highest R\2\ (most explanatory power to explain the difference in average charges).

Otherwise, we did not subdivide the base MS-DRG into CC subgroups.

For any given base MS-DRG, our evaluation in some cases showed that a subdivision between a non-CC and a combined CC/MCC subgroup was all that was warranted (that is, there was not a great enough difference between the CC and MCC subgroups to justify separate CC and MCC subgroups). Conversely, in some cases, even though an MCC subgroup was warranted, there was not a sufficient difference between the non-CC and CC subgroups to justify separate non-CC and CC subgroups.

Based on this methodology, a base MS-DRG may be subdivided according to the following three alternatives, rather than the current ``with CC'' and ``without CC'' division.

DRGs with three subgroups (MCC, CC, and non-CC).

DRGs with two subgroups consisting of an MCC subgroup but with the CC and non-CC subgroups combined. We refer to these groups as ``with MCC'' and ``without MCC.''

DRGs with two subgroups consisting of a non-CC subgroup but with the CC and MCC subgroups combined. We refer to these two groups as ``with CC/MCC'' and ``without CC/MCC.''

As a result of the application of these criteria, 745 MS-DRGs were created as shown in the following table.

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Table M.--Number of CC Subgroups

Number of Subgroups

base MS- Number of DRGs MS-DRGs

No subgroups..................................

53

53 Three subgroups...............................

152

456 Two subgroups: CC and major CC; non-CC........

43

86 Two subgroups: non-CC and CC; major CC........

63

126

Subtotal..................................

311

721

MDC 14........................................

22

22 Error DRGs....................................

2

2

Total.................................

335

745

The 745 MS-DRGs represent an increase over the 652 DRGs we proposed in our 1994 CC revision analysis. The increase in the number of DRGs is primarily the result of an increase in the number of proposed base MS- DRGs that are subdivided into three CC subgroups. The distribution of patients across the different types of CC subdivisions is contained in Table N below. The table shows that 51.7 percent of the patients are assigned to base MS-DRGs with three CC subgroups, and only 11.8 percent of the patients are assigned to base MS-DRGs with no CC subgroups.

Table N.--Distribution of Patients by Type of CC Subdivision

CC subdivision

Count Percent

None.......................................... 1,382,810

11.8 (MCC and CC), Non-CC.......................... 629,639

5.4 MCC, (CC and Non-CC).......................... 3,650,321

31.2 MCC, CC, and Non-CC........................... 6,054,081

51.7

Using Medicare charge data (without applying any criteria to remove statistical outlier cases), the reduction in variance (R\2\) was computed for current CMS DRGs, the MS-DRGs with all 311 base MS-DRGs subdivided into 3 CC subgroups, and the MS-DRGs collapsed into 745 DRGs. Table O below shows that the R\2\ for the MS-DRGs with all 311 base MS-DRGs subdivided into 3 CC subgroups (957 DRGs composed of 311 base MS-DRGs subdivided into 3 CC subgroups plus an additional 22 MDC 14 and MDC 15 DRGs as well as 2 error DRGs) is 10.62 percent higher than the current CMS DRGs. Collapsing the 957 MS-DRGs down to 745 MS- DRGs lowers this increase in R\2\ slightly to 9.41 percent. Although adopting a 3-way split for each base MS-DRG would produce a DRG system with higher explanatory power, the 957 MS-DRGs would not meet the criteria we specified above for subdividing each base DRG. The criteria we specified above would create a monotonic DRG system. We believe that the value of having a monotonic DRG system outweighs the slight decrease in explanatory power. For this reason, we proposed to adopt the 745 MS-DRGs.

Table O.--Explanatory Power (R\2\) for MS-DRGs

Percent R\2\ change

Current CMS DRG................................... 36.19 ......... 2007 CMS Severity DRGs with 3 CC Subgroups........ 40.03 10.62 2007 CMS Severity DRGs Collapsed to 714 DRGs...... 39.59 9.41

Comment: One commenter supported our five criteria for establishing severity subgroups. The commenter believed the use of specific quantitative criteria to determine how specific base DRGs are divided into terminal categories that reflect severity levels is logical and designed to ensure that only substantively important differences in resource requirements are recognized by the MS-DRG system. The commenter did note that CMS had not explicitly included statistical significance in these criteria and urged CMS to consider CC or MCC splits only when they meet minimal standards of both size and statistical significance.

Response: We appreciate the commenter's support for our five criteria for establishing severity subgroups. We will consider the commenter's other suggestion as we make further refinements to the MS- DRGs.

Comment: One commenter disagreed with our five criteria for establishing severity subgroups. The commenter stated that these criteria are too restrictive, lack face validity, and create perverse admission selection incentives for hospitals by significantly overpaying for cases without a CC and underpaying for cases with a CC. The commenter recommended that the existing five criteria be modified for low-volume subgroups to assure materiality. For higher volume MS- DRG subgroups, they recommended that two other criteria be considered, particularly for nonemergency, elective admissions. These two criteria are:

Is the per-case underpayment amount significant enough to affect admission vs. referral decisions on a case-by-case basis?

Is the total level of underpayments sufficient to encourage systematic admission vs. referral policies, procedures, and marketing strategies?

The commenters also recommended refining the five existing criteria for MCC/CC/without subgroups as follows:

Create subgroups if they meet the five existing criteria, with cost difference between subgroups ($1,350) substituted for charge difference between subgroups ($4,000).

If a proposed subgroup meets criteria 2 and 3 (at least 5 percent of discharges in the subgroup and at least 500 cases) but fails one of the others, create the subgroup if either of the following criteria is met:

--At least $1,000 cost difference per case between subgroups; or --At least $1,000,000 overall cost should be shifted to cases with a CC (or MCC) within the base DRG for payment weight calculations.

The commenter stated that this approach would affect DRGs where the total dollars under consideration may be quite high (for example, in the hundreds of millions), due to large numbers of procedures, but the percentage difference in average charges falls short of the 20 percent difference in average charges between subgroups.

Response: We disagree that the five criteria for establishing severity subgroups are too restrictive and will lead to overpayments for cases without a CC and underpay for cases with a CC. Relative to the current CMS DRGs, the statistical data above suggest that the construction of the MS-DRGs using these criteria will improve payment accuracy. The explanatory of the MS-DRGs to predict resource use is more than 9 percent greater than under the current CMS DRGs. Further, under the current CMS DRGs, nearly 78 percent of patients are in the highest severity level, while only 22.2 percent are in the

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highest severity level under the MS-DRGs. In addition to having a better distribution of cases among severity levels, the MS-DRGs have more significant difference in average charges over the different severity levels compared to the current CMS DRGs (72 FR 24706).

The commenter does not appear to disagree with these statistics suggesting that improvements will result from the MS-DRGs. Rather, the commenter is suggesting that we should create more subgroups with smaller differences in average charges (or costs). We do not believe the first two alternative criteria are practical or necessary to apply. They would require us to make subjective judgments about whether a hospital would treat patients or refer them elsewhere solely based on payment incentives. We do not believe it is possible or appropriate for us to make judgments about whether a hospital would decide to treat or not treat a patient based on how much they are paid. Further, with the exception of cardiac specialty hospitals, we have no evidence hospitals are selectively treating or avoiding particular types of patients because of incentives present in Medicare's IPPS payments. The reforms we are making are intended to pay hospitals more accurately for the patients they are already treating and avoid incentives for more specialty hospitals to form. Therefore, we do not believe it is practical or necessary to use the first two criteria suggested by the commenter.

With respect to the last criteria, we note that the MS-DRGs represent a significant expansion in the number of DRGs from 538 in FY 2007 to 745 in FY 2008. The commenter is suggesting that we create additional subgroups with less variation between the subgroups. Payments under a prospective payment system are predicated on averages. Thus, most individual cases within any DRG system will have costs that are either higher or lower than the average for that group. While creating groups that have lower differences in average charges or costs between the groups may lessen variation around the average and improve explanatory power, it will also create more low-volume groups and increase the likelihood that the relative weights will be nonmonotonic and have instability in their values from year to year. We believe the value of a lower number of DRGs outweighs the benefit we would obtain from a slight increase in R\2\ and the risk of having nonmonotonic DRGs that would come from adopting the commenter's suggestions. 4. Conclusion

We believe the MS-DRGs represent a substantial improvement over the current CMS DRGs in their ability to differentiate cases based on severity of illness and resource consumption. As developed, the MS-DRGs increase the number of DRGs by 207, while maintaining a reasonable patient volume in each DRG. The MS-DRGs increase the explanation of variance in hospital resource use relative to the current CMS DRGs by 9.41 percent. Further, the data shown below in Table P and Table Q illustrate how assignment of cases to different severity of illness subclasses improves in the MS-DRGs relative to the CMS DRGs.

Table P.--Overall Statistics for CMS DRGs

Average CC subclass--current CMS DRG

Percent charges

One or more CCs................................... 77.66 $24,538 Non-CC............................................ 22.34 14,795

Table Q.--Overall Statistics for MS-DRGs

Number of

Average CC subgroup

cases Percent charges

MCC.............................. 2,607,351

22.2 $44,219 CC............................... 4,298,362

36.6 24,115 Non-CC........................... 4,826,980

41.1 18,416

Under the current CMS DRGs, 78 percent of cases are assigned to the highest severity levels (CC) and the remaining 22 percent are assigned to the lowest severity level (non-CC). Applying the three severity subclasses to FY 2006 data would result in approximately 22 percent of patients being assigned to the severity subgroup with the highest level of severity (MCC), 41 percent being assigned to the lowest severity subclass (non-CC), and the remaining 37 percent being assigned to the middle severity subclass (CC). Adding the new MCC subgroup greatly enhances our ability to identify and pay hospitals for treating patients with high levels of severity. As Table Q above shows, the new subgroups also have significantly different resource requirements. The MCC subgroup contains patients with average charges almost twice as large as for those in the CC group ($44,219 compared to $24,115).

In addition to resulting in improvements in the DRG system's recognition of severity of illness, we believe the MS-DRGs are responsive to the public comments that were made on last year's IPPS proposed rule with respect to how we should undertake further DRG reform. In the FY 2007 IPPS final rule, we identified three major concerns in the public comments about our proposed adoption of CS DRGs:

We received comments after the FY 2007 IPPS final rule suggesting that further adjustments were needed to the proposed DRG system. The commenters believed that the CS DRGs did not incorporate many of the changes to the DRG assignments that have been made over the years to the CMS DRGs. There was significant interest in the public comments in either revising the CS DRGs to reflect these changes or using the CMS DRGs as the starting point to better recognize severity.

We believe that the MS-DRGs are responsive to these suggestions. The MS-DRGs use the CMS DRGs as the starting point for revising the DRGs to better recognize resource complexity and severity of illness. We are generally retaining all of the refinements and improvements that have been made to the base DRGs over the years that recognize the significant advancements in medical technology and changes to medical practice. At the same time, the MS-DRGs greatly improve our ability to identify groups of patients with varying levels of severity. They retain all of the improvements made to the DRGs over the years, while providing a more equitable basis for hospital payment.

We received many comments on the FY 2007 IPPS rule about the potential use of a proprietary DRG system. The comments about the CS DRGs raised compelling issues about the potential government use of a proprietary system, including concerns about the availability, price, and transparency of the source code, logic and documentation of the DRG system. The commenters noted that CMS makes available these resources in the public

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domain for purchase through the National Technical Information Service at nominal fees to cover costs. The commenters urged CMS not to adopt a proprietary DRG system that would not be available on the same terms as the current CMS DRGs.

There are no proprietary issues associated with the MS-DRGs. The MS-DRGs will be available on the same terms as the current CMS DRGs through the National Technical Information Service.

We also received other comments on the FY 2007 IPPS rule concerning the use of CS DRGs. The commenters stated that no alternatives to CS DRGs had been evaluated. The commenters suggested that alternative DRG systems can better recognize severity than the CS DRGs and should be evaluated before CMS decides which system to adopt. In response to these concerns, we contracted with RAND Corporation to evaluate several alternative DRG systems, including the MS-DRGs that we proposed and are finalizing in this final rule with comment period for FY 2008.

As indicated above, we believe the MS-DRGs offer significant improvements to the DRG system without many of the liabilities the public commenters on the FY 2007 IPPS rule identified with the CS DRGs. Thus, we believe the MS-DRGs offer significant improvements in recognition of severity of illness and complexity of resources and are adopting them for FY 2008.

Comment: Many commenters supported the MS-DRGs. One commenter stated that ``your proposal showcases the best of CMS, evidenced, for example, by an elegant and reasonable framework for severity-adjusted DRGs.'' Another commenter stated that it was ``about time that Medicare adopted a DRG system that allows for more equitable reimbursement for cases of severe illness with high risk of death or significant morbidity.'' Other commenters stated that it was very apparent that CMS dedicated an extensive amount of thought, planning, and resources toward the development of the MS DRGs, and that the system appears to be a very reasonable approach toward stratifying the patient grouping system more distinctly based on the severity of the patient's illness.

Many commenters found the MS-DRGs to represent a reasonable approach to DRG refinement, stating they are, in principle, a positive advancement and will create a more equitable and accurate payment system. Other commenters stated that the MS DRGs are an effective method for incorporating greater refinements to reflect variations in patient severity. Other commenters stated that hospitals providing services to more complex patients should be paid in a manner that reflects the nature of that care. These commenters stated that they do not want to see a payment system that rewards hospital inefficiency and it is reasonable that Medicare reimbursement policy assures that services are appropriately compensated. Other commenters stated that, over time, some DRGs have become more profitable than others. The commenters stated that making adjustments in rates helps to restore balance to the entire hospital inpatient payment system. These commenters endorsed CMS' efforts to achieve these goals through the adoption of the MS-DRGs.

Other commenters expressed their appreciation for CMS' recognition and consideration of issues raised in the public comments on last year's proposal to adopt CS DRGs. The commenters indicated that CMS took account of the public comments in crafting this year's MS-DRG proposal. The commenter applauded CMS for addressing many concerns that were expressed regarding CS DRGs. One of these commenters stated that MS-DRGs are significantly superior to the CS DRGs that were proposed last year. One commenter indicated that it had asked CMS to do the following when considering adoption of a new DRG system:

Show evidence that the alternative resulted in an improved hospital payment system compared to the existing DRG system;

Test the degree to which the variation in costs within cases at the DRG level is reduced;

Consider whether there were easier ways to adjust for severity similar to the differentiation of patients in FY 2006 based on the absence or existence of a major cardiovascular diagnosis;

Maintain the improvements made to differentiate cases based on complexity in the existing system; and

Avoid creating a system that is proprietary and lacks transparency.

The commenter indicated that CMS made a concerted effort to develop a system that incorporates all of these goals and indicated their support for these meaningful improvements to the IPPS. Like this commenter, several other commenters were also in agreement that the proposed DRG system should not be proprietary to avoid limiting public access to the system. Another commenter who expressed appreciation for CMS' responsiveness to issues raised in last year's IPPS rule indicated that the MS-DRGs are logical, transparent, and nonproprietary, which well suits the needs of the health care community. Other commenters also expressed support for CMS' decision to make the MS-DRGs nonproprietary, open, and accessible, and available on the same terms as the current DRGs.

Another commenter stated that it had decades of experience doing work with DRG systems and believe that there has been a need for a severity adjustment mechanism in the CMS DRGs to facilitate more accurate payment under the IPPS. In its view, the MS-DRG methodology is an appropriate mechanism to add severity adjustments to IPPS for FY 2008. According to the commenter, the MS-DRGs' advantages include:

They are based on the current CMS DRGs, whose technical features, data structures, and program algorithms have been fine-tuned over the years to accommodate the insertion and deletion of DRGs, changes in code/criteria lists, changes to CC and CC exclusion lists, changes in hierarchy, addition or deletion of DRG criteria, among others.

Additional severity adjustments will not require substantial modifications to this basic, extensible, and highly efficient architecture. The architecture will facilitate the addition of new categories necessitated by the introduction of new technologies or the application of the methodology to non-Medicare populations.

The commenter recommended that CMS plan for a more flexible, four- character nomenclature in the severity DRG system as soon as reasonably possible. The commenter noted that all commercially available severity- adjusted DRG systems have adopted a nomenclature that employs an initial 3-digit base DRG designation followed by a 1-digit severity score. This approach is far more flexible and transparent. More importantly, the approach lends itself more readily to the addition of new base DRGs and the evolution of more granular severity-adjustment.

Many commenters were supportive of the MS-DRGs because they were derived from the existing system and, therefore, preserve the numerous policy decisions made over the years and embodied in the CMS DRGs. These commenters appreciated that severity stratifications were created from the existing base DRGs with the result of redistribution within, rather than across, the DRGs. Commenters also stated that the MS-DRGs provide CMS with the flexibility of making DRG reassignments within a base MS-DRG by moving more complex services up a severity level. Other commenters stated that the MS-

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DRG system does a better job than last year's proposed CS DRGs or the current CMS DRGs of reflecting advancements in medical technology and other improvements in medical care.

Some commenters stated that, with the development and proposal of MS-DRGs, they saw little reason for CMS to continue assessing and considering alternative patient classification systems in the foreseeable future. These commenters stated that the MS-DRG system is more transparent, accessible, and understandable than the alternative systems being evaluated by RAND.

Some commenters stated that the MS-DRGs provide more accurate grouping for severity of illness while retaining the CMS-DRG refinements to account for more accurate payment of resource utilization. However, these commenters recommended that the implementation of MS-DRGs be delayed for one year to wait for the final RAND report and the availability of a GROUPER. One commenter stated that the MS-DRGs are an excellent attempt to define severity of illness based on DRGs for the Medicare population but urged us not to implement them in FY 2008 unless it is deemed to be the final system adopted from the ones being studied by RAND. Several commenters stated that hospitals will undergo enormous costs to ``educationally gear up'' for the MS-DRGs. The commenter stated that the hospital community must expend educational dollars in its attempt to improve coding to optimize each case's DRG assignment. These comments were concerned about the burden and expense that would be imposed on hospitals from adopting one significant DRG reform this year and another one next year. A number of other similar comments urged CMS not to move to MS-DRGs if it plans to implement another new severity system in FY 2009.

Response: We appreciate the support for MS-DRGs. We agree that, building on the current DRG system, we have maintained the best aspects of our past efforts while adding additional refinements to better identify severity. We also agree that it is beneficial to consider moving to a four-character nomenclature for MS-DRGs. We have already developed an internal version with four characters, with the fourth character indicating the severity levels. Systems restrictions prevent us from using this four-character numbering system in Medicare's data systems at this time. However, we will continue to evaluate the possibility of moving to such a numbering system.

With respect to the comments about the RAND project and the concern about adopting two different DRG reforms in succeeding years, we note that RAND has completed its evaluation of alternative DRG systems, including the MS-DRGs. Consistent with RAND's findings, we believe it is appropriate at this time to adopt the MS-DRG system for Medicare in FY 2008. While there will be an opportunity for the public to comment on RAND's findings, we expect to permanently adopt the MS-DRGs for the IPPS. We do not believe it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems being evaluated by RAND is clearly superior.

Comment: One commenter fully endorsed the move to MS-DRGs, but stressed the need of maintaining the current level of transparency in the DRG system, regardless of the chosen methodology. The commenter stated that many companies offer software that hospitals and health plans utilize in managing the billing, coding, and payment for hospital inpatient services under the DRGs. The development of this software is possible only because the current DRG methodology is a transparent system. By that, they mean that members of the public can obtain full access to the details underlying the system by purchasing information and software from the National Technical Information Service (NTIS) at a nominal charge in a timely manner (well in advance of the implementation of changes). The commenter appreciated the agency's commitment in the FY 2007 final rule to ``continue to strive to promote transparency in our decision making as well as in future payment and classification systems, as we have done in the past.'' The commenter commended CMS for its continued attention to the transparency issue and appreciates CMS' proposal to make the MS-DRGs available on the same terms as they currently do CMS DRGs through NTIS.

Response: We agree that it is important to provide updates and modifications to the DRG system in a transparent manner. We intend to continue our efforts to do so by providing the necessary information through our regulations, Web sites, and through NTIS. The MS-DRGs will be available to the public on the same terms as the CMS DRGs.

Comment: MedPAC reviewed the MS-DRGs and commended CMS for its commitment to improve the accuracy of Medicare payments for hospital acute inpatient services. MedPAC stated that CMS staff had made significant progress toward achieving this goal with the development of MS-DRGs coupled with cost-based weights. MedPAC's analysis showed that MS-DRGs will result in a substantial improvement in payment accuracy. MedPAC took several steps to evaluate the proposed MS-DRGs. First, they examined their face validity. An effective patient classification system, in the context of a payment system, should group together clinically similar cases that have similar costs. In addition, MedPAC stated that relative weights calculated for the classification groups (MS-DRGs) generally should exhibit a consistent hierarchy of values across levels of severity of illness for different conditions. Therefore, one issue is how much costs vary around the mean cost per case for cases grouped within MS-DRGs. Another issue is whether relative weights for different severity levels show the expected hierarchy across most clinical conditions. For comparison, MedPAC also looked at the cost variation and relationships among relative weights for cases grouped in the current DRGs and in the severity categories of the APR DRGs. MedPAC also examined how the MS-DRGs would affect payment accuracy in the IPPS, measured by how closely payments would track costs for different types of cases. MedPAC compared payment accuracy under the MS-DRGs with the results under the current CMS DRGs and the severity categories of the APR DRGs.

MedPAC found that MS-DRGs did a better job of grouping cases with similar costs into the same category. This was expected because the MS- DRGs break out high severity (and high cost) cases with MCCs into separate DRGs. For comparison, MedPAC also calculated the amount of variation in costs among cases within the severity classes of APR DRGs (Version 23). The average absolute difference for the APR DRGs, in turn, was 7.4 percent lower than the value for DRGs. MedPAC stated that this suggests that at least some opportunities are available for further refinement of the MS-DRGs. Although MedPAC found the MS-DRGs were not perfect, and may need to be further refined over time, it believed they represent a significant improvement over the current CMS DRGs. MedPAC's analysis showed that payment accuracy increased substantially when moving from the current DRGs to one based on the MS- DRGs.

Response: We agree with MedPAC that the MS-DRGs represent a significant improvement over the current CMS DRGs. As suggested above, we intend to use RAND's evaluation of the MS-DRGs to make further improvements to it. We appreciate MedPAC's suggestion to use the APR DRGs to also help us identify potential

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areas where further improvements can be made to the MS-DRGs.

Comment: One comment stated that the ``Crosswalk from CMS DRGs to MS-DRGs'' was somewhat misleading. The commenter was concerned that some entities are interpreting it as a one-to-one mapping. The commenter suggested that it be clarified that an individual DRG code cannot be mapped directly to a MS-DRG. The commenter recommended that MS-DRG implementation be delayed so that CMS can release the MS-DRG GROUPER and allow hospitals time to analyze the impact prior to implementation.

Response: After public display of the proposed rule, we were asked to provide additional information on the CMS Web site showing how the current CMS DRGs map to the new MS-DRGs. Although we provided this information, we were concerned about its usefulness because of the very issue raised in this public comment. That is, there is not a one-to-one crosswalk between the 538 DRGs that exist under the CMS DRGs and the 745 MS-DRGs. While this information may not have been as useful as originally anticipated by members of the public that requested it, we believe the fact that there is not a one-to-one crosswalk between the CMS DRGs and the MS-DRGs was well understood by the public based on the description of each system in the proposed rule. In addition, we made other information available to the public that would allow for a detailed analysis of the MS-DRG proposal as well as the continuing transition to cost-based weights. We made available two MedPAR files (FY 2005 and FY 2006) that included the CMS DRG and MS-DRG assignment for each case. In addition, we made available charge-based, cost-based, and blended weights under the CMS DRGs and the blended weights under the MS-DRGs. With this information, we believe the public had detailed information to be able to do a comprehensive analysis of our proposal to adopt MS-DRGs. We do not believe that there should have been any confusion associated with the publicly requested CMS DRG to MS-DRG crosswalk on the CMS Web site, and we do not see this comment as a reason to delay implementation of the MS-DRGs.

Comment: A number of commenters urged CMS to process more than nine diagnosis and six procedure codes. The commenters stated that this particular concern is more acute with MS-DRGs where a hospital needs to make sure that CMS processes codes that are MCCs and CCs because they determine DRG assignment. The commenters also stated that vendors and health care groups make decisions about quality of care based upon the CMS claim file. The commenters asked CMS to commit to a timeframe when it will revise its systems to accept all 25 diagnosis and procedure codes provided via electronic transmissions.

Response: We recognize the importance of using and analyzing as much clinical data from claims as possible. Unfortunately, current system limitations preclude CMS from processing more than nine diagnoses and six procedures at this time. We will continue to review this matter in conjunction with our other information systems priorities.

Comment: Several commenters stated that ICD-10-CM and ICD-10-PCS would provide a much better foundation for a severity-adjusted DRG system than ICD-9-CM. The value of MS-DRGs or any other severity- adjusted DRG system that relies on claims data will be limited by the continued use of an obsolete, non-specific classification system. ICD- 10-CM and ICD-10-PCS would provide greater clinical detail, and up-to- date clinical information for capturing information on disease severity, including complications, comorbidities and risk factors, as well as more detailed information on the use of medical technology and its impact on resource utilization and outcomes. The longer adoptions of contemporary classifications are delayed, the more CMS must develop alternatives that become costly to administer and for providers costly to continually implement.

One commenter stated that, in previous years, the commenter's recognition of the industry's need for consistency in medical coding, improved data integrity, and more precise and contemporary data reflecting 21st century medicine has led it to advocate for adoption and coordinated implementation of ICD-10-CM and ICD-10-PCS in their previous comments on the IPPS. The commenter stated that it is unfortunate that, as new initiatives that rely heavily on coded data gain momentum (such as present on admission reporting, pay-for- performance, and DRG refinements to better recognize severity of illness), ICD-10-CM and ICD-10-PCS still have not been implemented as replacements for ICD-9-CM.

One commenter stated that if the obsolete ICD-9-CM coding system had been replaced earlier, claims data that would significantly add to the knowledge needed to measure severity, quality, and other factors under consideration would now be available. The commenter stated that the proposed MS-DRG system and other proposals in this year's proposed rule are excellent examples of how ICD-10-CM and ICD-10-PCS could improve the ability to refine reimbursement systems in order to better reflect severity of illness. The commenter urged CMS and HHS to take immediate action to secure the adoption and implementation of these two classification systems, and supporting transaction standards as early as possible.

Response: We are continuing to carefully analyze issues associated with implementing ICD-10.

Comment: Several commenters opposed the reuse of the current CMS DRG numbers in the MS-DRG system. Although one commenter acknowledged the advantages of maintaining the current 3-digit numerical scheme, it believed the use of the same DRG numbers in both the CMS DRG and MS-DRG systems will create confusion when analyzing longitudinal data, given the same DRG number will have a different meaning in the two systems. The commenter suggested that delaying implementation of a severity- adjusted DRG system until FY 2009 would allow additional time for making more extensive systems modifications, such as adopting an alphanumeric or 4-digit numerical structure for the new DRG system. Another commenter suggested that CMS begin numbering with a 4-digit number so that there will not be confusion about which system is being used.

Response: We agree that it is beneficial to consider moving to a 4- character nomenclature for MS-DRGs. We have already developed an internal version with four characters, with the fourth character indicating the severity levels. Systems restrictions prevent us from using this 4-character numbering system in Medicare's data systems at this time. However, we will continue to evaluate the possibility of moving to such a numbering system in the future. We do not expect the changes to our data systems that would be necessary to adopt a 4-digit DRG numbering system will occur with a year's delay of the MS-DRGs. Therefore, we do not believe that we should delay the improvements in recognition of severity of illness in our payment system for this reason. If there is public interest, we will make our internal 4-digit numbering system available on the CMS Web site to assist the public in understanding the future numbering system we would be likely to adopt. Such information may also be useful to the public to engage in the types of analysis suggested by this public comment.

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Comment: One commenter stated that the Medicare CMS DRG GROUPER is used by some payers for their commercial, non-Medicare business. The commenter understands that CMS may want to move to MS-DRGs for Medicare patients, but is concerned about its continued access to the current GROUPER program, should Medicare decide to replace CMS DRGs with MS- DRGs. The commenter requested that the existing CMS GROUPER remain intact for commercial insurers to utilize for their non-Medicare contracts. The commenter suggested this could be done by keeping the GROUPER in the CMS database with the title ``CMS GROUPER.'' The commenter stated CMS would not need to update the weights of the CMS GROUPER or make any other adjustments.

Response: The focus of CMS' efforts is in developing and maintaining a DRG system that is appropriate for its Medicare population. We have, and will continue to, encourage other payers to make any necessary modifications to this program to meet their needs. The current versions of the CMS DRGs will remain in the public domain. However, we do not intend to make any updates to them once we move to the MS-DRGs or another severity DRG system. We do not believe that Medicare should undertake the effort and expense to maintain and update a DRG system that will have no application for Medicare beneficiaries. We encourage other payers to avail themselves of any DRG logic in our nonproprietary system from past years and use this information as appropriate to develop updates and refinements annually to suit the needs of their own patient populations. 5. Impact of the MS-DRGs

Unlike the CS DRGs we proposed last year for FY 2008, the payment impacts from the MS-DRGs we proposed to adopt (and are finalizing in this final rule with comment period) for FY 2008 would largely be redistributive within each base MS-DRG. Such a result occurs because we collapse the current CC/non-CC, age and other distinctions that exist in the CMS DRGs and redivide them based on MCCs, CCs, and non-CCs. Thus, within each base MS-DRG, some cases will be paid more and some less, but the base MS-DRGs are retained so there is no redistribution between types of cases as would have occurred under the proposed CS DRGs. In the proposed rule, we encouraged readers to review Table 5 in the Addendum to the proposed rule for a list of the proposed MS-DRGs and the proposed respective relative weight from the revisions we proposed to better recognize severity of illness to better understand how payment for cases within each base MS-DRG will be affected.

As indicated above, all of the severity DRG systems being evaluated by RAND can be expected to result in similar redistributions in case- mix among hospitals. The payment models used by RAND and CMS (and RTI as well) all assume static utilization. That is, payment impact models simulate the effects of a change in policy, assuming no change to Medicare utilization. Any system adopted to better recognize severity of illness with a budget neutrality constraint will result in case-mix changes that can be expected to benefit urban hospitals at the expense of rural hospitals. This impact occurs because patients treated in urban hospitals are generally more severely ill than patients in rural hospitals and the CMS DRGs are not currently recognizing the full extent of these differences. Similarly, there will be differential impacts among other categories of hospitals (for example, teaching, disproportionate share, large urban, and other urban hospitals) depending on the mix of cases that each hospital treats. The impact of the MS-DRGs can be expected to have similar effects on case-mix as the DRG systems being analyzed by RAND. These conclusions are confirmed by RAND's analysis earlier in this final rule with comment period as well as the payment impacts we illustrated in the proposed rule and again in this final rule with comment period.

Comment: One commenter believed that a ``stop loss'' provision should be instituted as part of the transition. Similar to that under the IPF PPS, no hospital can receive less than 70 percent of what they would otherwise have been paid under the old system. Another commenter asked that CMS investigate mechanisms for dampening large payment rate fluctuations.

Response: Changes in payments from MS-DRGs will be mitigated in any single year by adopting them over a 2-year transition period. We believe a 2-year transition period for implementation of the MS-DRGs addresses the concern of these commenters. Further information is provided in section II.E. of the preamble of this final rule with comment period about how MS-DRG relative weights are being determined to reflect implementation over a 2-year period. 6. Changes to Case-Mix Index (CMI) From the MS-DRGs

After the 1983 implementation of the IPPS DRG classification system, CMS observed unanticipated growth in inpatient hospital case- mix (the average relative weight of all inpatient hospital cases), which we use as a proxy measurement for severity of illness. We had projected the rate of growth in case-mix for the period 1981 to 1984 to be 3.4 percent. The realized rate of growth during this period, which included the introduction of the IPPS, was 8.4 percent, a variance in excess of 1.6 percent per year. The unexpected growth in payments was due to increases in the hospital case-mix index (CMI) beyond the previously projected trend. Hospitals' CMI values measure the expected treatment cost of the mix of patients treated by a particular hospital. There are three factors that determine changes in a hospital's CMI:

(a) Admitting and treating a more resource intensive patient-mix (due, for example, to technical changes that allow treatment of previously untreatable conditions and/or an aging population);

(b) Providing services (such as higher cost surgical treatments, medical devices, and imaging services) on an inpatient basis that previously were more commonly furnished in an outpatient setting; and

(c) Changes in documentation (more complete medical records) and coding practice (more accurate and complete coding of the information contained in the medical record).

We note that changes in patient-mix and medical practice signal real changes in underlying resource utilization and cost of treatment. While these changes may have occurred in response to incentives from IPPS policies, they represent real changes in resource needs. In contrast, changes in CMI as a result of improved documentation and coding do not represent real increases in underlying resource demands. For the implementation of the IPPS in 1983, improved documentation and coding were found to be the primary cause in the underprojection of CMI increases, accounting for as much as 2 percent in the annual rate of CMI growth observed post-PPS.\2\

\2\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 1985.

The Medicare Trustees Technical Review Panel \3\ has previously determined the annual measured change in CMI for inpatient hospital services to oscillate around an underlying real trend of 1 percent annual growth. In 1991 the Medicare-specific trend in real CMI growth was found in a then-HCFA

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funded study \4\ to be within a range of 1 to 1.4 percent. In the annual study conducted by CMS, there has been no evidence to support a real case-mix increase in excess of the annually projected 1 percent upper bound in the period. MedPAC findings have echoed this with its recent study of real case-mix change finding growth rates for years 2002, 2003, and 2004 of 1 percent, 0.6 percent, and 0.4 percent, respectively.\5\

\3\ Review of Assumptions and Methods of The Medicare Trustees' Financial Projections; Technical Review Panel on the Medicare Trustees Reports, December 2000.

\4\ ``Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between 1987 and 1988''; Carter, Newhouse, Relles; R-4098- HCFA/ProPAC (1991).

\5\ Medicare Payment Advisory Commission: Report to the Congress, March 2006 (p. 52).

In the proposed rule, we indicated that we believe that adoption of the proposed MS-DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. MedPAC notes that ``refinements in DRG definitions have sometimes led to substantial unwarranted increase in payments to hospitals, reflecting more complete reporting of patients' diagnoses and procedures.'' MedPAC further notes that ``refinements to the DRG definitions and weights would substantially strengthen providers' incentives to accurately report patients' comorbidities and complications.'' To address this issue, MedPAC recommended that the Secretary ``project the likely effect of reporting improvements on total payments and make an offsetting adjustment to the national average base payment amounts.'' \6\

\6\ Medicare Payment Advisory Commission: Report to Congress on Physician-Owned Specialty Hospitals, March 2005, p. 42.

The Secretary has broad discretion under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized amount so as to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix. While we modeled the changes to the DRG system and relative weights to ensure budget neutrality, we are concerned that the large increase in the number of DRGs will provide opportunities for hospitals to do more accurate documentation and coding of information contained in the medical record. Coding that has no effect on payment under the current CMS-DRGs may result in a case being assigned to a higher paid DRG under the proposed MS-DRGs. Thus, more accurate and complete documentation and coding may occur because it will result in higher payments under the MS-DRG system. For the proposed rule, we stated that the potential for more accurate and complete documentation and coding will apply equally under the acute IPPS as well as under the LTCH PPS because the same DRGs are used for both payment systems. However, for reasons explained elsewhere in this final rule with comment period, we are limiting this analysis to the IPPS.

CMS in the past has adjusted standardized amounts under the IRF PPS to account for case-mix increases due to improvements in documentation and coding. In 2004, RAND \7\ published a technical report as part of the follow-up to the implementation of the IRF PPS. The initial weights used within the IRF PPS were based on a mix of CY 1999 and CY 1998 data. The study reviewed the changes between this base data set and the IRF PPS implementation year of 2002. The report found that the weight per discharge for IRFs had grown by 3.4 percent between the CY 1999 data set and the CY 2002 data set. In a detailed analysis of both statistical patterns in acute stay records and directly measured coding practices, RAND found that the level of case-mix increase associated with documentation and coding-induced changes in the transition year ranged between 1.9 and 5.8 percent, with the upper end of the estimate associated with real declines in resource use. (We note that RAND revised its report in late 2005 to reflect an upper bound of 5.9 percent, instead of the 5.8 percent that we reported in the FY 2006 IRF PPS proposed and final rules.)

\7\ Carter, Paddock: Preliminary Analyses of Changes in Coding and Case Mix Under the Inpatient Rehabilitation Facility Prospective Payment System, RAND, 2004.

We used the results of this analysis to justify a 1.9 percent adjustment to payment rates for IRFs in FY 2006 (70 FR 47904) and a 2.6 percent adjustment to payment rates for IRFs in FY 2007 (71 FR 48370), for a combined total adjustment of 4.5 percent. The implementation year was marked by the transitioning of hospitals to the IRF PPS payment based on cost reports beginning January 1, 2002, and staggered to October 1, 2002. A combination of increased familiarity with the system by providers and the staggered transition could mean that documentation and coding-induced case-mix change continued as hospitals experienced ongoing changes in the early years of the IRF PPS and as the incentives within the system were more widely recognized. We also recognize that significant changes in IRF patient populations may be occurring as a result of recent regulatory changes, such as the phase-in of the 75- percent rule compliance percentage. We intend to continue analyzing changes in coding and case-mix closely, using the most current available data, as part of our ongoing monitoring of the IRF PPS and, based on this analysis, we intend to propose additional payment refinements for IRFs in the future as the analysis indicates such adjustments are warranted.

Furthermore, as part of our analysis of this issue, we considered the recent experience of the State of Maryland with adopting the APR DRG system. Maryland introduced APR DRGs for payment for three teaching hospitals in 2000. Between State fiscal years (SFYs) 2001 and 2005,\8\ the remaining hospitals continued to be paid using modified CMS DRGs. In June 2004, the remaining hospitals were notified that Maryland would expand the use of APR DRGs throughout its all payer charge-per-case system beginning in July 2005. Hospitals in Maryland improved coding and documentation in response to the adoption of APR DRGs. As a result of this improved documentation and coding, reported CMI increased at a greater rate than real CMI. Given the similarity between coding incentives using the APR DRGs in Maryland and the MS-DRGs that are being proposed for Medicare, we analyzed Maryland data to develop an adjustment for improved documentation and coding.

\8\ Maryland uses a July 1 to June 30 State fiscal year. Prior to FY 2003, Maryland had a 6-month lag in the data used to calculate the hospital base case-mix index and case-mix change. Maryland used 12 months data ending December even though the hospitals' rate year was July 1 to June 30. In FY 2003, Maryland moved to what it calls ``Real Time Case-Mix'' and started using 12 months data ending June 30 to calculate case-mix index and case-mix change for a rate year beginning July 1.

For the Maryland analysis, we assume that, in SFY 2005, those hospitals not already being paid under the APR DRG system began acting as if the transition to the new DRG logic had already taken place. This assumption is supported by the following facts: (a) Maryland hospitals were reporting to the Health Services and Cost Review Commission (HSCRC), Maryland's governing body of its all-payer ratesetting system using the APR DRG GROUPER in 2005; (b) hospitals were provided training in coding under the APR DRG GROUPER; (c) hospitals had access to reports based on APR DRG logic; and (d) hospitals were given large amounts of feedback as to their performance under the GROUPER by the HSCRC relative to peer hospitals.

The incentives for Maryland hospitals are to code as completely and accurately as possible because, beginning in July 2005, all Maryland hospitals were paid using APR DRGs. SFY 2005 was an

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important year in Maryland, as it marked the beginning of the 2-year period of transition after which a hospital's revenues were reduced if coding was not as complete as a peer hospital. Under the current CMS DRGs, each secondary diagnosis code is recognized as either a CC or non-CC. Hospitals in Maryland and nationally for Medicare only needed to code one secondary diagnosis as a CC when paid using CMS DRGs for the patient to be assigned to a higher-weighted DRG split based on the presence or absence of a CC. Under the APR DRGs, each secondary diagnosis is designated as minor, moderate, major, or extreme. Under the MS-DRGs, each secondary diagnosis is designated as a non-CC, CC, or MCC. Hospitals in Maryland have incentives under the APR DRGs to code until a case is assigned to the highest of the four severity levels within a base DRG. Under the MS-DRGs, hospitals will have incentives to code until a case is assigned to one of up to three severity levels within a base DRG. Although the APR DRGs and the MS-DRGs may be different, we believe that hospitals have the same incentive under both systems to code as completely as possible. For this reason, we believe that the Maryland experience is a reasonable basis for projecting changes in coding practices for the wider national hospital population for the first 2 years of the MS-DRGs.

We believe the analysis presented below provides a reasonable analysis of the potential growth in CMI due to improved documentation and coding. In addition to the similarity between coding incentives under the proposed MS-DRGs and the APR DRGs, we note that Maryland is an all-payer State; therefore, hospitals are paid by all third party payers--not just the State's Medicaid program--using the APR DRGs. Coding has been very important for each hospital's overall revenue for many years, and the incentives are uniform across all third party payers. The transition to APR DRGs was known well in advance of the actual date and, as stated above, hospitals were provided training in coding under the APR DRGs. It is reasonable to expect that hospitals' experience with improved documentation and coding will occur over a period of at least 2 years. Thus, the experience in Maryland may be similar to expectations for case-mix growth for the nation as a whole. Finally, in reviewing the results from Maryland, we note that three large teaching hospitals began using APR DRGs prior to SFY 2005. These facilities generally treat a wider variety of patients with higher acuity that gives them a greater potential for increasing coding under the APR DRG system than other hospitals throughout Maryland. Because these hospitals were paid using the APR DRGs earlier than other Maryland hospitals, we believe data for these hospitals need to be analyzed from an earlier time period. However, based on the consultations with the HSCRC, we believe there were special issues with one of these hospitals that may have made its case-mix growth during the early years of the transition to the APR DRGs atypical of the other teaching hospitals.\9\ Therefore, we did not separately analyze the data for this hospital from the earlier time period and, as stated below, included its data with the rest of the Maryland hospitals.

\9\ The HSCRC informed us that it began using APR DRGs for this hospital to calculate the CMI and case-mix change to set the hospital's charge per case target (CPC) that is used in Maryland's all-payer ratesetting system for payment. However the HSCRC also compared the reasonableness of hospital rates and costs for this hospital relative to peer institutions using modified CMS DRGs to calculate CMI and case-mix change. This use of dual systems to calculate CMI and case-mix change made it difficult for the hospital to code aggressively in the first few years of using APR DRGs.

As part of its contract with CMS, 3M Health Information Systems reviewed the Maryland data in the context of our proposed changes to adopt MS-DRGs. 3M grouped Medicare cases in Maryland through both the CMS DRGs Version 24.0 and the proposed MS-DRGs for FY 2008. At our request, 3M deleted two of the three early transition hospitals from the data. It compared the results of the observed growth in case-mix from these data to the same process applied to Medicare data, excluding Maryland hospitals.

The MedPAR data file for Federal fiscal year (FFY) 2006 (October 2005 through September 2006) was used to create relative weights for both CMS DRG Version 24.0 and the MS-DRGs. The MedPAR data file contained 12,794,280 records. In constructing the weights, the following edits were used:

Cases with zero covered charges or length of stay were excluded.

Cases with length of stay greater than 2 years were excluded.

Only hospitals contained in the impact file for the FY 2007 IPPS final rule were included.

The latter criterion excluded providers reimbursed outside of the IPPS, including Maryland hospitals, from the weight calculation. 3M employed standardized charge-based relative weights developed in accordance with the CMS methodology. Cost-based weights were not used and no adjustment to the charge weights was made for application of CMS transfer and postacute care transfer payment policy.

3M further grouped 2 years of MedPAR data from FY 2004 and FY 2005, using CMS DRG Version 24.0 and the MS-DRGs for hospitals nationally. Using 2 years of MedPAR data with one version of each DRG system further required 3M to make adjustments to the data to reflect revisions to ICD-9-CM codes that are made each year. MedPAR data for Maryland IPPS acute care providers within the IPPS data set were similarly assigned to the MS-DRGs and CMS DRGs for FYs 2004 through 2006.

Each Maryland record, exclusive of the two early transition teaching hospitals for the 3 observed years (SFY 2004 to SFY 2006), was assigned to a proposed MS-DRG based on the ICD-9-CM codes the hospital submitted. The same results were obtained from data at the national level using the MS-DRGs. Further, we obtained data from the HSCRC showing the weighted average increase in case-mix for calendar years 2001 to 2003 for the two large academic medical centers that began an early transition to the APR DRGs. In addition, we also obtained case- mix increases under the CMS DRGs for FYs 2004 through 2006. The Medicare Actuary examined the data below:

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Table R.--Maryland and National Data Used for Case-Mix Adjustment Analysis

FY 2004 to FY 2005 to FY 2004 to 2005

2006

2006 (percent) (percent) (percent)

Rest of Maryland MS-DRG CMI

2.30

2.57 4.93 [Delta].

CY 2000 to FY 2003

Early Transition Hospitals....

4.4

6.7 11.4 National MS-DRG CMI [Delta]...

0.47

2.65 3.13 National CMS DRG CMI [Delta]..

-0.04

1.20 1.16 Blend of MS-DRG & CMS DRG ........... ........... 1.68 [Delta] using 0.47 Percent for 2005 and 1.2 Percent for 2006. Difference between Maryland ........... ........... 9.58 Early Transition Hospitals and National Data. Difference between Rest of ........... ........... 3.20 Maryland and National Data. Medicare Actuary Estimate (75%/ ........... ........... 4.8 25%) [Delta] between Early Transition and Rest of Maryland.

The data above show that case-mix for hospitals increased by 4.93 percent from SFYs 2004 to 2006, during which Maryland adopted the APR DRGs for most hospitals. Case-mix for the two large teaching hospitals that were paid using the APR DRGs earlier than other hospitals in the State increased by 11.4 percent from SFYs 2001 to 2003. The weighted average increase in Maryland from these two categories of hospitals is 5.58 percent. Case-mix using the MS-DRGs would have increased 0.47 percent in FY 2005 and 2.65 percent in FY 2006. Nationally, Medicare case-mix using the CMS DRGs decreased by 0.04 percent in FY 2005 and increased by 1.2 percent in FY 2006. The Actuary calculated a Medicare case-mix increase nationally over 2 years using a blend of these data from the MS-DRGs for FY 2005 and national Medicare data for FY 2006 from the CMS DRGs. The Actuary did not use either the -0.04 percent for the CMS DRGs or the 2.65 percent for the MS-DRGs to create this blended case-mix because these figures appeared atypical to national trends. Therefore, the Actuary dropped one atypically high and low number from each of the 2 years of data and calculated an average increase of 1.68 percent from FY 2004 to FY 2006. These data demonstrate that the measure of average CMI for Medicare cases is growing more rapidly within Maryland than nationally. Case-mix for the Maryland teaching hospitals and the rest of Maryland increased 9.58 percent and 3.20 percent more, respectively, than the national average over 2 years, suggesting that improved documentation and coding lead to perceived, but not real, changes in case-mix.

The Actuary noted that the case-mix increase in Maryland for two large teaching hospitals over a 2-year period was much higher in the early years of the APR DRGs than other Maryland hospitals (11.4 percent compared to 4.93 percent for the rest of Maryland). Further, teaching hospitals generally treat cases with higher acuity than other hospitals and have more opportunity to improve coding and documentation to increase case-mix than other hospitals. Teaching hospitals also represent a higher proportion of national Medicare data than they do of the data in Maryland. The two early transition teaching hospitals in Maryland account for approximately 10 percent of the Medicare discharges in Maryland. Nationally, teaching hospitals account for approximately 50 percent of Medicare discharges. Therefore, the Actuary believes that the teaching hospitals should be given a higher weight in the national data than they represent in Maryland. However, like other hospitals, teaching hospitals vary in size and patient mix and not all have the same opportunity to improve documentation and coding. Therefore, we believe the weight given to teaching hospitals should be higher than the 10 percent for the two early transition hospitals in Maryland but lower than the 50 percent of discharges that they account for in Maryland. The Actuary gave a weight of 25 percent for teaching hospitals and 75 percent for the rest of Maryland to the excess growth in case-mix over the national average and estimates that an adjustment of 4.8 percent will be necessary to maintain budget neutrality for the transition to the MS-DRGs. This analysis reflects our current estimate of the necessary adjustment needed to maintain budget neutrality for improvements in documentation and coding that lead to increases in case-mix. Consistent with the statute, we will compare the actual increase in case-mix due to documentation and coding to our projection once we have actual data to revise the Actuary's estimate and the adjustment we make to the standardized amounts.

Based on the Actuary's analysis, using the Secretary's authority under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized amount to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case mix, we proposed to reduce the IPPS standardized amounts by 2.4 percent each year for FY 2008 and FY 2009. We indicated that we were considering proposing a 4.8 percent adjustment for FY 2008. However, we believed it would be appropriate to provide a transition because we would be making a significant adjustment to the standardized amounts. In the proposed rule, we expressed interest in receiving public comments on whether we should apply the proposed adjustment in a single year, over 2 years, or in different increments than \1/2\ of the adjustment each year. Section 1886(d)(3)(A)(vi) of the Act further gives the Secretary authority to revisit adjustments to the standardized amounts for changes in coding or classification of discharges that were based on estimates in a future year. Consistent with the statute, we will compare the actual increase in case mix due to documentation and coding to our projection once we have actual data for FY 2008 and FY 2009 for the FY 2010 and FY 2011 IPPS rules. At that time, if necessary, we may make a further adjustment to the standardized amounts to account for the difference between our projection and actual data.

Comment: Many commenters opposed the documentation and coding adjustment, which they believed would reduce payments to hospitals by $24 billion over the next 5 years. The commenters did not believe this reduction is warranted. They suggested the adjustment for documentation and coding is a ``backdoor attempt'' to reduce Medicare's inpatient hospital payments. One commenter stated that the documentation and coding

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

[[pp. 47179-47228]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates

[[Continued from page 47178]]

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adjustment would result in a total estimated reduction in payment for Pennsylvania hospitals of $67.5 million in FY 2008, and an estimated $1.6 billion over the next 5 years. The commenter stated that such reductions and attempts at backdoor budget cuts would only further erode scarce resources and challenge hospitals in their ability to care for patients. The commenter stated that until MS-DRGs are fully implemented, and CMS can document and demonstrate that any increase in case-mix results from changes in coding practices rather than real changes in patient severity, there should be no documentation and coding adjustment.

Response: We stress that there are no savings attached to this adjustment. This adjustment is not a ``backdoor'' attempt to reduce Medicare inpatient hospital payments. Without a documentation and coding adjustment, the changes to MS-DRGs would not be budget neutral. Substantial evidence supports our conclusion that the CMI will increase as a result of adoption of MS-DRGs without corresponding growth in patient severity. We have provided evidence from studies going back over 20 years that show that hospitals respond to incentives when payment classifications are changed to improve documentation and coding to receive higher payments. Maryland provides a recent example demonstrating the validity of the finding that hospitals respond to changes in payment classification groups by changing documentation and coding practices. Furthermore, we are not aware of a situation in which a new or revised payment system provided a payment incentive to improve documentation and coding, yet hospitals did not improve documentation and coding.

Comment: Many commenters stated that the documentation and coding adjustment is based on assumptions made with little to no data or experience about how medical record documentation and coding practices will change as a result of the implementation of MS-DRGs. One commenter stated that the proposed adjustment has no basis in actual data or research pertaining to inpatient hospital coding practices. One commenter objected to the -2.4 percent adjustment for documentation and coding stating it could not understand the proposal and noted that the hospitals are utilizing the coding system that the Department of Health and Human Services has created. The commenter stated that if, in fact, the new severity DRGs were designed to better recognize the resources needed to treat the various DRG conditions, the argument can be made that CMS has been underpaying institutions for over 20 years. Other commenters objecting to the documentation and coding adjustment further indicated that hospitals have operated under the current DRG system for 23 years and hospitals are already expert in their ability to maximize coding for payment. These commenters stated that not even in the initial years of the IPPS was coding change found to be in the magnitude of CMS' proposed FY 2008 and FY 2009 cuts. The commenters stated that the proposed MS-DRGs would be a refinement of the existing system; the underlying classification of patients and ``rules of thumb'' for coding would be the same. They stated that there is no evidence that an adjustment of 4.8 percent over 2 years is warranted when studies by RAND, cited in the preamble, are looking at claims between 1986 and 1987 at the beginning of the IPPS that showed only a 0.8 percent growth in case-mix due to coding. The commenters stated that even moving from the original reasonable cost-based system to a new patient classification-based PPS did not generate the type of coding changes CMS contends will occur under the MS-DRGs.

Many commenters disagreed with the applicability of generalizing from the experience in Maryland to Medicare. One commenter indicated that MS-DRGs and APR DRGs are two completely different ways to classify patients, and generalizing from one system to the other cannot be done. The existing classification rules will change only marginally with the introduction of MS-DRGs, whereas they are very different under the APR DRG system. Differences include:

APR DRGs consider multiple CCs in determining the placement of the patient and, ultimately, the payment. In fact, to be placed in the highest severity level, more than one high-severity secondary diagnosis is required.

APR DRGs consider interactions among primary and secondary diagnoses. Thus, factors that increase the severity level for a case under the APR DRGs will not occur under the MS-DRGs.

APR DRGs consider interactions among procedures and diagnoses as well. MS-DRGs do not.

APR DRGs have four severity subclasses for each base DRG, while MS-DRGs have three tiers, and this is only for 152 base DRGs--106 base DRGs only have two tiers and 77 base DRGs are not split at all.

Less than half the number of patient classifications in the MS-DRG system are dependent on the presence or absence of a CC--410 for MS-DRGs versus 863 for APR DRGs.

The commenters believed that all of these differences make the Maryland experience an invalid comparison. They suggested there is significantly less possibility for changes in coding to affect payment under the MS-DRGs.

Another commenter indicated that the CMS analysis is not applicable to Medicare because Maryland hospitals were not paid using a DRG system prior to APR DRG implementation. DRG data were collected for statistical purposes, but DRGs were not used for reimbursement. The commenter added that coding practices under APR DRGs are not necessarily comparable to MS-DRGs because they were not designed for reimbursement purposes. Further, the commenter found that the system logic is not always consistent with nationally recognized coding rules and guidelines, resulting in possible changes in coding practices that do not necessarily represent improved coding. The commenter stated that hospitals have little ability to change their classification and coding practices. Another commenter stated that Maryland's hospitals were paid prior to the APR DRGs under a State ratesetting system where an incentive to code accurately did not significantly affect what a hospital was paid. The commenter stated that APR DRGs are also much more complicated than MS-DRGs. The commenter stated that generalizing the Maryland experience to the rest of the nation's hospitals is an ``apples to oranges'' comparison.

One commenter also disagreed with CMS' use of the example of the IRF PPS to justify the coding adjustment. The commenter believed that the IRF experience is an inappropriate comparison. The commenter stated that coding changes seen under the IRF PPS were the result of moving from a cost-based system to a PPS, not the marginal difference of moving from the existing CMS DRGs to the refined MS-DRGs. In addition, coding under the IRF PPS is driven by the Inpatient Rehabilitation Patient Assessment Instrument (IRF-PAI). This tool provides an incentive for IRFs to code in a way that differs from the IPPS, which does not utilize a patient assessment instrument. The commenter believed that coding for the IRF-PAI differs significantly from the longstanding coding rules that inpatient PPS hospitals have followed for the following reasons:

The IRF-PAI introduced a new data item into coding-- namely, ``etiological

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diagnosis.'' The definition of this new diagnosis and the applicable coding rules are significantly different than the ``principal diagnosis'' used to determine the DRG. More importantly, the Official Coding Guidelines that apply to all other diagnostic coding do not apply to the selection of the ICD-9-CM etiologic diagnoses codes.

The Official Coding Guidelines do not consistently apply to the coding of secondary diagnoses on the IRF-PAI. Several different exceptions to the guidelines have been developed by CMS for the completion of the IRF-PAI.

The definition of what secondary diagnoses may be appropriately reported differs under the IRF-PAI from the definition used by other inpatient coders.

Most hospitals are already coding as carefully and accurately as possible because of other incentives in the system to do so, such as risk adjustment in various quality reporting systems. Analysis of Medicare claims from 2001 to 2005 suggests that hospitals have been coding CCs at high rates for many years. More than 70 percent of claims already include CCs, and more than 50 percent of claims have at least eight secondary diagnoses (the maximum number accepted in Medicare's DRG GROUPER). Hospitals'' assumed ability to use even more CCs under MS-DRGs is very low.

The commenter also indicated that according to an article in the magazine Healthcare Financial Management, the level of coding on claims suggests that the presence of a CC on a bill is not strongly influenced by financial gain. The proportion of surgical cases with a CC code is higher for cases where there is no CC split and, thus, no financial benefit, than on those cases where there is a CC split and a corresponding higher payment. Thus, coding is driven primarily by coding guidelines and what is in the medical record rather than by financial incentives according to this commenter. In addition, the commenter believed that many cases simply do not have additional CCs to be coded. For many claims, additional codes are simply not warranted and not supported by the medical record. Therefore, there is no opportunity for a coding change to increase payment.

The commenter analyzed the all-payer health care claims databases from California, Connecticut, Florida, and Michigan because, unlike the MedPAR files, these databases include all 25 diagnoses reported on the claims. This analysis showed that only 0.25 percent of claims had an MCC or CC appear for the first time in positions 10 through 25. The commenter believed this strongly suggests that hospitals will not be able to ``re-order'' their secondary diagnoses to appear higher on the claim so that Medicare will pay a higher rate. The commenter's coding experts note that most hospitals use software that automatically re- sorts the secondary diagnoses to ensure that those pertinent to payment are included in positions two through nine.

The commenter also examined secondary diagnosis codes and found that there were relatively few non-specific codes listed among the common secondary diagnoses of discharges without a MCC/CC. The commenter believed that this means hospitals cannot shift large numbers of discharges to MCCs or CCs based on coding a more specific code to replace a nonspecific code.

The commenter further indicated that there is no opportunity for increased payment due to a change in coding for 77 base DRGs under the MS-DRG system, as there is only one severity class and no differentiation in payment. Additionally, there are MS-DRGs that are now split between ``with MCC'' and ``without MCC'' (a combined non-CC and CC MS-DRG) that have historically contained a single CC/non-CC split. These DRGs already required secondary diagnosis coding; thus, the codes to qualify the case as an MCC already would have been present. In these cases, it is very unlikely that the medical record would justify an MCC that is not already present in the medical record. Coders must code strictly based on what the physician notes in the chart. Therefore, the commenter believed it is highly unlikely that a coder will be able to select an MCC that was not previously present in the medical record.

One commenter stated that case-mix will and should increase from adoption of the MS-DRGs. According to the comment, changes in case-mix due to improved accuracy in documentation and coding have been observed since the introduction of DRG payments in 1983. These changes have occurred in every refinement of every classification system across every care setting. The commenter stated that changes are driven primarily by the fact that documentation and numbers of diagnoses coded is inevitably incomplete due to time pressures for completion of paperwork and limitations of computer systems to identify this information. If an item is not used and/or not important, it is less well documented. Refinements in patient classification make certain paperwork more important, encouraging providers to improve their documentation and reporting accuracy. This, in turn, increases apparent case mix that depends on these codes according to this commenter. The commenter stated that coding changes that affect CMI are desirable in the long run, since they represent more accurate data and evidence- based care, payments, quality measurement, management decisions, and policy are all enhanced. This increase in accuracy is not only desired, it is necessary to truly reform health care (severity adjusted payments, quality measurement and reporting, value based-purchasing, among others), where ``bad data'' is frequently cited as an excuse to defer reform efforts. This commenter stated that it is impossible to accurately predict the total magnitude and timing of case-mix changes. Every hospital will have their own documentation and coding accuracy baseline, and their own real CMI based on accurate data for their patient mix. Each will have a different commitment to increasing their accuracy, resources to do so, and learning curve for implementation. The commenter believed that, like any prediction of the future, it will inevitably be wrong, particularly due to its complexity.

Response: Many of the commenters ascribed the term ``behavioral offset'' to our proposed rule and believed that CMS was pejoratively describing hospital motives. We note that we did not use the term ``behavioral offset'' to describe the proposed -2.4 percent adjustment to IPPS rates for FYs 2008 and 2009 for changes in documentation and coding. We regret that the term ``behavioral offset'' has been attributed to us. The proposed rule uses the phrase ``documentation and coding adjustment'' to refer to the proposed -4.8 percent (-2.4 percent each year for FYs 2008 and 2009) adjustment to the IPPS standardized amounts to maintain budget neutrality for the MS-DRGs consistent with the statute. Further, we believe it is important to address the notion in some of the public comments that CMS believes changes in how services are documented or coded that is consistent with the medical record is inappropriate or otherwise unethical. We do not believe there is anything inappropriate, unethical or otherwise wrong with hospitals taking full advantage of coding opportunities to maximize Medicare payment that is supported by documentation in the medical record. In its public comments, MedPAC recommended an adjustment for improvements in documentation and coding and also noted that hospitals' efforts to improve the specificity and

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accuracy of documentation and coding are perfectly legitimate.\10\

\10\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 12.

We encourage hospitals to engage in complete and accurate coding. Section 1886(d)(3)(A)(vi) of the Act authorizes the Secretary to adjust the standardized amount so as to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix. In its public comments, MedPAC indicated that the increases in payments that result from improvements in documentation and coding are not warranted because the increase in measured case-mix does not reflect any real change in illness severity or the cost of care for the patients being treated. Therefore, offsetting adjustments to the PPS payment rates are needed to protect the Medicare program and those who support it through taxes and premiums from unwarranted increases in spending.\11\

\11\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 12.

In response to the comment that stated, ``moving from the original reasonable cost-based system to a new patient classification-based PPS did not generate the type of coding changes CMS contends will occur under the MS-DRGs,'' we believe the estimates for improvements in documentation and coding are within the range of those projected under the original IPPS. As stated above, for the implementation of the IPPS in 1983, RAND found that improved documentation and coding were found to be the primary cause in the underprojection of CMI increases, accounting for as much as 2 percent in the annual rate of CMI growth observed post-PPS.\12\ This study found a 2 percent annual change in case-mix from improvements in documentation and coding during the original adoption of the IPPS, while we are forecasting a 4.8 percent total increase due to the MS-DRGs. MedPAC's public comments citing a study in Health Affairs found that the original adjustment for anticipated increases in case mix due to documentation and coding ``were substantially smaller than the actual change in case mix which increased more than 7 percent from the pre-PPS period to the first full year of the PPS system.'' \13\ MedPAC further noted that CMI increases due to improvements in documentation can be expected to occur over many years. It stated that the Prospective Payment Assessment Commission (a predecessor of MedPAC) considered case-mix change in developing its annual update recommendations to the Congress and made offsetting adjustments for continuing coding improvements for 10 consecutive years from 1986 to 1995. \14\ For these reasons, we disagree with the comment that our forecast of changes in case-mix from improvements in documentation and coding are not within the range of those projected when the original IPPS was implemented.

\12\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 1985.

\13\ Medicare Payment Advisory Comission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 12 citing Steinwald, B. and L. Dummit. 1989. ``Hospital Case-mix change: Sicker patient or DRG Creep?'' Health Affairs. Summer, 1989.

\14\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 11.

With respect to comments about the use of the APR DRG system in Maryland to forecast an adjustment for improvements in documentation and coding for Medicare, we agree that there are differences between the APR DRGs being used in Maryland and the MS-DRGs being proposed for use by Medicare. We believe that coding incentives in Maryland under the APR DRGs and nationally under the MS-DRGs are similar, not identical. The Maryland experience provides a useful example to forecast the potential increase in case mix from improvements in documentation because it is a recent and similar change to what we plan to adopt for Medicare. Although the APR DRGs and the MS DRGs may be different, we believe that hospitals have the same incentive under both systems to code as completely as possible. Moreover, as explained above, we estimated CMI growth using the MS DRG and CMS DRG GROUPERs, not APR DRG GROUPER. We used Medicare claims from Maryland hospitals for our analysis, but we grouped the claims under the CMS DRG GROUPER and proposed MS DRG GROUPER.

For these reasons, we continue to believe that the Maryland experience is a reasonable basis for projecting increased case mix in the wider national hospital population for the first 2 years of the MS- DRGs. MedPAC supported using the Maryland experience to forecast potential increases in case mix by stating: ``The case-mix reporting changes that occurred in Maryland-when that state adopted APR DRGs in its all payer rate-setting system--provide one of the few recent benchmarks for comparison outside of Medicare's historical experience.'' \15\

\15\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 12.

The reference to the IRF PPS was not intended to suggest that we used the experience with that system to forecast a potential adjustment under the IPPS. Rather, we were merely noting that the adoption of a PPS system for IRFs also produced an increase in case-mix as a result of the new incentives presented by going to a different payment system. The example suggests that there is strong evidence that hospitals-- whether they are IRFs, acute care IPPS hospitals, or LTCHs--respond to coding incentives presented by their respective payment systems and will react accordingly. MedPAC's public comments also supported this point. In its public comments on the FY 2008 IPPS proposed rule, MedPAC stated that there were increases in case mix with the introduction of prospective payment systems for IRFs and LTCHs.\16\

\16\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 11.

The comments about reordering of codes and substituting specific codes for nonspecific codes suggests that hospitals are already maximizing coding opportunities and there is no further changes they can make that would result in an increase in Medicare payment. With respect to reordering of codes, the commenter argues that MCCs and CCs will already be found in the first 9 fields on the Medicare claim and the codes that are stored or processed from fields 10 to 25 cannot be moved up higher on the claim to increase payment. While this public comment suggests that there will be no opportunity to increase case mix by moving secondary diagnoses higher on a claim, another public comment provided a specific estimate of how much this practice could increase case-mix. The commenter examined data from New York State discharges and indicated that if MCC and CC codes that are currently provided beyond the original 9 diagnoses on the claim that are used by Medicare are moved to the first 9 positions, case mix would increase by 0.5 percent. This reaffirms CMS' views that hospitals focus their documentation and coding efforts to maximize reimbursement. Again, we believe these examples provide evidence from the public comments supporting the necessity for us to apply an adjustment for documentation and coding to meet the requirements of the law.

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We believe increases in case-mix do not only have to come from moving codes higher on the claim. A hospital can merely change the order of a principal and secondary diagnosis for closely related conditions to affect payment. The selection of a principal diagnosis that was previously coded as secondary can increase hospital payment. Again, we found a public comment suggesting that reordering of principal and secondary diagnoses can increase case mix. The commenter stated some DRG groups only count a code in ``the primary position while others only count a code in a secondary position.'' The commenter is noting that many DRGs are split based on the presence or absence of an MCC or CC as a secondary diagnosis. According to the commenter, many Medicare patients have multiple conditions occasioning their admission, suggesting that reordering the principal and secondary diagnosis codes can result in an increase in case-mix.

We also disagree with the comments suggesting that hospitals do not have the opportunity to substitute a specified for an unspecified code to increase case mix. In fact, we believe these incentives will be very strong under the MS-DRGs with the reclassification of many unspecified codes as non-CCs. Again, we found statements in the public comments that support the notion that hospitals will have opportunities to substitute a specified for an unspecified condition to increase case- mix under the MS DRGs. One commenter indicated that the CC list revisions encourage coding of more detailed codes and estimates that switching from ``not otherwise specified'' codes to detailed codes could increase case mix by 0.5 percent. Another commenter states: ``The most dramatic example is ICD-9-CM code 428.0, Congestive heart failure, unspecified, which was applied to an average of 2.3 million Medicare fee-for-service cases a year during the past three years. This was the most widely used secondary diagnosis code, despite the fact that 12 more specific codes were added in FY 2003 * * * if the revised CC list were implemented before hospitals had a chance to improve their coding to accommodate the revisions, then case-mix creep and inpatient prospective payment system (IPPS) overpayments would ensue.''

We further note that many of the public comments arguing against the documentation and coding adjustment also request a year's delay in implementation of the MS-DRGs so ``hospitals may focus on understanding the impact of the revised CC list, training and educating their coders, and working with their physicians for any documentation improvements required to allow the reporting of more specific codes where applicable.'' We believe this comment provides a strong indication that, even though many public commenters themselves argue against the need for the documentation and coding adjustment, the same commenters would like a year's delay to take the very actions that they say make an adjustment unnecessary. The MS-DRGs are not making any changes to ICD-9-CM codes. While the MS-DRGs do include some consolidations of base DRGs, the major changes from the current DRGs simply involve adding severity levels to many of the new MS-DRGs. The move to MS-DRGs will not necessitate additional data elements or changes in reporting practices. Therefore, hospitals may continue to document and code as they do currently to be paid by Medicare under the MS-DRGs. The only reason hospitals would need a delay in the MS-DRGs is to have more time to understand how their revenues are affected by coding under the new DRG system. In our view, there is a clear indication in these comments that hospitals will change their documentation and coding practices and increase case mix consistent with the payment incentives that are provided by the MS-DRG system.

As further evidence that documentation and coding practices are affected by payment, we note a recent article in the Journal of AHIMA (American Health Information Management Association) which discusses methods for improving clinical documentation in order to increase reimbursement. The article describes a program at a hospital utilizing clinical documentation specialists that work on the hospital treatment floors to encourage improvements in clinical documentation. The article states that one year after implementing the program, the hospital gained an additional $1.5 million in reimbursement. In the second year, the hospital gained $900,000. The article reports a similar program at another hospital where the ``the academic hospital was overly conservative in its coding practices and ``leaving money on the table.' '' \17\ These examples provide strong support for concluding that there were opportunities under the current CMS DRGs to improve coding and increase payment. With incentives changing under the MS-DRGs, we believe there will be additional opportunities to improve documentation and coding. We believe this article supports our contention that hospital coders and physicians will respond to incentives available under MS-DRGs by improving documentation and coding to increase case- mix.

\17\ Dimick, Chris ``Clinical Documentation Specialists,'' Journal of AHIMA, July-August 2007, pages 44-50.

Comment: One commenter stated that the ICD-9-CM Official Guidelines for Coding and Reporting and the American Hospital Association's Coding Clinic for ICD 9-CM provide official industry guidance on complete, accurate ICD-9-CM coding, without regard to the impact of code assignment on reimbursement. AHIMA's Standards of Ethical Coding stipulate that ``coding professionals are expected to support the importance of accurate, complete, and consistent coding practices for the production of quality healthcare data.'' The commenter believed that all diagnoses and procedures should be coded and reported in accordance with the official coding rules and guidelines and does not advocate the practice of only coding enough diagnoses and procedures for correct DRG assignment. The commenter stated that increased attention to the quality of coding and documentation as a result of the role coding plays in DRG assignment has led to much-improved coding practices since the adoption of the IPPS in 1983. The commenter further noted that hospitals code more completely so CMS has more complete data to make DRG modifications that would recognize the resource- intensiveness of a diagnosis or procedure.

Response: We believe the commenter's assertion supports our point that improvements in documentation and coding occurred as a result of the payment incentives provided by the IPPS. That is, the commenter is saying that the adoption of the original IPPS in 1983 led hospitals to improve documentation and coding practices because ``of the role coding plays in DRG assignment.'' The commenter believed that MS-DRGs will not lead to changes in documentation and coding practices and cites--among other sources--AHIMA's Standards of Ethical Coding. AHIMA is a professional association representing more than 51,000 health information professionals who work throughout the healthcare industry whose work is closely engaged with the diagnosis and procedure classification systems that serve to create the DRGs. The article cited above from the July-August issue of the Journal of AHIMA provided documented examples of how hospitals can change coding practices to maximize payments. Thus, there is an

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assertion in this comment that official coding rules and guidelines require all diagnoses and procedures to be reported on the claim minimizing opportunities for changes in documentation and coding to increase case mix. However, AHIMA's own professional journal provides strong evidence of opportunities that exist for improvements in coding to increase payment. As we stated previously and suggested by the article in the Journal of AHIMA, we believe that payment incentives lead hospital staff to carefully examine documentation and coding practices, work with physicians to improve the precision of clinical documentation in order to make subsequent changes in coding.

Comment: A number of commenters requested that CMS not make the documentation and coding adjustment until hospitals have had experience with the MS-DRGs. Once the MS-DRGs are fully implemented, the commenters indicated that CMS can investigate whether payments have increased due to coding rather than the severity of patients and determine if an adjustment is necessary. Several commenters stated that CMS is not required to make a prospective adjustment to IPPS rates to account for improvements in documentation and coding and should not do so without an understanding of whether there will even be coding changes in the first few years of the refined system. Another commenter stated that CMS should retrospectively determine the national rate reduction to offset increases in case-mix from improvements in documentation and coding even though the reduction would be made to future rates and would not account for potential increases in payment that would occur until the adjustment is made. The commenter indicated that section 1886(d)(3)(A)(vi) of the Act authorizes just such an adjustment and it is the only way to ensure that the level of the reduction is accurate. All of these commenters argued that CMS can always correct for additional payments made as a result of coding changes in a later year when there is sufficient evidence and an understanding of the magnitude.

One commenter suggested that CMS defer (but not eliminate) adjustments for improvements in documentation and coding. This commenter suggested that CMS make the adjustment at a later time when there is actual data suggesting how much improvements in documentation have increased case mix but that we consider a ``stop loss'' if initial coding changes appear to far exceed the current 4.8 percent estimate. The commenter indicated that CMS should encourage facilities to improve their documentation and coding accuracy sooner (that is, prior to adjusting for documentation and coding), and not do any MCC/CC consolidations until after coding improvements have occurred (that is, have 3 severity levels for all DRGs).

Another commenter noted that RAND's evaluation of alternative severity DRG systems included an assessment of how coding behaviors are expected to vary under each system. However, RAND did not evaluate the MS-DRGs and further noted that it was not able to empirically assess the relative risk the alternative severity-adjusted systems pose for case mix increases attributable to coding improvement without having the opportunity to observe actual changes in coding behavior when a DRG system is used for payment. The commenter did not believe any payment adjustment to account for case mix increases, which are attributable to coding improvements, should be made until CMS has conducted appropriate research to determine the extent to which improvements in coding becomes an issue under the proposed MS-DRG system. While the design of the MS-DRG system may encourage an increased level of coding specificity, the commenter stated that it is unknown what effect, if any, this might have on the CMI.

Response: RAND did not repeat the analysis of the potential for documentation and coding improvements to increase case mix using the MS-DRGs because it only worked with FY 2005 data to evaluate them. The RAND report refers readers to the analysis CMS did of the likely impact of documentation and coding improvements on case mix using the MS- DRGs.\18\

\18\ Wynn, Barbara O., Beckett, Megan, et al., ``Evaluation of Severity Adjusted DRG System: Draft Interim Report,'' RAND HEALTH, August, 2007, Addendum, page 27.

With respect to delaying making any adjustments for documentation and coding, the commenters are correct that section 1886(d)(3)(A)(vi) of the Act gives the Secretary authority to revisit adjustments to the standardized amounts for changes in coding or classification of discharges that were based on estimates in a future year. We also note that section 1886(d)(4)(C) of the Act requires that ``changes in classifications or weighting factors'' not increase or decrease aggregate inpatient hospital payments. We believe that Congress has expressed its clear preference that all changes to DRG reclassifications be budget neutral. Substantial evidence indicates that, unless we make an adjustment to account for improvements in documentation and coding, aggregate payments under the IPPS will increase when we adopt MS-DRGs as a result of these improvements in documentation and coding. Further, as discussed above, the independent Office of the Actuary validated the -1.2 percent adjustment to the standardized amount to ensure that improvements in documentation and coding do not increase case-mix and IPPS payments.

In addition, by revisiting the adjustment at a later date when we have actual data, we can ensure that the standardized amounts are permanently set at the level they otherwise would have been had the increase in case mix due to improvements in documentation and coding been known. That is, any overestimate or underestimate of the adjustment for improvements in documentation would not be permanently embedded in the IPPS standardized amount for subsequent years. While any differences between projected and actual data could result in higher or lower payments to hospitals for the intervening years, MedPAC believes that CMS should provide an adjustment that lies somewhere in the middle of its own estimate of 2.0 percent and CMS' estimate of 4.8 percent. In its comments, MedPAC recommended that CMS should adopt an adjustment for improvements in documentation and coding between 1.6 and 1.8 percent per year that would ``put both Medicare and the hospital industry at some risk that the actual value will turn out to be higher or lower than the adjustment that is applied.'' \19\

\19\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 13.

Comment: Several commenters agreed with RAND's assertion that the magnitude of coding improvement is likely to vary across hospitals, depending on how strong their current coding practices are and the resources they are able to devote to improving them. One commenter stated that the hospitals that already use the more specific codes and those with a low proportion of cases in split DRGs would receive fewer, if any, overpayments because their case mix indices would not increase as much, or at all. The commenter stated that New York hospitals, in particular, would have less opportunity for coding improvement than other hospitals because the union of the Medicare CC list and the New

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York State CC list has 279 more codes than the Medicare CC list alone. Thus, moving from the union of the CC list to the revised CC list would add only 1,298 codes, 279 fewer codes than in the rest of the country. Furthermore, New York hospitals are well-practiced in using specific codes because the New York State AP-DRG grouper differentiates between CCs and major CCs, as the MS-DRG grouper would do. This commenter and others that cited the RAND study agree that CMS' practice of making an across-the-board adjustment to PPS payments to address case mix increases attributable to coding improvements raises an equity issue that CMS needs to consider. The adjustment to the standardized amount for documentation and coding for hospitals that have already improved coding would result in significant payment losses according to the commenter rather than offsetting higher case mix indices. The commenter stated that these changes are not uniform, creating unintended distributional impacts. The commenter stated that the process to make adjustments for documentation and coding is an across the board adjustment to the standardized amount, while actual changes will vary widely. This will create unintended distributional impacts across patient types, providers, and states that will in turn, according to the commenter, create push-back in providers, states, Congress, and potentially the courts.

One of these commenters acknowledged that CMS may not have the option to recoup overpayments on a hospital-specific basis, as is done in New York. The commenter suspected that the proposed documentation and coding adjustment is too high because hospitals in other states-- particularly New York--have more experience with secondary diagnosis coding than the Maryland hospitals had before their change to APR DRGs. Therefore, hospitals in other states probably have less opportunity to generate documentation and coding improvements that increase case mix.

Response: We agree that completeness of hospital coding practices may well vary across hospitals. Although we recognize this variability, we believe there will be potential for coding improvements to increase case mix for all hospitals. For instance, as noted above, a hospital can change the order of a principal and secondary diagnosis for closely related conditions to affect payment. The selection of a principal diagnosis that was previously coded as secondary can increase hospital payment. This type of potential coding change to increase case mix could be available to all hospitals irrespective of whether or not they maximized coding in the past. As noted above, a commenter examined data from New York State discharges and indicated that if MCC and CC codes that are currently provided beyond the original 9 diagnoses on the claim that are used by Medicare are moved to the first 9 positions, case mix would increase by 0.5 percent. Thus, this comment indicates that there will be at least some opportunity to increase case mix through improvements in documentation and coding in States like New York that have used sophisticated DRG systems in the past for payment. Similarly, there are public comments suggesting hospitals can select a specified condition in place of an unspecified one to increase payment under the MS-DRGs but that this change in documentation and coding practice will not be applicable in areas of the country where a DRG system is in use that distinguishes between MCCs and CCs. As noted above, congestive heart failure, unspecified appears on an average of 2.3 million cases per year from FY 2004 to FY 2006 or on over 20 percent of the Medicare claims. In our view, billing of an unspecified code on this magnitude of claims suggests potential improvements in coding from substituting a specified for an unspecified code are widespread. While improvements in documentation and coding that increase case mix may be variable, section 1886(d)(3)(A)(vi) of the Act only allows us to apply the adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case mix to the standardized amounts.

Comment: Several commenters indicated that there should be a transition to the MS-DRGs. A number of commenters supported a 4-year transition period for implementing the MS-DRGs. The commenters stated that such a transition would allow hospitals the opportunity to educate their employees and physicians to assure proper, accurate coding, along with allocation of required resources through their budgetary process. The commenters recommended that FY 2008 be used to prepare for and test the MS-DRGs. In FY 2009 through 2011, the DRG weights would be computed as a blend of the MS-DRGs and the current DRGs. These commenters believed a 1-year delay would provide hospitals adequate time to implement and test the new system and adjust operations and staffing for predicted revenues. They also suggested that the 1-year delay would provide CMS adequate time to finalize data and a CC list, introduce and test software for case classification and payment, and train its fiscal agents. It would also allow vendors and State agencies time to incorporate such changes into their respective software and information systems. Other commenters were concerned that CMS would implement the MS-DRGs in FY 2008 and then, as a result of the final RAND report, move to another new system for FY 2009. These commenters urged CMS to delay the implementation of the MS-DRGs if there was a possibility for another completely new system in FY 2009. These commenters stated that hospitals will expend a large number of hours educating their coding staff about the MS-DRGs so that they can attempt to legitimately optimize their payment. Some commenters recommended that CMS implement the MS-DRGs effective October 1, 2007, with a 3-year phase-in approach of the relative weights.

One commenter indicated that CMS should phase in the revised CC list and MS-DRGs to reduce the amount of documentation and coding related overpayments that would be made ``in the first place.'' The commenter recommended that the MS-DRGs not be implemented in FY 2008. Instead, they recommend that the revised CC list be used with a Version 25.0 of the current CMS DRGs and allow vendors of the alternative severity systems being evaluated by RAND to incorporate this information into an updated version of their systems. The commenter stated that the updated version of the CMS DRGs using the revised CC list would produce a greatly improved DRG GROUPER. The commenter recommended a 5-year phase-in during which the old CC list/CMS-DRG weights and the new CC list/MS-DRG weights would be blended in the following proportions: 80/20 percent in FY 2008, 60/40 percent in FY 2009, 40/60 percent in FY 2010, 20/80 percent in FY 2011, and 0/100 percent in FY 2012. The commenter stated that CMS should release the MS-DRG grouper software as soon as possible and should also encourage vendors to release products as soon as possible that ensure that both old and new CCs are listed among the first eight secondary diagnoses, as these are the only ones that can be used for payment purposes. With respect to the phase-in, the commenter believed it is prudent to begin to use the new CC list/MS-DRGs in FY 2008 so that hospitals are compelled as soon as possible (1) to improve their coding, and (2) to educate

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their physicians about complete documentation. However, the commenter would not want the new DRG weights to represent a majority of the blend until they can be based on the first year of corrected data. The FY 2010 weights would be based on the FY 2008 cases, so they would reflect the first year's coding corrections and would presumably be more accurate. Because it can take several years for hospitals and physicians to adjust to new documentation and coding requirements, continuing blended payments in FY 2011 would be important to minimize documentation and coding related overpayments, according to the commenter.

The commenter stated that the goal is to minimize the aggregate level of documentation and coding related overpayments so that hospitals not generating increases in case mix are not unfairly penalized by an across-the-board reduction. If overpayments could be recouped on a hospital-specific basis, the commenter stated that an attenuated phase-in would not be necessary. The commenter stated that they realized that their recommended phase in would be cumbersome because each case would have to be grouped twice to determine the DRG assignment under the CMS DRG and MS-DRG GROUPERS. However, the commenter believed this is the better policy option since the alternative for good-coding hospitals and those with relatively few patients in split DRGs would be to effectively eliminate the IPPS update for 2 years.

Response: We received many comments in support of the MS-DRGs, particularly because they are so structurally similar to the current DRGs, and therefore, we believe that a full year's delay is unwarranted. While the MS-DRGs include some consolidations of base DRGs, the major changes from the current DRGs simply involve adding severity levels to many of the new MS-DRGs. The move to MS-DRGs will not necessitate additional data elements or changes in reporting practices. Providers will be submitting the same clinical information on their claims. In our view, the issues in the comments concerning the need to examine the new system in detail do not justify delaying the move to this new system. We have provided detailed information in both the proposed and final rule as well as on our Web site on the formation of the MS-DRGs. We believe the significant benefits of the new system outweigh concerns by the provider community that they have not had time to analyze the details of the new system. We are confident that once they start working with the new system, they will find it simple to understand and far better at identifying and paying for more costly and severely ill patients. Accordingly, we do not believe that extensive preparation for implementation of the MS DRGs is necessary, and therefore, we are not delaying adoption of the MS-DRGs until FY 2009.

MedPAC also carefully evaluated the options of implementing MS-DRGs in FY 2008 versus deferring the implementation until FY 2009 and agrees with our assessment that there is not sufficient cause to delay the proposed adoption of MS-DRGs beyond FY 2008. While MedPAC agreed that MS-DRGs should be implemented in FY 2008, it also stated that the transition should coincide with the transition to cost-based weights-- that is, implement the MS-DRGs over a 2-year period beginning in FY 2008.\20\ We agree with MedPAC that the MS-DRGs should be implemented over a 2-year transition period that coincides with the phase-in of cost-based weights. Therefore, we will implement MS-DRGs beginning in FY 2008 over a 2-year transition period where the DRG relative weights will be a blend of 50 percent each of the CMS DRG and MS DRG weights. We have provided more detail in section II.D.2. of the preamble of this final rule with comment period about the DRG relative weight calculations over this 2-year transition period.

\20\ Medicare Payment Advisory Commission: Letter to Acting Administrator Leslie Norwalk, June 11, 2007, page 10.

There appears to be a suggestion in many of the public comments both here and above that delaying implementation of MS-DRGs will allow the improvements in documentation and coding to occur before they have any financial impact on the Medicare program because hospitals would know and be encouraged to code using the incentives provided under the MS-DRGs, while Medicare would continue to be using the current CMS DRGs for payment. As discussed, one comment suggested that we could lessen the need for the documentation and coding adjustment by minimizing the financial impact of improvements in documentation and coding through a long transition period (5 years). We believe hospitals will not improve documentation and coding consistent with the incentives provided under the MS-DRGs unless they have a financial incentive to do so. As indicated in one public comment, ``Documentation and numbers of diagnosis codes is inevitably incomplete due to time pressures for completion of `paperwork' and limitation of computer systems to capture this information. If an item is not used and/or not important, it is less well documented.''

If there is a delay in MS-DRGs, the coding incentives that would come with its adoption would not be present and, therefore, likely would not occur. While we appreciate the suggestion for adopting a long transition period to provide an incentive to improve coding but minimize its financial impact on Medicare, such an idea may well just extend the period of time that documentation and coding improvements occur while delaying the improvements in recognition of severity of illness that would result from adopting MS DRGs. Again, we do not believe that either delaying or adopting MS-DRGs over a long period of time will reduce the need to apply a documentation and coding adjustment of the magnitude we estimated. We believe that adopting either of the ideas would only result in us needing to delay or extend the period of time over which the documentation and coding adjustment is applied.

Comment: MedPAC indicated that case-mix might increase more or less than the 4.8 percent we estimated from Maryland's experience. MedPAC recommended an adjustment between 1.6 and 1.8 percent a year for 2 years. This adjustment is based on a comparison between the MS-DRGs in Maryland and nationally (2.0 percent over 2 years) increased:

To reflect their view that many hospitals do not respond quickly to improve reporting after major changes in the DRG definitions; and

The estimated change in case-mix for hospitals in the rest of the nation may reflect some improvements in documentation and coding in response to changes in the DRG definitions that were adopted in 2006 (such as the refinements to the cardiac care DRGs among others).

MedPAC recommended that we apply an adjustment that is somewhere in the middle between their estimate of 2.0 and the CMS figure of 4.8 percent. According to MedPAC, a middle point in the range of 1.6 to 1.8 percent per year would put both Medicare and the hospital industry at some risk that the actual value will turn out to be higher or lower than the adjustment that is applied. If the actual increase due to improvements in case-mix reporting turns out to be higher, the Medicare program will have paid more than it should have. If the actual increase is lower, the hospitals will have been paid less than they should have. MedPAC noted that we have already stated a willingness to correct for any difference

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between our forecast and the actual increase in case mix due to improved coding when data become available in 2009 when we prepare the proposed rule for fiscal year 2010. MedPAC further suggested that CMS plan on taking coding adjustments for longer than two years. CMS may want to adopt a series of adjustments that takes somewhat higher adjustments in the first few years of the MS-DRG changes, on the assumption that history has shown that previous coding adjustments have underestimated the impact of the changes.

Response: We proposed to adjust the IPPS standardized amounts by - 2.4 percent each year for FYs 2008 and 2009 for improvements in documentation and coding that will increase case-mix. As we are adopting the MS-DRGs over a 2-year transition period, we do not believe that the incentives to improve documentation and coding will be as strong in the first year as we previously estimated. Further, as suggested above by the evidence when the IPPS was first implemented, MedPAC, and other public comments, it can take several years for hospitals and physicians to adjust their documentation and coding practices in response to payment incentives. For these reasons, we believe the documentation and coding adjustment should be applied over a period of 3 rather than 2 years. We do not agree with MedPAC that a larger adjustment ``should be taken in the first few years of the MS- DRGs on the assumption that history has shown that previous coding adjustments have underestimated the impact of changes.'' Rather, as stated above, we believe that the coding incentives during the first year of MS-DRGs will be lessened because we are adopting them over a 2- year transition period. Therefore, we believe a smaller adjustment should be applied in the initial year. We continue to believe that our analysis justifies a -4.8 percent adjustment for improvements in documentation and coding at this time. Therefore, we are applying an adjustment of -1.2 percent in this final rule with comment period to the IPPS standardized amounts for FY 2008 and based on current projections will apply adjustments of -1.8 percent each year to the IPPS standardized amounts for FYs 2009 and 2010.

Consistent with the statute, we will compare the actual increase in case-mix due to documentation and coding to our projection once we have actual data to revise the Actuary's estimate and the adjustment we make to the standardized amounts. With these adjustments occurring over 3 rather than 2 years, we will have information in 2009 as we prepare the IPPS rule for FY 2010 to reevaluate how the actual increase in case mix compares to our estimate. We may also have partial year information in 2008 to inform any proposal for FY 2009. Therefore, we will consider revising the planned adjustments for FY 2009 and FY 2010 if information in the Medicare billing data suggests that our projections are either too high or low compared to actual experience.

Based on the Actuary's analysis, using the Secretary's authority under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized amount to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix, we are reducing the IPPS standardized amount by -1.2 percent for FY 2008. Section 1886(d)(3)(A)(vi) of the Act further gives the Secretary authority to revisit adjustments to the standardized amounts for changes in coding or classification of discharges that were based on estimates in a future year. Consistent with the statute, we will compare the actual increase in case-mix due to documentation and coding to our projection once we have actual data for FY 2008. At that time, if necessary, we may make a further adjustment to the standardized amounts to account for the difference between our projection and actual data. 7. Effect of the MS-DRGs on the Outlier Threshold

To qualify for outlier payments, a case must have costs greater than Medicare's payment rate for the case plus a ``fixed loss'' or cost threshold. The statute requires that the Secretary set the cost threshold so that outlier payments for any year are projected to be not less than 5 percent or more than 6 percent of total operating DRG payments plus outlier payments. The Secretary is required by statute to reduce the average standardized amount by a factor to account for the estimated proportion of total DRG payments made to outlier cases. Historically, the Secretary has set the cost threshold so that 5.1 percent of estimated IPPS payments are paid as outliers. The FY 2007 cost outlier threshold is $24,485. Therefore, for any given case, a hospital's charge adjusted to cost by its hospital-specific CCR must exceed Medicare's DRG payment by $24,485 for the case to receive cost outlier payments.

Adoption of the MS-DRGs will have an effect on calculation of the outlier threshold. For the proposed rule and this final rule with comment period, we analyzed how the outlier threshold would be affected by adopting the MS-DRGs. Using FY 2005 MedPAR data, we have simulated the effect of the MS-DRGs on the outlier threshold. By increasing the number of DRGs from 538 to 745 to better recognize severity of illness, the MS-DRGs would be providing increased payment that better recognizes complexity and severity of illness for cases that are currently paid as outliers. That is, many cases that are high-cost outlier cases under the current CMS DRG system would be paid using an MCC DRG under the MS- DRGs and could potentially be paid as nonoutlier cases. For this reason, we expected the FY 2008 outlier threshold to decline from its FY 2007 level of $24,485. We proposed an FY 2008 outlier threshold of $23,015. In this final rule with comment period, we are establishing an FY 2008 outlier threshold of $22,650. In section II.A.4. of the Addendum to this final rule with comment period, we provide a more detailed explanation of how we determined the final FY 2008 cost outlier threshold. We address any comments received on the FY 2008 proposed outlier threshold in section II.A.4. of the Addendum to this final rule with comment period. 8. Effect of the MS-DRGs on the Postacute Care Transfer Policy

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. Section 412.4(c) establishes the conditions under which we consider a discharge to be a transfer for purposes of our postacute care transfer policy. In transfer situations, 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. The purpose of the IPPS postacute care transfer payment policy is to avoid providing an incentive for a hospital to transfer

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patients to another 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.

Beginning with the FY 2006 IPPS, the regulations at Sec. 412.4 specified that, effective October 1, 2005, we make a DRG subject to the postacute care transfer policy if, based on Version 23.0 of the DRG Definitions Manual (FY 2006), using data from the March 2005 update of FY 2004 MedPAR file, the DRG meets the following criteria:

The DRG had a geometric mean length of stay of at least 3 days;

The DRG had at least 2,050 postacute care transfer cases; and

At least 5.5 percent of the cases in the DRG were discharged to postacute care prior to the geometric mean length of stay for the DRG.

In addition, if the DRG was one of a paired set of DRGs based on the presence or absence of a CC or major cardiovascular condition (MCV), both paired DRGs would be included if either one met the three criteria above.

If a DRG met the above criteria based on the Version 23.0 DRG Definitions Manual and FY 2004 MedPAR data, we made the DRG subject to the postacute care transfer policy. We noted in the FY 2006 final rule that we would not revise the list of DRGs subject to the postacute care transfer policy annually unless we make a change to a specific CMS DRG. We established this policy to promote certainty and stability in the postacute care transfer payment policy. Annual reviews of the list of CMS DRGs subject to the policy would likely lead to great volatility in the payment methodology with certain DRGs qualifying for the policy in one year, deleted the next year, only to be reinstated the following year. However, we noted that, over time, as treatment practices change, it was possible that some CMS DRGs that qualified for the policy will no longer be discharged with great frequency to postacute care. Similarly, we explained that there may be other CMS DRGs that at that time had a low rate of discharges to postacute care, but which might have very high rates in the future.

The regulations at Sec. 412.4 further specify that if a DRG did not exist in Version 23.0 of the DRG Definitions Manual or a DRG included in Version 23.0 of the DRG Definitions Manual is revised, the DRG will be a qualifying DRG if it meets the following criteria based on the version of the DRG Definitions Manual in use when the new or revised DRG first became effective, using the most recent complete year of MedPAR data:

The total number of discharges to postacute care in the DRG must equal or exceed the 55th percentile for all DRGs; and

The proportion of short-stay discharges to postacute care to total discharges in the DRG exceeds the 55th percentile for all DRGs. A short-stay discharge is a discharge before the geometric mean length of stay for the DRG.

A DRG also is a qualifying DRG if it is paired with another DRG based on the presence or absence of a CC or MCV that meets either of the above two criteria.

The MS-DRGs that we proposed to adopt (and are finalizing in this final rule with comment period) for FY 2008 are a significant revision to the current CMS DRG system. Because the new MS-DRGs are not reflected in Version 23.0 of the DRG Definitions Manual, consistent with Sec. 412.4, we proposed to recalculate the 55th percentile thresholds in order to determine which MS-DRGs would be subject to the postacute care transfer policy. Further, under the MS-DRGs, the subdivisions within the base DRGs will be different than those under the current CMS DRGs. Unlike the current CMS DRGs, the MS-DRGs are not divided based on the presence or absence of a CC or MCV. Rather, the MS-DRGs have up to three subdivisions based on: (1) The presence of a MCC; (2) the presence of a CC; or (3) the absence of either an MCC or CC. Consistent with our existing policy under which both DRGs in a CC/ non-CC pair are qualifying DRGs if one of the pair qualifies, we proposed that each MS-DRG that shared a base MS-DRG would be a qualifying DRG if one of the MS-DRGs that shared the base DRG qualified. We proposed to revise Sec. 412.4(d)(3)(ii) to codify this policy.

Similarly, we believe that the changes to adopt MS-DRGs also necessitate a revision to one of the criteria used in Sec. 412.4(f)(5) of the regulations to determine whether a DRG meets the criteria for payment under the ``special payment methodology.'' Under the special payment methodology, a case subject to the special payment methodology that is transferred early to a postacute care setting will be paid 50 percent of the total IPPS payment plus the average per diem for the first day of the stay. Fifty percent of the per diem amount will be paid for each subsequent day of the stay, up to the full MS-DRG payment amount. A CMS DRG is currently subject to the special payment methodology if it meets the criteria of Sec. 412.4(f)(5). Section 412.4(f)(5)(iv) specifies that if a DRG meets the criteria specified under Sec. 412.4(f)(5)(i) through (f)(5)(iii), any DRG that is paired with it based on the presence or absence of a CC or MCV is also subject to the special payment methodology. Given that this criterion would no longer be applicable under the MS-DRGs, we proposed to add a new Sec. 412.4(f)(6) that includes a DRG in the special payment methodology if it is part of a CC/non-CC or MCV/non-MCV pair. We proposed to update this criterion so that it conforms to the proposed changes to adopt MS- DRGs for FY 2008. The revision would make an MS-DRG subject to the special payment methodology if it shares a base MS-DRG with an MS-DRG that meets the criteria for receiving the special payment methodology.

Comment: One commenter urged CMS to ``suspend application of the postacute care transfer policy for one year, until sufficient data is available, and then apply the criteria anew to the MS-DRGs.'' As an alternative to ceasing the application of the postacute care transfer policy for one year, the commenter recommended that CMS limit the application of the postacute care transfer policy as much as possible until better data are available and not to increase the average length of stay for less complicated DRGs over their current levels.

Response: Under both the CMS DRGs and MS-DRGs, there were two criteria for making a DRG subject to the postacute care transfer policy. These criteria are:

The total number of discharges to postacute care in the DRG must equal or exceed the 55th percentile for all DRGs; and

The proportion of short-stay discharges to postacute care to total discharges in the DRG must equal or exceed the 55th percentile for all DRGs.

While these criteria are identical under the CMS DRGs and the MS- DRGs, we needed to recalculate the 55th percentile thresholds in order to determine which MS-DRGs would be subject to the postacute care transfer policy to conform the existing policy to the new DRG system. Further, we also needed to make a conforming change to our policy that a DRG is subject to the postacute care transfer policy if it is one of a paired set of DRGs based on the presence or absence of a CC or MCV where one of the DRGs in the set meets the numerical criteria specified above. As the MS-DRGs have subdivisions based on MCC, CCs and non-CCs rather than MCVs, CCs and non-CCs, we needed to amend the regulatory text to reflect the nomenclature of the MS-DRG system. Therefore, our policy for making a DRG subject to the postacute care transfer policy under the MS-DRGs is unchanged other than to make it

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conform to the new DRG system. As our policy is unchanged, we do not believe that either suspending or limiting application of the postacute care transfer policy under the MS-DRGs is warranted.

Comment: One commenter opposed CMS' ``proposal to significantly expand the list of the DRGs subject to the postacute care transfer policy.'' The commenter, a hospital, noted that ``manual processes'' would have to take place in order to identify patients meeting the home health criteria. Specifically, the commenter stated that, ``hospitals

[would] either have to contact patients to determine if they have received home health services within 3 days after discharge or wait for the fiscal intermediary to let the hospital know that a patient received home care that was not planned at the time of discharge which requires coders to review and correct the disposition and for the Business Office to resubmit the claim.''

Response: We note that we did not propose to change or expand the postacute care transfer policy provision in this year's proposed rule. Rather, we applied existing post-acute transfer policy to the new MS- DRG system. Thus, the criteria that would have made a CMS-DRG subject to the postacute care transfer policy last year were the same as those applied to the MS-DRGs for FY 2008. We note that in FY 2007, 190 CMS DRGs of 538 CMS DRGs were subject to the postacute care transfer policy, or about 35 percent. For FY 2008, 273 out of 745 MS-DRGs are subject to the postacute care transfer policy or about 36 percent. Therefore, the proportion of postacute care transfer MS-DRGs subject to the policy is very similar to what it was last year under the CMS DRGs. Thus, we disagree there has been a ``significant expansion'' of DRGs subject to the postacute care transfer policy. Rather, we are simply conforming the existing postacute care transfer policy to the new MS- DRGs.

In response to the commenter's concern about it being administratively burdensome to identify patients who received home health care services subsequent to discharge from the acute care hospital, we note that, under section 1886(d)(5)(J)(ii)(III) of the Act, the term ``qualified discharge'' includes a discharge from an IPPS hospital upon which the patient is provided home health services from a home health agency if such services relate to the condition or diagnosis for which the patient received hospital inpatient services. The proposed rule did not make any change to application of the postacute care transfer policy in this circumstance. We note that, in most instances, patients are discharged from the acute hospital with a written plan of care for the provision of home health services, so hospitals would usually know if a patient was going to receive home health care services at the time of discharge. Additionally, we do not expect that the administrative burden of identifying patients discharged to home for the provision of home health services within 3 days will be any greater under the MS-DRG system than it was under the CMS DRG system because the proportion of DRGs subject to the postacute care transfer policy is very similar under both systems.

Comment: One commenter stated that it is unreasonable to categorize all three MS-DRGs in the same base DRG as subject to the postacute care transfer policy if only one of the three meets the criteria. The commenter suggested that, for base MS-DRGs where there are three base- DRGs, two of the three base-DRGs should meet the postacute care transfer criteria (on their own) for all of them to be subject to the postacute care transfer policy and that if only one meets the criteria, none should be subject to the postacute care transfer policy.

Response: Under the CMS DRG system, some DRGs were paired with others (with CC or without CC). Under that system, if one DRG qualified for the postacute care transfer policy, we included its paired DRG so as not to create an incentive for hospitals not to include any code that would identify a complicating or comorbid condition. The same logic applies under the MS-DRG system: If one DRG in a set meets the postacute care transfer criteria, we believe that it is appropriate to include the paired or grouped DRGs so as not to create any coding incentives to bypass the postacute care transfer payment. Therefore, we disagree with the commenter that it is ``unreasonable'' to include a group of MS-DRGs where only one MS-DRG in the group meets the postacute care transfer criteria on its own. We also note that we apply the same logic to the special-pay MS-DRGs. That is, if an MS-DRG qualifies to receive the special payment methodology, any other MS-DRGs that share the same base MS-DRG also qualify to receive the special payment methodology.

In this final rule with comment period, we are adopting the proposed postacute care transfer policy conforming changes as final.

In addition, Sec. 412.4(f)(3) states that the postacute care transfer policy does not apply to CMS DRG 385 for newborns who die or are transferred. We proposed to make a conforming change to this paragraph to reflect that this CMS DRG would become MS-DRG 789 (Neonates, Died or Transferred to Another Acute Care Facility) under our proposed DRG changes for FY 2008. We did not receive any comments on this proposal and, therefore, are finalizing this conforming change as proposed.

These revisions do not constitute a change to the application of the postacute care transfer policy. Therefore, any savings attributed to the postacute care transfer policy will be unchanged as a result of adopting the MS-DRGs. Consistent with section 1886(d)(4)(C)(iii) of the Act, aggregate payments from adoption of the MS-DRGs cannot be greater or less than those that would have been made had we not made any DRG changes.

We also proposed and are adopting as final technical changes to Sec. Sec. 412.4(f)(5)(i) and (f)(5)(iv) to correct a cross-reference and a typographical error, respectively.

E. Refinement of the Relative Weight Calculation

In the FY 2007 IPPS final rule (71 FR 47882), effective for FY 2007, we began to implement significant revisions to Medicare's inpatient hospital rates by basing the relative weights on hospitals' estimated costs rather than on charges. This reform was one of several measured steps to improve the accuracy of Medicare's payment for inpatient stays that include using costs rather than charges to set the relative weights and making refinements to the current CMS-DRGs so they better account for the severity of the patient's condition. Prior to FY 2007, we used hospital charges as a proxy for hospital resource use in setting the relative weights. Both MedPAC and CMS have found that the limitations of charges as a measure of resource use include the fact that hospitals cross-subsidize departmental services in many different ways that bear little relation to cost, frequently applying a lower charge markup to routine and special care services than to ancillary services. In MedPAC's 2005 Report to the Congress on Physician-Owned Specialty Hospitals, MedPAC found that hospitals charge much more than their costs for some types of services (such as operating room time, imaging services and supplies) than others (such as room and board and routine nursing care).\21\ Our analysis of the MedPAC report in the FY 2007 IPPS

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proposed rule (71 FR 24006) produced consistent findings.

\21\ Medicare Payment Advisory Commission:Report to the Congress: Physician-Owned Specialty Hospitals, March 2005, p. 26.

In the FY 2007 IPPS proposed rule, we proposed to implement cost- based weights incorporating aspects of a methodology recommended by MedPAC, which we called the hospital-specific relative value cost center (HSRVcc) methodology. MedPAC indicated that an HSRVcc methodology would reduce the effect of cost differences among hospitals that may be present in the national relative weights due to differences in case mix adjusted costs. After studying Medicare cost report data, we proposed to establish 10 national cost center categories from which to compute 10 national CCRs based upon broad hospital accounting definitions. We made several important changes to the HSRVcc methodology that MedPAC recommended using in its March 2005 Report to the Congress on Physician-Owned Specialty Hospitals. We refer readers to the FY 2007 IPPS proposed rule (71 FR 24007 through 24011) for an explanation and our reasons for the modification to MedPAC's methodology. In its public comments on the FY 2007 IPPS proposed rule, MedPAC generally agreed with the adaptations we made to its methodology. MedPAC further recommended that we expand the number of distinct hospital department CCRs being used from 10 to 13, which we subsequently adopted in the FY 2007 IPPS final rule.

We did not finalize the HSRVcc methodology for FY 2007 because of concerns raised in the public comments on the FY 2007 IPPS proposed rule (71 FR 47882 through 47898). Rather, we adopted a cost-based weighting methodology without the hospital-specific relative weight feature. In response to a comment from MedPAC, we also expanded the number of distinct hospital departments with CCRs from 10 to 13. We indicated our intent to study whether to adopt the HSRVcc methodology after we had the opportunity to further consider some of the issues raised in the public comments. In the interim, we adopted a cost-based weighting methodology over a 3-year transition period, substantially mitigating the redistributive payment impacts illustrated in the proposed rule, while we engaged a contractor to assist us with evaluating the HSRVcc methodology.

Some commenters raised concerns about potential bias in cost-based weights due to ``charge compression,'' which is the practice of applying a lower percentage markup to higher cost services and a higher percentage markup to lower cost services. These commenters were concerned that our proposed weighting methodology may undervalue high cost items and overvalue low cost items if a single CCR is applied to items of widely varying costs in the same cost center. The commenters suggested that the HSRVcc methodology would exacerbate the effect of charge compression on the final relative weights. One of the commenters suggested an analytic technique of using regression analysis to identify adjustments that could be made to the CCRs to better account for charge compression. We indicated our interest in researching whether a rigorous model should allow an adjustment for charge compression to the extent that it exists. We engaged a contractor, RTI International (RTI), to study several issues with respect to the cost- based weights, including charge compression, and to review the statistical model provided to us by the commenter for adjusting the weights to account for it. We discuss RTI's findings in detail below.

Commenters also suggested that the cost report data used in the cost methodology are outdated, not consistent across hospitals, and do not account for the costs of newer technologies such as medical devices. However, the relationship between costs and charges (not costs alone) is the important variable in setting the relative weights under this new system. Older cost reports also do not include the hospital's higher charges for these same medical devices. Therefore, it cannot be known whether the CCR for the more recent technologies will differ from those we are using to set the relative weights. The use of national average cost center CCRs rather than hospital-specific CCRs may mitigate potential inconsistencies in hospital cost reporting. Nevertheless, in the FY 2007 IPPS final rule, we agreed that it was important to review how hospitals report costs and charges on the cost reports and on the Medicare claims and asked RTI to further study this issue as well.

In summary, we proposed to adopt HSRVcc relative weights for FY 2007 using national average CCRs for 10 hospital departments. Based on public comments concerned about charge compression and the accuracy of cost reporting, we decided not to finalize the HSRVcc methodology, but adopted cost-based weights without the hospital specific feature. In response to comments from MedPAC, we expanded the number of hospital cost centers used in calculating the national CCRs from 10 to 13. Finally, we decided to implement the cost-based weighting methodology gradually, by blending the cost-based and charge-based weights over a 3-year transition period beginning with FY 2007, while we further studied many of the issues raised in the public comments. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for more details on our final policy for calculating the cost-based DRG relative weights. 1. Summary of RTI's Report on Charge Compression

In August 2006, we awarded a contract to RTI to study the effects of charge compression in calculating DRG relative weights. The purpose of the study was to develop more accurate estimates of the costs of Medicare inpatient hospital stays that can be used in calculating the relative weights per DRG. RTI was asked to assess the potential for bias in relative weights due to CCR differences within the 13 CCR groups used in calculating the cost-based DRG relative weights and to develop an analysis plan that explored alternative methods of estimating costs with the objective of better aligning the charges and costs used in those calculations. RTI was asked to consider methods of reducing the variation in CCRs across services within cost centers by:

Modifying existing cost centers and/or creating new centers.

Using statistical methods, such as the regression adjustment for charge compression. Some commenters on the FY 2007 IPPS proposed rule suggested that we use a regression adjustment to account for charge compression.

As part of its contract, RTI convened a Technical Expert Panel composed of individuals representing academic institutions, hospital associations, medical device manufacturers, and MedPAC. The members of the panel met on October 27, 2006, to evaluate RTI's analytic plan, to identify other areas that are likely to be affected by compression or aggregation problems, and to propose suggestions for adjustments for charge compression. We posted RTI's draft interim report on the CMS Web site in March 2007. For more information, interested individuals can view RTI's report at the following Web site: http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The report may also

be viewed on RAND's Web site at http://www.rand.org/pubs/online/health.

As the first step in its analysis, RTI compared the reported Medicare program charge amounts from the cost reports to the total Medicare charges summed across all claims filed by providers. Using cost and charge data

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from the most recent available Medicare cost reports and inpatient claims from IPPS hospitals, RTI was charged with performing an analysis to determine how well the MedPAR charges matched the cost report charges used to compute CCRs. The accuracy of the DRG cost estimates is directly affected by this match because MedPAR charges are multiplied by CCRs to estimate cost. RTI found consistent matching of charges from the Medicare cost report to charges grouped in the MedPAR claims for some cost centers but there appeared to be problems with others. For example, RTI found that the data between the cost report and the claims matched well for total discharges, days, covered charges, nursing unit charges, pharmacy, and laboratory. However, there appeared to be inconsistent reporting between the cost reports and the claims data for charges in several ancillary departments (medical supplies, operating room, cardiology, and radiology). For example, the data suggested that hospitals often include costs and charges for devices and other medical supplies within the Medicare cost report cost centers for Operating Room, Radiology or Cardiology, while other hospitals include them in the Medical Supplies cost center.

RTI found that some charge mismatching results from the way in which charges are grouped in the MedPAR file. Examples include the intermediate care nursing charges being grouped with intensive care nursing charges and electroencephalography (EEG) charges being grouped with laboratory charges. RTI suggested that reclassifying intermediate care charges from the intensive care unit to the routine cost center could address the former problem.

As the second step in its analysis, RTI reviewed the existing cost centers that are combined into the 13 groups used in calculating the national average CCRs. RTI identified CCRs with potential aggregation problems and considered whether separating the charge groups could result in more accurate cost conversion at the DRG level. The analysis led RTI to calculate separate CCRs for Emergency Room and Blood and Blood Administration, both of which had been included in ``Other Services'' in FY 2007.

During this second step, RTI noted that a variation of charge compression is also present in inpatient nursing services because most patients are charged a single type of accommodation rate per day that is linked to the type of nursing unit (routine, intermediate, or intensive), but not to the hours of nursing services given to individual patients. Unlike the situation with charge compression in ancillary service areas, there are virtually no detailed charge codes that can distinguish patient nursing care use. Therefore, any potential bias cannot be empirically evaluated or adjustments made without additional data.

Next, RTI examined individual revenue codes within the cost centers and used regression analysis to determine whether certain revenue codes in the same cost center had significantly different markup rates. Those revenue codes include devices, prosthetics, implants within the Medical Supplies cost center, IV Solutions within the Drugs cost center, CT scanning and MRI within the Radiology cost center, Cardiac Catheterization within the Cardiology cost center, and Intermediate Care Units within the Routine Nursing Care cost center. Devices, prosthetics, and implants within the Medical Supplies cost center have a lower markup and, as a result, a higher CCR than the remainder of the medical supplies group according to RTI's analysis. Within the Drugs CCR, IV Solutions have a much higher markup and much lower CCR than the other drugs included in the category. Within the Radiology CCR, CT scanning and MRI have higher markups and lower CCRs than the remaining radiology services. RTI's results for Cardiac Catheterization and Intermediate Care Units were ambiguous due to data problems.

RTI's analysis also determined the impact of the disaggregated CCRs on the relative weights. Differences in CCRs alone do not necessarily alter the DRG relative weights. The impact on the relative weights is the result of the interaction of CCR differences and DRG differences in the proportions of the services with different CCRs. In FY 2007, we calculated relative weights using CCRs for 13 hospital departments. The RTI analysis suggests expanding the number of distinct hospital department CCRs from 13 to 19. Of the additional six CCRs, two would result from separating the Emergency Department and Blood (Products and Administration) from the residual ``Other Services'' category. Four additional CCRs would result from applying a regression method similar to a method suggested in last year's public comments to three existing categories: supplies, radiology, and drugs. This method, as adapted by RTI, used detailed coding of charges to disaggregate hospital cost centers and derive separate, predicted alternative CCRs for the disaggregated services. RTI's analysis suggests splitting Medical Supplies into one CCR for Devices, Implants, and Prosthetics and one CCR for Other Supplies; splitting Radiology into one CCR for MRIs, one CCR for CT scans, and one CCR for Other Radiology; and splitting Drugs into one CCR for IV Solutions and one CCR for Other Drugs.

RTI's draft report provides the potential impacts of adopting these changes to the CCRs. We note that RTI's analysis was based on Version 24.0 of the CMS DRGs. Because the proposed MS-DRGs were under development for the FY 2008 IPPS proposed rule, they were unavailable to RTI for their analysis. The results of RTI's analysis may be different if applied to the MS-DRGs. However, it seems reasonable to believe that the impact of RTI's suggestions will be consistent using Version 24.0 of the CMS DRGs and the MS-DRGs, as both systems generally use the same base DRGs while applying different subdivisions to recognize severity of illness. Of all the adjusted CCRs, the largest impact on weights came from accounting for charge compression in medical supplies for devices and implants. The impact on weights from accounting for CCR differences among drugs was modest. The impact of splitting MRI and CT scanning from the radiology CCR was greater than the impact of modifying the Drugs CCRs, but less than the impact of splitting the Medical supplies group. Separating Emergency Department and Blood Products and Administration from the ``Other Services'' category would raise the CCR for other services in the group.

RTI found that disaggregating cost centers may have a mitigating effect on the impact of transitioning from charge-based weights to cost-based weights. That is, the changes being suggested by RTI will generally offset (fully or more than fully in some cases or in part in other cases) the impacts of fully implemented cost-based weights that we are adopting over the FY 2007-FY 2009 transition period. Thus, RTI's analysis suggests that expanding the number of distinct hospital department CCRs used to calculate cost-based weights from 13 to 19 will generally increase the relative weights for surgical DRGs and decrease them for the medical DRGs compared to the fully implemented cost-based weights to which we began transitioning in FY 2007. 2. RTI Recommendations

In its report, RTI provides recommendations for the short term, medium term, and long term, to mitigate aggregation bias in the calculation of relative weights. We summarize RTI's

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recommendations below and respond to each of them. a. Short-Term Recommendations

Most of RTI's short-term recommendations have already been described above. The most immediate changes that RTI recommends implementing include expanding from 13 distinct hospital department CCRs to 19 by:

Disaggregating ``Emergency Room'' and ``Blood and Blood Products'' from the ``Other Services'' cost center;

Establishing regression-based estimates as a temporary or permanent method for disaggregating the Medical Supplies, Drugs, and Radiology cost centers; and

Reclassifying intermediate care charges from the intensive care unit cost center to the routine cost center.

We believe these recommendations have significant potential to address issues of charge compression and potential mismatches between how costs and charges are reported in the cost reports and on the Medicare claims.

RTI's recommendations show significant promise in the short term for addressing issues raised in the public comments on the cost-based weights in the FY 2007 IPPS proposed rule. However, in the time available for the development of the proposed rule, we were unable to investigate how RTI's recommended changes may interact with other potential changes to the DRGs and to the method of calculating the DRG relative weights. As we noted above, RTI's analysis was done on the Version 24.0 of the CMS DRGs and not the MS-DRGs we proposed for FY 2008. For the proposed rule and this final rule with comment period, we were not able to examine the combined impacts of the MS-DRGs and RTI's recommendations. In addition, we believe it is also important to consider that, in the FY 2007 IPPS final rule (71 FR 47897), we anticipated undertaking further analysis of the HSRVcc methodology over the next year in conjunction with the research we were to do on charge compression. Analysis of the HSRVcc methodology will be part of the second phase of the RAND study of alternative DRG systems to be completed by September 1, 2007, that has not been completed in time for this final rule with comment period. As a result, we have also been unable to consider the effects of the HSRVcc methodology together with the MS-DRGs and RTI's recommendations. Finally, we note that in order to complete the analysis in time for the proposed rule or this final rule with comment period, RTI's study used only hospital inpatient claims. However, hospital ancillary departments typically include both inpatient and outpatient services within the same department and only a single CCR covering both inpatient and outpatient services can be calculated from Medicare cost reports. Although we believe that applying the regression method used by RTI to only inpatient services is unlikely to have had much impact for the adjustments recommended by RTI, the preferred approach would be to apply the regression method to the combined inpatient and outpatient services. The latter approach would ensure that any potential CCR adjustments in the IPPS would be consistent with potential CCR adjustments in the OPPS. We hope to expand their analysis to incorporate outpatient services during the coming year.

Although we did not propose to adopt RTI's recommendations for FY 2008, we solicited public comments on expanding from 13 CCRs to 19 CCRs. Again, we noted that RTI's analysis suggests significant improvements that could result in the cost-based weights from adopting its recommendations to adjust for charge compression. Therefore, we also expressed interest in public comments on whether we should proceed to adopt the RTI recommended changes for FY 2008 in the absence of a detailed analysis of how the relative weights would change if we were to address charge compression while simultaneously adopting an HSRVcc methodology together with the MS-DRGs. Given the change in the impacts that were illustrated in last year's FY 2007 IPPS final rule (71 FR 47915-47916), going from a hospital-specific to a nonhospital-specific cost-weighting methodology, we believe that sequentially adjusting for charge compression and later adopting an HSRVcc methodology could create the potential for instability in IPPS payments over the next 2 years (that is, payments for surgical DRGs would increase and payment for medical DRGs would decrease if we were to adopt the RTI recommended changes for FY 2008, but could potentially reverse direction if we were to adopt an HSRVcc methodology for FY 2009). Again, we solicited public comments on all of these issues before making a final decision as to whether to proceed with the RTI's short-term recommendations in the final rule for FY 2008.

Comment: Many commenters commented on whether we should proceed in adopting the recommendations made by RTI in its January 2007 report, particularly concerning changes in cost reporting practices and the additional, regression-based CCRs. Several commenters focused on problems highlighted by RTI with the inconsistent and varying methods in which hospitals group their charges in MedPAR and report costs and charges on the Medicare cost report, which can result in distortions in the DRG weights. Some commenters asserted that mismatching is not caused by the failure of hospitals to prepare their cost reports correctly, as appeared to be suggested by the RTI study. Other commenters noted that RTI recommends the incorporation of edits to reject cost reports or require more intensive review by auditors to resolve the lack of uniformity in cost reporting. However, the commenters believed that such edits or audits will not solve the mismatch problem because hospitals' reporting is consistent with the cost reporting instructions. The commenters described that, currently, cost report instructions included with the CMS Form-339 allow for three methods of reporting Medicare charges. The method selected by each hospital is specific to its information systems and based on the method that most accurately aligns Medicare program charges on Cost Report Worksheet D-4 (inpatient) and/or Worksheet D, Part IV (outpatient) with the overall cost and charges reported on Worksheets A and C. Many hospitals elect to allocate some or all of the Medicare program charges from the Medicare Provider Statistical and Reimbursement (PS&R) data to various lines in the cost report based on hospital-specific financial system needs. Under this scenario, total hospital CCRs are aligned with the hospital's program charges, but would not match the charge groupings used in MedPAR.

Instead of increased edits or cost report rejections, the commenters believed that hospitals must be educated to report costs and charges, particularly for supplies, in a way that is consistent with how MedPAR groups charges. The commenters are launching such an educational campaign, which would encourage consistent reporting that they believe would, in turn, produce consistent groupings of departments within the 13 cost center groups that are currently used to create the cost-based weights, or any future expansion of the categories that may occur. The commenters stated that their educational efforts will take time and CMS should recognize that some hospitals will be in a better position to adopt certain cost report changes more rapidly because the changes may be more expensive and time-consuming for some hospitals to adopt relative to

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others. The commenters requested that CMS communicate with its fiscal intermediaries/MAC that such action is appropriate and encouraged for improvements in Medicare's cost-based weights. The commenters were concerned that, without direction from CMS, the fiscal intermediaries/ MAC may not allow hospitals to change how they report costs.

Although one commenter supported the education of hospitals in better cost reporting, this commenter opposed mandating hospitals to make these cost reporting changes. One commenter stated that ``it is important to note that charge compression results from hospitals' markup practices,'' and that the problem would be eliminated if hospitals would use a single markup for all items and services included within all revenue centers. Another commenter asserted that hospitals are not consistent in their cost reporting and the first step should be to issue cost report instructions. The next step would be to allocate audit resources to the fiscal intermediary/MAC in order to determine whether these instructions are properly implemented because reporting of costs and charges does have an indirect effect on payments to hospitals. Another commenter stated that CMS needs to place more emphasis and audit resources toward ensuring that hospitals properly complete their cost reports. However, while another commenter supported scrutiny and auditing for extreme CCRs, the commenter also appreciated that CMS has limited audit resources. One commenter stated that adjustments to revenue codes reported on the standard UB-04 claims forms may also be appropriate to better match charges on claims forms with the charges (and costs) reported on the Medicare cost report. Other commenters stated that the costing of the weights should be done at the UB revenue code level. Given the variety of ways in which hospitals report their costs and charges, it is impossible to make assumptions related to revenue codes across all hospitals without the assistance of the PS&R crosswalk, which is submitted with the filed cost report as an attachment to the CMS-339 form. The commenters noted that if CMS is going to continue a transition to cost-based weights, hospitals will need time to align their mapping of cost centers into departments or cost categories for purposes of cost reporting and claims reporting. The accurate costing of claims would be in line with the original MedPAC recommendations.

In light of the cost reporting and MedPAR mismatch problems, the commenters did not believe that a temporary, regression-based adjustment that does not fix the underlying concerns with cost reporting is appropriate. The commenters are concerned that, for the sake of expediency, the use of estimates (a regression analysis approach), as opposed to efforts to collect accurate data at the appropriate cost center level, would be insufficient. In addition, the commenters expressed doubt that a regression model can be easily validated, as the DRG weights are modified on an annual basis. One commenter argued that CMS did not include details of the regression- based adjustment in the proposed rule and, consequently, the commenter could not assess the impact of implementing the adjustment. The commenter agreed with CMS' assessment that RTI's adjustments might change if they are implemented jointly with MS-DRGs, and if estimated using both inpatient and outpatient costs and charges. This commenter, along with others, believed that, at the very least, implementation of the regression-based CCRs should be delayed, and once short-term educational efforts and CMS' long-term cost report evaluation are underway, it would be more appropriate to have an informed discussion on which cost report changes are needed to alleviate the issue of charge compression.

Response: In the FY 2008 IPPS proposed rule (72 FR 24715), we stated that because we did not have sufficient time to investigate how RTI's recommended changes might interact with other possible changes to the DRGs and the DRG relative weights, and because RTI's regression method was only applied to inpatient services and not also outpatient services, we decided not to propose implementing RTI's recommendations for FY 2008. However, we also stated that, despite these concerns, we believe RTI's recommendations have the potential to significantly address the issues of charge compression and potential mismatches between how costs and charges are reported in the cost reports and on the Medicare claims. Therefore, we solicited comments on whether we should expand the 13 CCRs to 19 CCRs for FY 2008.

We have carefully considered all comments, ranging from those urging us to adopt all 19 CCRs in FY 2008, to those believing that the regression-based CCRs should be delayed for at least a year, if used at all. Because of concerns that we and some commenters continue to have about premature adoption of the regression-based CCRs without the benefit of knowing how they will interact with other DRG changes, and the arguments in the comments summarized above concerning cost and claims reporting, we have decided to finalize our proposal to not implement the four regression-based CCRs for medical supplies and devices, IV drugs, and radiology (MRI and CT scans) for FY 2008. However, as we explain in more detail in response to comments below, we are adopting the two cost report-based CCRs for ``Emergency Room'' and ``Blood and Blood Products'' for a total of 15 national average CCRs for FY 2008. We believe these changes to the relative weight methodology do not have the disadvantages that are of concern to the commenters. That is, recognizing these additional departments will allow us to use information that is already being reported by hospitals in their cost reports and adopt some of the changes being recommended by RTI without going to a regression-based model at this time.

Many of the concerns in the comments summarized above related to how hospitals' report costs and charges on the cost report and how hospitals include charges on their bills for inpatient services or the way the charges are grouped in the MedPAR. RTI indicated that more precise cost reporting is the best solution to address the issue of charge compression in the long term. Many commenters believed that rather than rely on increased edits and audits to resolve the lack of uniformity in cost reporting, hospitals must be educated to report costs and charges in a manner that is consistent with the way in which MedPAR groups charge, and the commenters were launching an educational campaign accordingly. We agree with the educational initiative of these commenters. Participation in these educational initiatives by hospitals is voluntary. Hospitals are not required to change how they report costs and charges if their current cost reporting practices are consistent with rules and regulations and applicable instructions. However, to the extent allowed under current regulations and cost report instructions, we encourage hospitals to report costs and charges consistently with how the data are used to determine relative weights. We believe achieving this goal is of mutual benefit to both Medicare and hospitals.

The commenters also suggested that CMS should inform the fiscal intermediary/MAC that hospitals may be changing their cost reporting and allocation methodologies in response to the educational initiative, that such action is encouraged, and that more

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audit resources should be allocated to fiscal intermediaries/MAC to ensure that any new cost reporting instructions are being implemented properly. First, we intend to notify the fiscal intermediaries/MAC of this cost reporting educational initiative subsequent to the issuance of this final rule with comment period, and provide both fiscal intermediaries/MAC and hospitals with guidance on how to address requests for changes in cost reporting practices from hospitals. Second, each hospital that wishes to change its cost reporting practices must follow the directives at Sec. 413.53(a)(1) of our regulations and PRM-1, section 2203, regarding matching the charges to the costs reported in each cost center. We recommend that the hospital also disclose the changes made in a cover letter with the submission of the cost report.

Commenters submitted suggestions about how MedPAR could be modified to further distinguish categories of charges. As we stated in the proposed rule, we will consider suggestions for adding additional revenue codes to MedPAR in conjunction with other competing priorities for our information systems. We cannot create additional revenue codes. Requests for new revenue codes on hospital bills have to be made to and approved by the National Uniform Billing Committee (NUBC).

Comment: Some commenters were uncertain whether RTI's recommendations to expand certain cost categories through regression analysis is the appropriate solution to address the issue of charge compression and potential inconsistencies in how hospitals report costs and charges. The commenters supported the expansion of categories to include CCRs based on cost centers that already exist on the cost report, such as emergency department and blood products, and possibly others after further examination. Another commenter stated that creating a CCR for blood and blood products will reflect more accurately the cost of blood and will help ensure future IPPS updates will account more adequately for these products. Although one commenter understood that CMS has not been able to analyze the effect of implementing the regression adjustments with the proposed MS-DRGs, the commenter believed that CMS should adopt RTI's adjustment to the CCRs for drugs and IV solutions for FY 2008, and subsequently analyze and report on the effects of this adjustment on MS-DRGs. Another commenter noted that while the RTI regression estimates provide a practical short-term approach to address charge compression for drugs, supplies, and radiology revenue cost centers, this method does not identify all of the charge compression that occurs at each hospital in these revenue centers, nor does it address charge compression that may be occurring in other revenue centers such as cardiology, or the routine and intensive care revenue cost centers where nursing costs per day are currently treated as if they were uniform across patient categories.

Another commenter also asked that CMS remember that the primary use of the cost report is to determine a hospital's costs of treating Medicare patients. The commenter noted that the cost report is still used for cost-based payment for many hospitals, such as CAHs, SCHs, and MDHs, and many State Medicaid plans and other payers also rely on data from the cost report to determine payment rates. Because of these uses, the commenters asked CMS to proceed cautiously with changing the cost report to avoid unintended consequences for hospitals where the cost report determines a significant portion of current payment. The commenter offered its services in reviewing and discussing cost report changes that Medicare may propose. Another commenter recommended that CMS work with hospital finance experts so the most appropriate and accurate instructions are issued, with very specific instructions as to where services are to be classified on the cost report and that subcategories should be eliminated.

Another commenter did not support RTI's recommendations for revising the cost reports to reduce cost and charge misalignment and to create new cost centers because of ``the enormous amount of work hospitals would have to perform'' to change internal operations and data collection to accommodate the revisions. The commenter expressed concern that this would lead to ``rising inefficiency and administrative costs.'' This commenter, and others, believed that ``clear, detailed instructions from CMS'' would be needed to differentiate between a ``device,'' ``implant,'' or ``IV solution,'' and other ``new nomenclature that distinguishes and separates tens of thousands of items and drugs, for instance, implantable spinal screws, bandages and bone cement, into specific cost centers'' would be necessary.

Response: As we noted in the proposed rule and in response to comments above, we believe that RTI's regression-based CCRs may be a promising means for addressing charge compression in the short term. However, because we do not yet know how the additional regression-based CCRs would interact with the MS-DRGs or with the HSRV methodology, and the significant concerns raised by a number of commenters about adopting regression-based CCRs, we are not adopting the adjustments to address charge compression in the FY 2008 IPPS final rule. We note RTI's long-term recommendations suggest addressing charge compression through adding new cost centers to the cost report and undertaking additional activities such as improvements in how hospitals report costs and charges. Thus, we believe that RTI and many of the public comments conclude that ultimately improved and more precise cost reporting is the best way to minimize charge compression. While we are not adopting the regression-based adjustments to address charge compression, we believe that the FY 2008 IPPS final rule relative weights should take advantage of additional information that is already reported on the cost report. Because the cost report currently allows for the creation of specific CCRs for Emergency Room and Blood and Blood Products, and some commenters expressed explicit support for expanding the number of CCRs based on cost centers that already exist on the cost report, we have decided to separate Emergency Room costs and charges and Blood and Blood Products costs and charges from the current ``Other Services'' CCR for the purposes of calculating the cost-based portion of the FY 2008 relative weights. That is, in accordance with RTI's short-term recommendation, for FY 2008, we are adding two additional CCRs to the current list of 13 CCRs, for a total of 15 CCRs. We are using line 61 on Worksheets C, Part I and D-4 to create the Emergency Room CCR and lines 46 and 47 on Worksheets C, Part I and D-4 to create a CCR for Blood and Blood Products. We are modifying the table listing the 15 cost center groupings in section II.H. of the preamble of this final rule with comment period accordingly.

With respect to the commenters that asked CMS to remember that the primary use of the cost report is to determine a hospital's costs of treating Medicare patients, we intend to proceed cautiously as the commenters suggest. To the extent that the cost report changes that we make improve consistency and accuracy of cost reporting, these benefits will extend to providers whose payments are based on reasonable costs (CAHs) or otherwise use the cost report to determine hospital-specific rates (SCHs and MDHs). As we stated above, we intend to work with finance and cost report experts in the hospital community if we

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decide to modify the cost report or its instructions to address issues with the DRG relative weights. We also understand that hospitals may be concerned about the resources that may be required to adapt to potential cost report changes. Any changes that would be made to the Medicare cost report would be done under the Paperwork Reduction Act and, by law, could not be undertaken without considering the burden that would be imposed on all hospitals.

Comment: Some commenters supported making adjustments to address charge compression. These commenters noted that charge compression was first identified in 2000 and MedPAC and other researchers have also recognized this issue. The commenters recommended implementation of a regression-based adjustment in the FY 2007 final rule and stated that this methodology has been evaluated and validated through RTI's study. Many commenters believe that RTI's results provide ample evidence of charge compression that justifies the implementation of their recommendations for the FY 2008 final rule. Furthermore, commenters stated that RTI's regression-based adjustment is appropriate and can be implemented immediately without any administrative burdens to the hospital. Several commenters emphasized that CMS should make it a priority to apply the regression methodology to the Medical supplies CCR. These commenters noted that in the proposed rule, CMS stated: ``of all the adjusted CCRs, the largest impact on weights came from accounting for charge compression in medical supplies for devices and implants,'' which demonstrates that a regression approach should be applied at least to disaggregate the medical supplies category into one CCR for ``Devices and Implants'' and a separate CCR for ``Other Supplies.''

One commenter disagreed with the reasons CMS expressed in the proposed rule for delaying implementation of RTI's recommendations, and found them to be ``rather insubstantial.'' The commenter did not believe that the combined impact of RTI's recommendations and the proposed MS-DRGs need to be studied before CMS could proceed with implementing the regression-based CCRs. The commenter noted that the relative independence of RTI's recommendations from the proposed MS-DRG changes was confirmed by a study commissioned by AdvaMed. The commenter also stated that the fact that RTI's analysis only included inpatient claims is relatively insignificant. The commenter believed that if further adjustments need to be made to incorporate outpatient claims into the regression estimate next year, they can be done with a fairly minor impact. This commenter, and others, urged CMS to implement a regression that uses both inpatient and outpatient claims when making an adjustment for charge compression for the CY 2008 OPPS, and use the same regression in subsequent years for both the IPPS and OPPS.

Another commenter stated that, although it understood that CMS wishes to understand the various interactions of regression-based CCRs with other aspects of the IPPS, the effect of charge compression is ``demonstrable and measurable'' and should be implemented in FY 2008 for the ``sake of payment accuracy.'' Another commenter stated that CMS' concern about the interaction between addressing charge compression and other proposed changes appeared ``disingenuous, as CMS is proposing so many changes that the interaction of the various components cannot be estimated.'' The commenter also questioned CMS' hesitation to make changes to the cost report to accommodate RTI's recommendation due to limited information system resources, time constraints, and inconvenience. The commenter asserted that ``hospitals find the defense of scarce resources, compressed implementation lead times and cost justification vis-a-vis outcomes an interesting option for CMS given the fact that it is manifestly unavailable to hospitals who have similar issues.''

Response: We disagree with the notion of the commenter that found us to be ``disingenuous'' because the ``interaction of various components [of the IPPS] cannot be estimated.'' We refer the commenter to the payment impact section of the IPPS proposed rule (72 FR 25119) and this final rule with comment period as well as the FY 2007 IPPS proposed rule (71 FR 24025) where we simulate the interaction of a number of different payment reforms including the adoption of cost- based weights, severity DRGs, and other changes. We note that for some categories of hospitals, the impact of adopting MS-DRGs is significant. The RTI work suggests that further changes to the relative weights will also be significant and potentially result in additional redistributions of Medicare payment. In our view, the ``interactions of various components'' can be determined and before we adopt potential policy options in a final rule, the public should be fully informed on the potential impacts. As we discussed in the FY 2008 proposed rule, we have concerns about implementing regression-based CCRs in the final rule without specifically proposing them because of concerns about how these changes would interact with the transition to MS-DRGs, the calculation of cost-based relative weights, and possibly the HSRV method.

Despite the commenters' support for the regression-based CCRs, we are still concerned about the accuracy of using regression-based estimates to determine relative weights rather than the Medicare cost report. Many public commenters, including several national hospital associations, shared these same concerns. However, we believe that more specific CCRs will improve payment accuracy for several DRGs. Therefore, as we stated above, we are implementing RTI's recommendation to expand the current 13 CCRs to 15 CCRs without the use of a regression-based adjustment.

In the proposed rule, we indicated there was insufficient time to assess how RTI's recommendations may interact with other potential changes to the DRGs and to the method of calculating the DRG relative weights. We noted that RTI's study examined charge compression within Version 24.0 of the CMS DRGs, and we could not examine their interactive effects with the MS-DRGs and be able to timely publish the FY 2008 proposed rule. For this reason, we requested public comment on whether to adopt these changes in the final rule without having fully analyzed them for the proposed rule. While there was strong support for adopting the regression-based charge adjustments in these comments, many other commenters believed that we should provide the public with modeled payment impacts and an opportunity to comment before implementing regression-based CCRs.

We are also continuing to consider whether to adopt an HSRV payment methodology for FY 2009. We anticipate undertaking further analysis of the HSRV methodology and would like to incorporate RTI's recommendations into that analysis. Although its evaluation of alternative severity DRG systems is complete, we are currently working with RAND to study the HSRV methodology. Furthermore, we continue to believe that adjusting for charge compression and later adopting the HSRV methodology could create payment instability over the next 2 years and it would be preferable to consider simultaneously adopting these changes.

Finally, if we were to adopt adjustments for charge compression, the preferred approach would be to apply

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the regression method to the combined inpatient and outpatient services. The RTI report discussed the notion that separating services that are generally delivered in outpatient settings might improve the accuracy of CCRs for inpatient services, and these areas include therapeutic radiology, nuclear medicine, chemotherapy, electroconvulsive therapy and outpatient surgery. RTI noted that while these charges are not significant under the IPPS, aggregation bias may be present in these outpatient services which would affect the overall department CCR. Therefore, we will consider expanding our analysis to include outpatient services.

Comment: One commenter urged CMS to separately distinguish intermediate (step-down) level nursing care costs. Another commenter argued that it is illogical that nursing costs are reflected in the relative weights only through flat room and board charges, given that nursing care is a variable, rather than a fixed cost. The commenter asserted that, as a result, a significant amount of money is being misallocated across hospitals for required nursing care. The commenter urged CMS to give serious consideration to the RTI report's recommendation to establish study groups and research options for improving patient-level charging within nursing units, as the outcomes could improve precision in relative resource weights without adding substantial administrative costs to either Medicare or to hospitals. Specifically, the commenter strongly supported the creation of a separate direct and indirect cost center at each hospital and the inclusion of these data in the annual Medicare cost report, the reporting and collection of nursing intensity data, and adjustment of the Medicare payment for severity of illness by modifying the proposed APR DRG severity adjustment formula to incorporate nursing intensity and cost within each diagnosis and severity category. The commenter also mentioned the New York State Medicaid model, which was the first prospective payment system to recognize and reimburse for relative nursing resource consumption levels among DRGs through the use of Nursing Intensity Weights (NIWs). The NIWs, which were developed by an expert panel, have been reevaluated and updated periodically to maintain consistency with changes in the DRG definitions. The commenter recommended that, because this program has been successfully implemented in a large state for a number of years, a Medicare demonstration project based on this model should be launched.

Response: The commenters' raise interesting concerns related to nursing costs that are variable but are reflected in the DRG weights only as fixed costs through flat room and board charges. There are currently no detailed charge codes that can be used to distinguish the intensity in nursing services provided by type of patient. In its report, RTI noted ``because intensity of nursing is likely correlated with DRG assignment, this could be a significant source of bias in DRG weights.'' Particularly because nursing comprises such a significant portion of hospital costs and charges, we agree that this issue should be further studied. We are interested in knowing whether the public has any ideas for how the relative weight methodology can systematically recognize and reimburse for differences in nursing resource consumption provided across hospital inpatients. We will consider whether we should study the possibility of using NIWs to recognize nursing intensity in the DRG relative weights.

Comment: Commenters supported adopting the regression CCRs to alleviate charge compression, but some commenters were concerned that the application of this adjustment methodology to capital intensive radiology services is premature and requires additional analysis. The commenters noted that the RTI report found that within the Radiology CCR, CT scanning and MRI have higher markups and lower CCRs than the remaining radiology services. Implementing RTI's recommendation to apply a regression method to split Radiology into one CCR each for MRIs, CT scans and Other Radiology could potentially result in lower CCRs for the CT and MRI categories. One commenter cited an analysis conducted by Direct Research, LLC, that found that the majority of hospitals do not allocate the capital costs of MRI and CT scan machines to the radiology cost center. Rather, the capital costs could be allocated more broadly across hospital services on a square footage basis. However, the commenter noted that RTI's analysis for radiology services assumes a detailed capital allocation for these services that results in differential CCRs found in MRIs and CT scans, which the commenter suggested is actually not found in the data. Therefore, the commenters requested that the regression-based CCRs for radiology not be adopted at this time.

Response: We appreciate the comment on the limitations of the regression-based CCR on radiology. This is another example of how changes to cost reporting can potentially improve the accuracy of CCRs for radiology and other departments. In our view, the commenter raises another issue that requires additional analysis before we adopt regression-based adjustments to address charge compression.

Comment: One comment addressed our proposal to move cost report line 54 for EEG out of the Cardiology cost center group into the Laboratory cost center group. The commenter noted that where providers elect to report EEG separately on line 54, this seems appropriate. However, some providers combine EEG with EKG on line 53 (usually because the EEG services are purchased as outside services and not a separate cost center for the hospital). In those instances, moving only the EEG costs would be impossible. The commenter noted that CMS did not indicate what portion of providers separately report EEG services on line 54, but the commenter was concerned that there will be continued mismatching under either grouping. The commenter encouraged CMS to consider expanding the MedPAR database to include separate fields for all revenue codes so that detailed analyses and accurate matching of costs and charges can be performed. The commenter also concurred with CMS' recommendation to move radioisotope costs to the radiology services grouping and out of ``other services.''

Response: We responded earlier that suggestions for adding additional revenue codes to MedPAR will be considered in conjunction with other competing priorities for our information systems. In the FY 2008 proposed rule, we decided to move the costs for cases involving EEG from the Cardiology cost center group to the Laboratory Cost center group to maintain consistency with their corresponding EEG MedPAR claims, which are categorized under Laboratory charges. Although the commenter indicated that hospitals may be combining EEG costs with EKG costs on line 53 instead of reporting it as a separate cost on line 54, we believe the MedPAR is clear in categorizing EEG claims under revenue codes 0740 and 0749, and therefore, costs for EEG should be reported on line 54 of the cost report as well. For this reason, we are finalizing our proposal to move the costs for cases involving EEG from the Cardiology cost center group to the Laboratory Cost center for purposes of calculating the DRG relative weights. As described in the FY 2008 IPPS proposed rule, we will also calculate the DRG relative weights for FY 2008 by moving radioisotype costs from the Other

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Services CCR to the Radiology Services CCR.

Comment: One commenter was concerned that hospitals do not have consistent charging and billing practices on an inpatient and outpatient basis for the administration of medications by injection and/or infusion at the bedside.

Response: We did not propose any changes on this issue. However, we will consider this issue as we research potential improvements that can be made to how hospitals report costs and charges.

Comment: One commenter stated that it believed it is important for CMS to explicitly recognize the ``limitations'' of the cost-based weighting methodology and its applicability to non-Medicare patients because this is a ``major precedent setting change for the entire hospital field.'' The commenter stated that in studies that it conducted, it found that the use of departmental CCRs presents a bias in that the higher unit costs of services provided to children that are labor intensive in terms of nursing and respiratory therapy are not reflected in the department-wide CCRs. The commenter requested that, at a minimum, CMS recognize in the final rule that there are cost issues in the Medicare CCR methodology that have implications for non-Medicare patient populations.

Response: The cost-based relative weights were developed solely using Medicare data. We do not have non-Medicare data that can be used to set DRG relative weights. For this reason, we are concerned that non-Medicare payers may be using our payment systems and rates without making refinements to address the needs of their own populations. As stated earlier, we encourage non-Medicare payers to adapt the MS-DRGs and the relative weight methodology to better serve their needs.

Among its other short-term recommendations, RTI also suggested that we incorporate edits to reject or require more intensive review of cost reports from hospitals with extreme CCRs. This action would reduce the number of hospitals with excluded data in the national CCR computations, and would also improve the accuracy of all departmental CCRs within problem cost reports by forcing hospitals to review and correct the assignment of costs and charges before the cost report is filed. Although we do not have a substantive disagreement with the recommendation, we generally focus our audit resources on areas in which cost report information directly affects payments to individual providers.

RTI further suggested revising cost report instructions to reduce cost and charge mismatching and program charge misalignment in its short-term recommendations. Although RTI suggests such an action could be immediately effective for correcting the reporting of costs and charges for medical supply items that are now distributed across multiple cost centers, we note that changes to improve cost reporting now will not become part of the relative weights for several years because of lags between the submission of hospital reports and our ability to use them in setting the relative weights. Currently, we expect there will continue to be a 3-year lag between a hospital's cost report fiscal year and the year it is used to set the relative weights. Thus, even if it were possible to issue instructions immediately beginning for FY 2008, revised reporting would not affect the relative weights until at least FY 2011. Nevertheless, we agree with this recommendation, and in the proposed rule, we welcomed public input on potential changes to cost reporting instructions to improve consistency between how charges are reported on cost reports and in the Medicare claims. We indicated that we would consider these changes to the cost reporting instructions as we consider further changes to the cost report below.

In the summary of the comments above, we stated that some commenters believed that RTI's recommendation to incoporate edits to reject cost reports or require more intensive audits will not solve the mismatch problem because hospitals' reporting is consistent with cost reporting instructions. The commenters instead recommended that hospitals be educated to report costs and charges in a manner that is consistent with how MedPAR groups charges. However, other commenters supported more intensive auditiing of cost reports. In response to these comments, we stated above that we agree with the initiative to educate hospitals to improve cost reporting and that we intend to inform the fiscal intermediaries/MAC of this educational initiative. We also stated that we intend to provide the fiscal intermediaries/MAC of this educational initiative. We also stated that we intend to provide fiscal intermediaries/MAC and hospitals with guidance on how to address requests for changes in cost reporting practices from hospitals.

Comment: Some commenters supported the use of the Standard Analytic File (SAF) to calculate CCRs, as used by RTI in its study, as the SAF provides more detailed charge data on supplies, drugs and radiology services, which would improve the payment accuracy for those revenue centers with significant charges.

Response: We appreciate the comment on the use of the SAF to calculate national CCRs. The RTI study used the SAF to extract detailed charge information for selected revenue codes with potential aggregation bias and used this information in the creation of the synthetic CCRs. However, because we are not expanding the CCRs using regression adjustments for FY 2008, it is not necessary to use the SAF to compute the relative weights in this final rule with comment period. Rather, we are using the FY 2006 MedPAR file and FY 2005 hospital cost reports to calculate the national CCRs.

Comment: Many commenters noted that, while the proposed rule seems to suggest that methods of addressing charge compression should be considered together with implementation of an HSRV methodology, these two issues (charge compression and HSRV) need not and should not be linked. The commenters reiterated their opposition to implementation of the HSRV methodology, as previously expressed in comments on the FY 2007 proposed rule, arguing that the method is flawed and may even introduce more bias into the relative weight calculations. Another commenter (who also opposed implementation of the HSRV methodology) stated that should the HSRV method be implemented, many DRG weights could move in one direction if the charge compression adjustments were implemented in FY 2008, and then move in the other direction if the HSRV method were to be implemented in FY 2009. This commenter requested that CMS delay both changes for at least one year, and implement the HSRV method and the regression-based CCRs only after issuing a formal proposal with a thorough analysis that is made available to the public for review and comment. One commenter stated that the RTI revisions should be reviewed in combination with the severity-based system recommended by RAND and should not be adopted in FY 2008. The commenter stated that CMS and the provider community should evaluate these recommendations and implement them together in FY 2009. One commenter stated that the combined use of hospital-specific charges and a national CCR will result in a distortion of the DRG weights and a shifting of Medicare payments among hospitals, not based on resource utilization, but rather on a mathematical calculation. This commenter recommended that CMS review the impact of using hospital-specific

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charges and costs to determine whether the national CCR has created inaccurate DRG weights.

MedPAC commented that adopting cost-based HSRV weights would result in substantial additional improvements in payment accuracy. MedPAC believed that the HSRV methodology removes all of the differences in the level of costs across hospitals, and is preferable to CMS' current method used for standardization, which is incomplete and introduces avoidable errors into the computation of payment weights. Two other commenters supported the adoption of the HSRV methodology and strongly opposed the current methodology and believed it is flawed for the following reasons: (1) The proposed formula derives a national average charge based on all hospitals being weighted equally, which disadvantages hospitals located in historically ``low charge'' States, and results in small, rural hospitals carrying the same weight as large, urban hospitals; (2) The data being used are outdated and do not reflect the cost of new technology; (3) Costs in excess of 25 percent are omitted by CMS from ``high cost'' hospitals in the cost base, while leaving in all of the charges from those same ``high cost'' hospitals and assigning a relative value on reduced costs. Since the costs are being excluded, but not the charges, there is a corresponding mismatching of revenues and costs; (4) The data contain only audited data, and hospitals that have not been audited would not be included in the data.

These two commenters stated that CMS should test the sensitivity of weights using various methodological assumptions and share the resulting data with the public. The commenters requested that CMS should ``strive'' to create a system that improves payments and does not include the ``obvious flaws'' listed above.

Response: Many commenters expressed their concerns and opposition to the HSRV methodology last year. As we explained in response to those comments in the FY 2007 IPPS final rule, we decided not to adopt the HSRV methodology to standardize charges for FY 2007 but stated that we would undertake further analysis of the method. As we indicated in the FY 2008 IPPS proposed rule, we engaged RAND as the contractor to study alternative DRG systems. The second phase of the RAND study will include evaluating the HSRV methodology; the evaluation report will not be available until after the issuance of this final rule with comment period. Therefore, we will consider those results as we plan changes as part of the FY 2009 IPPS rulemaking process. We intend to carefully analyze how the relative weights would change if we were to adopt regression-based CCRs to address charge compression while simultaneously adopting an HSRV methodology using fully phased-in MS- DRGs. Although many commenters do not believe that the HSRV methodology and addressing charge compression should be linked, we believe, as did one commenter, that sequentially adjusting for charge compression and later adopting the HSRV methodology could create instability in IPPS payments over the next 2 years. Accordingly, we intend to include a detailed description and discussion of RAND's and any other analyses that we may undertake on these issues in the FY 2009 IPPS proposed rule.

In response to the commenters who supported adopting the HSRV methodology and believed it superior to the method used by CMS currently, in the FY 2007 IPPS final rule (71 FR 47883), we stated that there are certain administrative difficulties with adjusting charges to costs using hospital-specific CCRs. Therefore, at least until we have the opportunity to analyze the results of RAND's analysis, we are utilizing national average CCRs to determine cost. We also do not believe that the use of hospital-specific charges together with national average CCRs redistributes Medicare payments among hospitals merely based on a mathematical calculation, as one commenter indicated. On the contrary, a system that improves payment accuracy and moderates the influence of individual hospital reporting practices on a national payment system is not one which haphazardly redistributes payments. We note that, in a report issued in July 2006, the GAO found that CMS's system of national CCRs shows promise to improve payment accuracy because it reduces the impact that individual hospital-reporting practices has on the DRG relative weights (GAO-06-880, ``CMS's Proposed Approach to Set Hospital Inpatient Payments Appears Promising''). With respect to the commenters' concerns regarding inappropriate ``equal weighting'' of hospitals, under CMS' current methodology for computing national CCRs, these concerns were addressed in last year's IPPS final rule. The national CCRs are the sum of all costs divided by the sum of all charges. Thus, all hospitals are not weighted equally. Larger hospitals will have more weight than smaller hospitals in the final CCR calculation.

In response to the commenters' concerns that the data are outdated and do not reflect the costs of new technology, there is an inevitable lag between the availability of information from hospital claims or cost reports and the time it can be used to determine relative weights. We always use the most recent data available to set relative weights. Furthermore, as we noted in the FY 2007 IPPS final rule, CMS' current method of using national average CCRs eliminates the need to match claims (for FY 2008, the 2006 MedPAR) to the time period of the CCRs (for FY 2008, FY 2005 HCRIS), which would be necessary under an HSRV method that uses hospital-specific CCRs. Thus, we can use claims data from one year later under our cost-based weighting methodology. We also note that add-on payments made for the latest advancements in medical technologies may not be included in the 2-year-old hospital claims data that are used to set the relative weights.

Regarding the comments stating that CMS mismatches revenues and costs by omitting excessive costs from ``high cost'' hospitals in the cost base, while leaving in the charges from those same ``high cost'' hospitals, we note that this is not actually the case. If a hospital's costs are dropped from the national average CCR calculations, the hospital's charges are also dropped from the national average CCR calculations. Lastly, the commenters' assertion that the cost report data used for CCRs include only audited data is incorrect. If the commenters are referring to the cost report data that CMS uses to calculate the national average CCRs, we note that in accessing data for IPPS hospitals from HCRIS, we select all IPPS hospitals, and do not only select hospitals whose cost reports are audited.

Comment: MedPAC submited comments on the method we use to calculate the national CCRs for the cost-based relative weights. The methodology to calculate the national CCRs is described in section II.H. of the preamble of this final rule with comment period. MedPAC suggested that we standardize the Medicare charges and costs used to calculate the national CCRs from the Medicare cost reports to adjust for differences in local wage levels, IME, and DSH. The standardization would be consistent with the use of national standardized charges by revenue center also used in the calculation of cost-based relative weights from the MedPAR.

Response: While we did not propose any changes to the cost-based relative weights methodology, we appreciate the comment on maintaining consistency

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among our data sources. Although we currently standardize charges from the MedPAR file when calculating relative weights, we do not standardize costs and charges from hospital cost reports, as MedPAC recommended. We may consider this recommendation as we continue to refine our methodology for calculating relative weights. However, we note that there would be no need to standarize costs and charges from hospital cost reports under an HSRV methodology. b. Medium-Term Recommendations

RTI recommended that we expand the MedPAR file to include separate fields that disaggregate several existing charge departments. For compatibility with prior years' data, the new fields should partition the existing ones rather than recombine charges. RTI recommended including additional fields in the MedPAR file for the hospital departments that it statistically disaggregated in its report, as well as intermediate care, observation beds, other special nursing codes, therapeutic radiation and EEG, and possibly others. As with some of RTI's earlier recommendations with respect to cost reports, we will examine this suggestion in conjunction with other competing priorities CMS has been given for our information systems. We have limited information systems resources, and we will need to consider whether the time constraints we have to develop the IPPS final rule, in conjunction with the inconvenience of using the SAF and accounting for charge compression through regression, will justify the infrastructure cost to our information systems of incorporating these variables into the MedPAR.

Finally, RTI's medium-term recommendations include encouraging providers to use existing standard cost centers, particularly those for Blood and Blood Administration and for Therapeutic Radiology, in the current Medicare cost report. We believe this is closely related to the recommendation for improved cost reporting instructions. Therefore, we will consider this recommendation as part of any further effort we may undertake to revise cost reporting instructions or change the cost report.

Comment: Some commenters supported expanding the MedPAR file to include separate fields to disaggregate additional cost centers. One commenter supported this recommendation and suggested that the assignment of revenue codes and charges to revenue centers in MedPAR should be reviewed and changed to better reflect hospital accounting practices as reflected on the Medicare cost report.

Response: We will consider suggestions for modifying MedPAR in conjunction with other competing priorities we have for our information systems. Further, while we support the efforts of the national hospital associations to streamline hospital's reporting practices, we note that CMS does not instruct hospitals in the appropriate revenue codes to use because hospitals have discretion as to where and how they allocate charges based on their own financial system needs. c. Long-Term Recommendations

RTI's long-term recommendations include adding new cost centers to the Medicare cost report and/or undertaking the following activities:

Add ``Devices, Implants and Prosthetics'' under the line for ``Medical Supplies Charged to Patients.'' Consider also adding a similar line for IV Solutions as a subscripted line under the line for ``Drugs Charged to Patients.''

Add CT Scanning and MRI as subscripted lines under the line for ``Radiology-Diagnostic.'' About one-third of hospitals that offer CT Scanning and/or MRI services are already reporting these services on nonstandard line numbers. More consistent reporting for both cost centers would eliminate the need for statistical estimation on the radiology CCRs.

In consultation with hospital industry representatives, determine the best way to separate cardiology cost centers and add a new standard cost center for cardiac catheterization and/or for all other cardiac diagnostic laboratory services. About 20 percent of hospitals already include a nonstandard line on their cost reports for catheterization. Creating a new standard cost center could improve consistency in reporting and substantially improve the program charge mismatching that now occurs.

In consultation with hospital industry representatives, consider establishing a new cost center to capture intermediate care units as distinct from routine or intensive care.

Establish expert study groups or other research vehicles to study options for improving patient-level charging within nursing units. Nursing accounts for one-fourth of IPPS charges and 41 percent of the computed costs from our claims analysis file. Historically, nursing charges and costs have been assigned to patients without relying on individual measures of service use. Consideration should be given to finding ways to improve precision in nursing cost finding that will improve relative resource weights without adding substantial administrative costs to either the Medicare program or to hospitals.

We agree with RTI that attention should be paid to these issues as we consider changes to the Medicare cost report. The cost report has not been revised in nearly 10 years. During this time, there have been significant changes to the Medicare statute and regulations that have affected the Medicare payment policies. Necessary incremental changes have been made to the Medicare cost report over the years to accommodate the Medicare wage index, disproportionate share payments, indirect and direct graduate medical education payments, reporting of uncompensated care costs, among others. The adoption of cost-based weights for the IPPS beginning in FY 2007 has brought further attention to the importance of the Medicare cost report and how hospitals report costs and charges. We recently began doing a comprehensive review of the Medicare cost report and plan to make updates that will consider its many uses. As we update the cost report, we will give strong consideration to RTI's recommendations and potential long-term improvements that could be made to the IPPS cost-based relative weighting methodology.

Comment: Several commenters made recommendations for how the relative weights would be calculated under a 3-year transition from the current DRGs to the new MS-DRGs. Some commenters suggested three options as follows:

(1) Use two GROUPERs (CMS DRGs and MS-DRGs) and then blend the weights for each individual case.

(2) Blending current DRG weights with MS-DRG weights: To calculate a blended cost-based weight, CMS could first calculate cost-based weights using the current DRGs. CMS could then calculate cost-based weights using the MS-DRGs. The blended weight for each MS-DRG would be based on the weighted average relative weights (based on the current DRGs from which cases group into the new MS-DRGs) and the MS-DRG weight. Under this approach, CMS would continue to calculate cost-based weights for the current DRGs during the first 2 years of the transition period. This approach recognizes that a case has different relative weights in the new system versus the current DRG system.

(3) Blending MS-DRG base and severity level weights: CMS would blend the actual MS-DRG weight with the weight of the base MS-DRG. The base MS-DRG weight is determined by

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using expected case mix volume among severity levels. For example, if an MS-DRG was subdivided into two subgroups: with the non-CC DRG accounting for 90 percent of the cases and the other 10 percent in the CC DRG, these ratios would be used to blend the base and the DRG- specific weight. Under this approach, CMS would not have to calculate weights using two different DRG systems. On the other hand, this approach does not use the current system when calculating the blended rates.

The commenters noted that while option 1 would provide the most accurate blended weights, it is the most burdensome to implement because it would require use of two GROUPERs, whereas under options 2 and 3, CMS would only use the blended relative weights, allowing hospitals and Medicare contractors to use only one grouping software.

MedPAC suggested that CMS adopt a 2-year transition period for MS- DRGs to coincide with the remainder of the current transition period for implementing cost-based weights, so as to ``balance the payment impacts of implementing severity refinements and cost-based weights.'' MedPAC suggested that a 2-year transition might work as follows: CMS could group cases using the MS-DRG grouper beginning in FY 2008, but then use a blended weight for each category. The blended weight for an MS-DRG would reflect partly the weight that would have been assigned under an MS-DRG system with fully implemented cost-based weights. The weight for each MS-DRG in FY 2008 would be a blend of two parts:

50 percent of the average DRG weight that would have been attached to cases in the MS-DRG from the 2006 MedPAR file under a policy of \1/3\ charge-based weights and \2/3\ cost-based weights. These DRG weights are the ones that would have applied to the same cases under the FY 2008 policy if CMS simply continued the transition to cost-based weights without changing the DRG definitions.

50 percent of the CMS refined weights for the MS-DRG for FY 2008. In FY 2009, cases would be grouped in the MS-DRGs and the weight for each MS-DRG would be a 100 percent cost-based weight.

Response: We have carefully considered each comment in determining whether there should be a transition period for the relative weights computed using MS-DRGs, the length of the transition and how to compute weights during the transition. We also considered how to accommodate a transition to MS-DRG relative weights with the continuing transition to cost-based weights. Although we received strong general support for adopting the MS-DRGs, we do believe that some transition is warranted to mitigate the magnitude of potential changes in payment to hospitals that could occur in one year. Furthermore, we agree with MedPAC that a two-year transition period that coincides with the remainder of the transition period for implementing cost-based weights is appropriate. By having these changes occur simultaneously over the same transition period, we can avoid having large changes in payment that would occur with sequential implementation. Further, we can also accomplish all of the payment reforms according to the same schedule. Accordingly, we are implementing a 2-year transition to MS-DRGs. For FY 2008, the first year of the transition, 50 percent of the relative weight for each MS- DRG will be based on the CMS DRG relative weight and 50 percent will be based on the MS-DRG relative weight. In FY 2009, the relative weights will be based entirely on the MS-DRG relative weight. The blended relative weights for FY 2008 are computed as follows:

First, using the Version 24.0 GROUPER, relative weights are calculated based on 100 percent costs and 100 percent charges, respectively (see section II.H. of the preamble of this final rule with comment period for a description of the cost- and charge-based calculations). Then these weights are blended using two-thirds of the cost-based weights and one-third charge-based weights to establish the CMS DRG portion of the transition weights.

Second, using the Version 25.0 GROUPER, relative weights are calculated based on 100 percent costs and 100 percent charges, respectively (see section II.H. of the preamble of this final rule with comment period for a description of how we compute cost-based and charge-based weights). These weights are then blended using two-thirds of the cost-based weights and one-third charge-based weights to establish the MS-DRG portion of the transition weights.

Under the transition blend we are adopting in this final rule with comment period, we group cases to MS-DRGs (using the Version 25.0 GROUPER), but the payment weight for each DRG is a 50/50 blend of the MS-DRG weight and the CMS DRG weight. Thus, we had to determine a blended weight for each DRG. Using the claims in the FY 2006 MedPAR database that we used to compute cost-based weights under the Version 24.0 GROUPER, we grouped each case to a CMS DRG (using the Version 24.0 GROUPER) and an MS-DRG (using the Version 25.0 GROUPER). Commonly, a set of cases that grouped to a single MS-DRG grouped to two or more CMS DRGs. Therefore, we determined an average CMS DRG weight for all cases that grouped to each MS-DRG. Specifically, we summed the CMS DRG weights of all the cases that grouped to each MS-DRG and then divided that number by the transfer-adjusted case count. To establish the final blended weight for each DRG, we added 50 percent of the MS-DRG weight to 50 percent of the average CMS DRG weight for that MS-DRG. These final blended relative weights are listed in Table 5 of this final rule with comment period.

Comment: Some commenters expressed concern about the continued transition from charge-based weights to cost-based weights, in light of RTI's recommendations to alleviate charge compression on the relative weights and the proposal to introduce MS-DRGs. For FY 2008, we proposed that the relative weights would be based on one-third charges and two- third costs. Some commenters suggested that this transition should be delayed until the public comments associated with cost reporting and charge compression can be addressed. We have also received comments expressing concern on the potential fluctuations in hospital payment if we were to implement both RTI's recommendations on charge compression along with the MS-DRG system. In both cases, commenters suggested delaying the transition from charge-based to cost-based weights by maintaining the relative weights at two-third charges and one-third costs. MedPAC also expressed concern about continuing the transition to cost-based weights. However, unlike the commenter above, MedPAC suggested that CMS discontinue the transition period to cost-based weights and implement 100 percent cost-based weights in FY 2008. MedPAC's recommendation to discontinue the transition to cost-based weights presumed full introduction of the MS-DRGs in FY 2008. The commenters believed the payment fluctuations that will occur with full implementation of MS-DRGs can be mitigated by fully adopting cost weights. However, as suggested above, MedPAC also suggested as an alternative adopting MS-DRG weights according to the same schedule as the cost-based weights.

Response: We appreciate the commenters' expressing concerns about the continued transition to cost-based relative weights and the potential changes in payment from the

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application of this methodology. In the FY 2007 IPPS final rule, we discussed our rationale for implementing cost-based weights over a 3- year transition period. We stated that the 3-year transition would mitigate the annual payment effects from the changes to the relative weights while we further study whether to make adjustments to account for charge compression. We believe that the cost-based methodology reduces bias in the relative weights and makes Medicare's payments more accurate for both medical and surgical DRGs. Therefore, any delays in the transition would not further our goal of payment accuracy. We believe that current efforts to improve cost reporting and our decision not to implement regression-based CCRs will alleviate concerns about additional fluctuations in hospital payments from further changes to the relative weight methodology. Furthermore, we believe that, for some types of hospitals (such as rural hospitals), the payment changes from MS-DRGs are the opposite of those that will occur from the transition to cost-based weights. For this reason, we believe a 2-year transition of the MS-DRG system that coincides with the remaining two years of the transition to cost-based weights will reduce the magnitude of annual payment changes and achieve our long-term goal of improvements in payment accuracy. Therefore, we are continuing with the 3-year transition to cost-based weights. For FY 2008, the DRG relative weights will be a blend of 33 percent of charge-based weights and 67 percent of cost-based weights. For the first year of the MS-DRG transition, the relative weights will be a blend of 50 percent of the CMS-DRG weight and 50 percent of the MS-DRG weight.

F. Hospital-Acquired Conditions, Including Infections

1. General

Medicare's IPPS encourages hospitals to treat patients efficiently. Hospitals receive the same DRG payment for stays that vary in length. In many cases, complications acquired in the hospital do not generate higher payments than the hospital would otherwise receive for other cases in the same DRG. To this extent, the IPPS does encourage hospitals to manage their patients well and to avoid complications, when possible. However, complications, such as infections, acquired in the hospital can lead to higher Medicare payments in two ways. First, the treatment of complications can increase the cost of hospital stays enough to generate outlier payments. However, the outlier payment methodology requires that hospitals experience large losses on outlier cases (for example, in FY 2007, the fixed-loss amount was $24,485 before a case qualified for outlier payments, and the hospital then only received 80 percent of its estimated costs above the fixed-loss cost threshold). Second, under the MS-DRGs we are adopting in this final rule with comment period, there are 258 sets of DRGs that are split into 2 or 3 subgroups based on the presence or absence of a major CC (MCC) or CC. If a condition acquired during the beneficiary's hospital stay is one of the conditions on the MCC or CC list, the result may be a higher payment to the hospital under the MS-DRGs. (We refer readers to section II.D. of this final rule with comment period for a detailed discussion of DRG reforms.) 2. Legislative Requirement

Section 5001(c) of Pub. L. 109-171 requires the Secretary to select, by October 1, 2007, at least two conditions that are (a) high cost or high volume or both, (b) result in the assignment of a case to a DRG that has a higher payment when present as a secondary diagnosis, and (c) could reasonably have been prevented through the application of evidence-based guidelines. For discharges occurring on or after October 1, 2008, hospitals will not receive additional payment for cases in which one of the selected conditions was not present on admission. That is, the case will be paid as though the secondary diagnosis was not present. Section 5001(c) provides that we can revise the list of conditions from time to time, as long as the list contains at least two conditions. Section 5001(c) also requires hospitals to submit the secondary diagnoses that are present at admission when reporting payment information for discharges on or after October 1, 2007. 3. Public Input

In the FY 2007 IPPS proposed rule (71 FR 24100), we sought input from the public regarding conditions with evidence-based guidelines that should be selected in order to implement section 5001(c) of Pub. L. 109-171. The comments that we received were summarized in the FY 2007 IPPS final rule (71 FR 48051 through 48053). In the FY 2008 IPPS proposed rule (72 FR 24716), we again sought formal public comment on conditions that we proposed to select under section 5001(c). As discussed below, in this final rule with comment period, we first summarize the comments we received on the FY 2007 IPPS proposed rule. We then explain our detailed proposals included in the FY 2008 proposed rule, followed by a summary of the public comments on each condition proposed and our responses to those public comments.

In summary, the majority of the comments that we received in response on the FY 2007 IPPS proposed rule addressed conceptual issues concerning the selection, measurement, and prevention of hospital- acquired infections. Many commenters encouraged CMS to engage in a collaborative discussion with relevant experts in designing, evaluating, and implementing this section. The commenters urged CMS to include individuals with expertise in infection control and prevention, as well as representatives from the provider community, in the discussions.

Many commenters supported the statutory requirement for hospitals to submit information regarding secondary diagnoses present on admission beginning in FY 2008, and suggested that it would better enable CMS and health care providers to more accurately differentiate between comorbidities and hospital-acquired complications. MedPAC, in particular, noted that this requirement was recommended in its March 2005 Report to Congress and indicated that this information is important to Medicare's value-based purchasing efforts. Other commenters cautioned us about potential problems with relying on secondary diagnosis codes to identify hospital-acquired complications, and indicated that secondary diagnosis codes may be an inaccurate method for identifying true hospital-acquired complications.

A number of commenters expressed concerns about the data coding requirement for this payment change and asked for detailed guidance from CMS to help them identify and document hospital-acquired complications. Other commenters expressed concern that not all hospital-acquired infections are preventable and noted that sicker and more complex patients are at greater risk for hospital-acquired infections and complications. Commenters suggested that CMS include standardized infection-prevention process measures, in addition to outcome measures of hospital-acquired infections.

Some commenters proposed that CMS expand the scope of the payment changes beyond the statutory minimum of two conditions. They noted that the death, injury, and cost of hospital-acquired infections are too high to limit this provision to only two conditions. Commenters also recommended that CMS annually select additional hospital

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acquired complications for the payment change. Conversely, a number of commenters proposed that CMS initially begin with limited demonstrations to test CMS' methodology before nationwide implementation. One commenter recommended that CMS include appropriate consumer protections to prevent providers from billing patients for the nonreimbursed costs of the hospital-acquired complications and to prevent hospitals from selectively avoiding patients perceived at risk of complications.

In addition to the broad conceptual suggestions, some commenters recommended specific conditions for possible inclusion in the payment changes, which we discussed in detail in the preamble of the proposed rule and in section II.D.4. of this final rule with comment period. We also discuss throughout section II.D. of the preamble of this final rule with comment period other comments that we have considered in developing hospital-acquired conditions that would be subject to reporting.

As it is not addressed elsewhere, we are responding here to the comment about hospitals billing patients for costs of hospital-acquired complications that are not counted as MCCs and CCs. Section 5001(c) does not make the additional cost of a hospital acquired complication a noncovered cost. The additional costs that a hospital would incur as a result of a hospital-acquired complication remains a covered Medicare cost that is included in the hospital's IPPS payment. Medicare's payment to the hospital is for all inpatient hospital services provided during the stay. The hospital cannot bill the beneficiary for any charges associated with the hospital-acquired complication. With respect to the concern about a hospital avoiding patients that are at high risk of complications, we note that the policy is selecting only those conditions that are ``reasonably preventable.'' Thus, we are only selecting those conditions where, if hospital personnel are engaging in good medical practice, the additional costs of the hospital-acquired condition will, in most cases, be avoided and the risk of selectively avoiding patients at high risk of complications will be minimized. We further note that Medicare's high cost outlier policy is unaffected by section 5001(c). The hospital's total charges for all inpatient services provided during the stay will continue to be used to determine whether the case qualifies for an outlier payment. Thus, there will continue to be limitations on a hospital's financial risk of treating high cost cases even if, despite the hospital maintaining good medical practice to avoid complications, a reasonably preventable condition occurs after admission. Finally, as stated further below, we are continuing to work to identify exclusions for situations where the policy should not apply for the selected condition. 4. Collaborative Effort

CMS worked with public health and infectious disease experts from the Centers for Disease Control and Prevention (CDC) to identify a list of hospital-acquired conditions, including infections, as required by section 5001(c) of Pub. L. 109-171. As previously stated, the selected conditions must meet the following three criteria: (a) high cost or high volume or both; (b) result in the assignment of the case to a DRG that has a higher payment when present as a secondary diagnosis; and (c) could reasonably have been prevented through the application of evidence-based guidelines. CMS and CDC staff also collaborated on developing a process for hospitals to submit a Present on Admission (POA) indicator with each secondary condition. The statute requires the Secretary to begin collecting this information as of October 1, 2007. The POA indicator is required in order for us to determine which of the selected conditions developed during a hospital stay. The current electronic format used by hospitals to obtain this information (ASC X12N 837, Version 4010) does not provide a field to obtain the POA information. We issued instructions requiring acute care IPPS hospitals to submit the POA indicator for all diagnosis codes, effective October 1, 2007, through Change Request No. 5499, with a release date of May 11, 2007. The instructions specify how hospitals under the IPPS submit this information in segment K3 in the 2300 loop, data element K301 on the ASC X12N 837, Version 4010 claim. Specific instructions on how to select the correct POA indicator for a diagnosis code are included in the ICD-9-CM Official Guidelines for Coding and Reporting. These guidelines can be found at the following Web site: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm .

CMS and CDC staff also received input from a number of groups and organizations on hospital-acquired conditions, including infections. Many of these groups and organizations recommended the selection of conditions mentioned in the FY 2007 IPPS final rule, including the following because of the high cost or high volume (frequency) of the condition, or both, and because in some cases preventable guidelines already exist:

Surgical site infections. The groups and organizations stated that there were evidence-based measures to prevent the occurrence of these infections which are currently measured and reported as part of the Surgical Care Improvement Program (SCIP).

Ventilator-associated pneumonias. The groups and organizations indicated that these conditions are currently measured and reported through SCIP. However, other organizations counseled against selecting these conditions because they believed it was difficult to obtain good definitions and that it was not always clear which ones are hospital acquired.

Catheter associated bloodstream infections.

Pressure ulcers.

Hospital falls. The injury prevention groups included this condition among a group referred to as ``serious preventable events,'' also commonly referred to as ``never events'' or ``serious reportable events.'' A serious preventable event is defined as a condition which should not occur during an inpatient stay.

Bloodstream infections/septicemia. Some commenters suggested that we focus on one specific organism, such as staph aureus septicemia.

Pneumonia. Some commenters recommended the inclusion of a broader group of pneumonia patients, instead of restricting cases to ventilator-associated pneumonias. Some commenters mentioned that while prevention guidelines exist for pneumonia, it is not clear how effective these guidelines may be in preventing pneumonia.

Vascular catheter associated infections. Commenters indicated that there are CDC guidelines for these infections. Other commenters stated that while this condition certainly deserves focused attention by health care providers, there is not a unique ICD 9 CM code that identifies vascular catheter-associated infections. Therefore, these commenters suggested that there would be difficulty separately identifying these conditions.

Clostridium difficile-associated disease (CDAD). Several commenters identified this condition as a significant public health issue. Other commenters indicated that, while prevalence of this condition is emerging as a public health problem, there is not currently a strategy for reasonably preventing these infections.

Methicillin-resistant staphylococcus aureus (MRSA). Several commenters indicated that MRSA has

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become a very common bacteria occurring both in and outside the hospital environment. However, other organizations stated that the code for MRSA (V09.0, Infection with microorganism resistant to penicillins Methicillin-resistant staphylococcus aureus) is not currently classified as a CC. Therefore, the commenters stated that MRSA does not lead to a higher reimbursement when the code is reported.

Serious preventable events. As stated earlier, some commenters representing injury prevention groups suggested including a broader group of conditions than hospital falls which should not be expected to occur during a hospital admission. They noted that these conditions are referred to as ``serious preventable events,'' and include events such as the following: (a) leaving an object in during surgery; (b) operating on the wrong body part or patient, or performing the wrong surgery; (c) air embolism as a result of surgery; and (d) providing incompatible blood or blood products. Other commenters indicated serious preventable events are so rare that they should not be selected as a hospital condition that cannot result in a case being assigned to a higher paying DRG. 5. Criteria for Selection of the Hospital-Acquired Conditions

CMS and CDC staff greatly appreciate the many comments and suggestions offered by organizations and groups that were interested in providing input into the selection of the initial hospital-acquired conditions.

CMS and CDC staff evaluated each recommended condition under the three criteria established by section 1886(d)(4)(D)(iv) of the Act. In order to meet the higher payment criterion, the condition selected must have an ICD-9-CM diagnosis code that clearly identifies the condition and is classified as a CC, or as an MCC (as proposed for the MS DRGs in the proposed rule). Some conditions recommended for inclusion among the initial hospital-acquired conditions did not have codes that clearly identified the conditions. Because there has not been national reporting of a POA indicator for each diagnosis, there are no Medicare data to determine the incidence of the reported secondary diagnoses occurring after admission. To the extent possible, we used information from the CDC on the incidence of these conditions. CDC's data reflect the incidence of hospital-acquired conditions in 2002. We also examined FY 2006 Medicare data on the frequency that these conditions were reported as secondary diagnoses. We developed the following criteria to assist in our analysis of the conditions. The conditions described were those recommended for inclusion in the initial hospital-acquired infection provision.

Coding--Under section 1886(d)(4)(D)(ii)(I) of the Act, a discharge is subject to the payment adjustment if ``the discharge includes a condition identified by a diagnosis code'' selected by the Secretary under section 1886(d)(4)(D)(iv) of the Act. We only selected conditions that have (or could have) a unique ICD-9-CM code that clearly describes the condition. Some conditions recommended by the commenters would require the use of two or more ICD-9-CM codes to clearly identify the conditions. Although we did not exclude these conditions from further consideration, the need to utilize multiple ICD-9-CM codes to identify them may present operational issues. For instance, the complexities associated with selecting septicemia as a hospital-acquired condition subject to section 5001(c) of the DRA may present operational issues in identifying whether or not the condition was present upon admission. The vast number of clinical scenarios that we would have to account for could complicate implementation of the provision.

Burden (High Cost/High Volume)--Under section 1886(d)(4)(D)(iv)(I) of the Act, we must select cases that have conditions that are high cost or high volume, or both.

Prevention guidelines--Under section 1886(d)(4)(D)(iv)(II) of the Act, we must select codes that describe conditions that could reasonably have been prevented through application of evidence-based guidelines. We evaluated whether there is information available for hospitals to follow to prevent the condition from occurring.

MCC or CC--Under section 1886(d)(4)(D)(iv)(III) of the Act, we must select codes that result in assignment of the case to a DRG that has a higher payment when the code is present as a secondary diagnosis. The condition must be an MCC or a CC that would, in the absence of this provision, result in assignment to a higher paying DRG.

Considerations--We evaluated each condition above according to how it meets the statutory criteria in light of the potential difficulties that we would face if the condition were selected. 6. Selection of Hospital-Acquired Conditions

We discuss below our analysis of each of the conditions that were raised as possible candidates for selection under section 5001(c) of Pub. L. 109-171 according to the criteria described above in section II.D.5. of the preamble of this final rule with comment period. We also discuss any considerations, which would include any administrative issues surrounding the selection of a proposed condition. For example, the condition may only be able to be identified by multiple codes, thereby requiring the development of special GROUPER logic to also exclude similar or related ICD-9-CM codes from being classified as a CC. Similarly, a condition acquired during a hospital stay may arise from another condition that the patient had prior to admission, making it difficult to determine whether the condition was reasonably preventable. Following a discussion of each condition, we provide a summary that describes how each condition was considered for the proposed rule, whether we are selecting it to be subject to the provision in this FY 2008 IPPS final rule or if it will continue to be considered for the future. In the proposed rule, we presented 13 conditions. The summary discussion and table reflect changes to the order of the conditions. The summary presents the conditions that best meet the statutory criteria and which conditions we are selecting to be subject to the payment adjustment for hospital-acquired conditions beginning in FY 2009. In the proposed rule, we encouraged comments on these conditions. We asked commenters to recommend how many and which conditions should be selected in the FY 2008 IPPS final rule along with justifications for these selections. We also encouraged additional comments on clinical, coding, and prevention issues that may affect the conditions selected. While, in this final rule with comment period, we present these 13 conditions in the order they were proposed, we have re-ranked these conditions based on how well they meet the statutory criteria according to compelling public health reasons in addition to public comment and internal analysis.

We received approximately 127 timely public comments on this section from hospitals and health care systems, provider associations, consumer groups, purchasers, medical device manufacturers, pharmaceutical companies, information technology companies, and health care research organizations.

Comment: Some commenters urged CMS to use discretion in selecting hospital-acquired conditions that will be subject to the statutory provision and suggested that CMS limit the number of conditions selected. A large majority of

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commenters strongly supported the inclusion of three of the serious preventable events (object left in surgery, air embolism and blood incompatibility) and generally commented that the remaining conditions are not always preventable or may not have unique codes established.

A number of commenters both supported and opposed the conditions other than the three serious preventable events mentioned above. The commenters were generally optimistic about considering proposed conditions for the future upon resolution of suggested issues. A few commenters proposed that CMS initially begin with limited demonstrations to test CMS' methodology before nationwide implementation. These commenters specifically mentioned the Michigan Hospital Association Keystone Center.

The commenters who suggested not including conditions other than the three serious preventable events mentioned above noted that sicker and more complex patients are at greater risk for hospital-acquired infections and complications. In particular, the commenters believed some of the conditions proposed are a biological inevitability at a certain predictable rate regardless of safe practice. In addition, the commenters expressed concern about the difficulty of distinguishing between hospital-acquired and community-acquired infections. The commenters also believed that CMS should use incentives to allow hospitals to adopt innovative infection prevention technologies and provide necessary treatments for infections. Finally, a few commenters submitted additional conditions that were not included in the 13 conditions we considered in the proposed rule.

Response: In general, we discuss our responses to each of these comments below in the context of the specific conditions they reference. With respect to the general comment that we should only select the three serious preventable events, we believe there is a significant public health interest in selecting more than just these conditions. According to the commenters, many of the other conditions we considered are not always preventable and, therefore, should not be selected. The statute indicates that the provision should apply to conditions that ``could reasonably have been prevented through the application of evidence-based guidelines.'' Therefore, for this reason, we are selecting other conditions in addition to the serious preventable events to be subject to this provision in this final rule with comment period. We discuss the application of the statutory criteria to each of the conditions we considered below and why we believe the condition is ``reasonably preventable.'' (a) Catheter-Associated Urinary Tract Infections

Coding--ICD-9-CM code 996.64 (Infection and inflammatory reaction due to indwelling urinary catheter) clearly identifies this condition. The hospital would also report the code for the specific type of urinary infection. For instance, when a patient develops a catheter associated urinary tract infection during the inpatient stay, the hospital would report code 996.64 and 599.0 (Urinary tract infection, site not specified) to clearly identify the condition. There are also a number of other more specific urinary tract infection codes that could also be coded with code 996.64. These codes are classified as CCs. If we were to select catheter-associated urinary tract infections, we would implement the decision by not counting code 996.64 and any of the urinary tract infection codes listed below when both codes are present and the condition was acquired after admission. If only code 966.64 were coded on the claim as a secondary diagnosis, we would not count it as a CC.

Burden (High Cost/High Volume)--CDC reports that there are 561,667 catheter-associated urinary tract infections per year. For FY 2006, there were 11,780 reported cases of Medicare patients who had a catheter associated urinary tract infection as a secondary diagnosis. The cases had average charges of $40,347 for the entire hospital stay. According to a study in the American Journal of Medicine, catheter- associated urinary tract infection is the most common nosocomial infection, accounting for more than 1 million cases in hospitals and nursing homes nationwide.\22\ Approximately 11.3 million women in the United States had at least one presumed acute community-acquired urinary tract infection resulting in antimicrobial therapy in 1995, with direct costs estimated at $659 million and indirect costs totaling $936 million. Nosocomial urinary tract infection necessitates one extra hospital day per patient, or nearly 1 million extra hospital days per year. It is estimated that each episode of symptomatic urinary tract infection adds $676 to a hospital bill. In total, according to the study, the estimated annual cost of nosocomial urinary tract infection in the United States ranges between $424 and $451 million.

Prevention guidelines--There are widely recognized guidelines for the prevention of catheter-associated urinary tract infections. Guidelines can be found at the following Web site: http://www.cdc.gov/ncidod/dhqp/gl_catheter_assoc.html .

\22\ Foxman, B.: ``Epidemiology of urinary tract infections: incidence, morbidity, and economic costs,'' The American Journal of Medicine, 113 Suppl 1A, pp. 5s-13s, 2002.

CC--Codes 996.64 and 599.0 are classified as CCs in the CMS DRGs as well as in the MS-DRGs.

Considerations--The primary prevention intervention would be not using catheters or removing catheters as soon as possible, both of which are worthy goals because once catheters are in place for 3 to 4 days, most clinicians and infectious disease/infection control experts do not believe urinary tract infections are preventable. While there may be some concern about the selection of catheter associated urinary tract infections, it is an important public health goal to encourage practices that will reduce urinary tract infections. Approximately 40 percent of Medicare beneficiaries have a urinary catheter during hospitalization based on Medicare Patient Safety Monitoring System (MPSMS) data.

As stated above in the Coding section, this condition is clearly identified through ICD-9-CM code 996.64. Code 996.64 is classified as a CC. The hospital would also report the code for the specific type of urinary infection. For instance, when a patient develops a catheter associated urinary tract infection during the inpatient stay, the hospital would report codes 996.64 and 599.0 or another more specific code that clearly identifies the condition. These codes are classified as CCs under the CMS DRGs as well as the MS-DRGs. To select catheter- associated urinary tract infections as one of the hospital-acquired conditions that would not be counted as a CC, we would not classify code 996.64 as a CC if the condition occurred after admission. Furthermore, we would also not classify any of the codes listed below as CCs if present on the claim with code 996.64 because these additional codes identify the same condition. The following codes represent specific types of urinary infections. We did not include codes for conditions that could be considered chronic urinary infections, such as code 590.00 (Chronic pyelonephritis, without lesion or renal medullary necrosis). Chronic conditions may indicate that the condition was not acquired during the current stay. We would not count code 996.64 or any of the following codes representing acute urinary

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infections if they developed after admission and were coded together on the same claim.

112.2 (Candidiasis of other urogenital sites)

590.10 (Acute pyelonephritis, without lesion of renal medullary necrosis)

590.11 (Acute pyelonephritis, with lesion of renal medullary necrosis)

590.2 (Renal and perinephric abscess)

590.3 (Pyeloureteritis cystica)

590.80 (Pyelonephritis, unspecified)

590.81 (Pyelitis or pyelonephritis in diseases classified elsewhere)

590.9 (Infection of kidney, unspecified)

595.0 (Acute cystitis)

595.3 (Trigonitis)

595.4 (Cystitis in diseases classified elsewhere)

595.81 (Cystitis cystica)

595.89 (Other specified type of cystitis, other)

595.9 (Cystitis, unspecified)

597.0 (Urethral abscess)

597.80 (Urethritis, unspecified)

599.0 (Urinary tract infection, site not specified)

We believe the condition of catheter-associated urinary tract infection meets all of our criteria for selection as one of the initial hospital-acquired conditions. We can easily identify the cases with ICD-9-CM codes. The condition is a CC under both the CMS DRGs and the MS-DRGs. The condition meets our burden criterion with its high cost and high frequency. There are prevention guidelines on which the medical community agrees to avoid catheter-associated urinary tract infections. We believe this condition best meets the criteria discussed. Therefore, we proposed the selection of catheter-associated urinary tract infections as one of the initial hospital-acquired conditions.

We encouraged comments on both the selection of this condition and the related conditions that we proposed to exclude from being counted as CCs.

Comment: Most commenters suggested that a large number of physicians believe urinary tract infections may not be preventable after several days of catheter placement. A few commenters submitted the following statement from the proposed rule (72 FR 24719): ``once catheters are in place for 3-4 days, most clinicians and infection control experts do not believe UTIs are preventable.'' The commenters also noted the potential difficulty in identifying this condition at admission.

Still other commenters believed this condition is difficult to code because the ICD-9-CM codes do not distinguish between catheter- associated inflammation and infection. The commenters asked CMS to consider a new code for ``inflammatory reaction from indwelling catheter'' distinct from ``catheter associated urinary tract infection.''

In addition, the commenters noted that prevention guidelines are still being debated. The commenters referenced the prevention guideline published in 1981 and posted on the Web site at: http://www.cdc.gov/ncidod/dhqp/gl_catheter_assoc.html .

A few commenters also recommended exceptions for this condition, including patients with immunosuppression, patients who have a catheter placed for therapeutic installation of antimicrobial/chemotherapy agent, patients with sustained urinary tract trauma, and patients in need of permanent use of a catheter.

Commenters stated that Medicare reimbursement does not cover the increased cost of antibiotic-coated catheters which have been shown to reduce the incidence of catheter infections. These same commenters asked CMS to change Medicare payment policy to encourage the application of proven existing technology.

Commenters provided two potential examples of unintended consequences if this condition is to be implemented. First, the commenters believed that physicians and hospitals will increase urinalysis testing to identify urinary tract infections prior to admission. Second, the commenters suggested that physicians and hospitals will use more antibiotics to ``clean'' the urine of bacteria upon admission.

Response: CMS seeks to reduce the incidence of preventable catheter associated urinary tract infections by reducing unnecessary and inappropriate use of indwelling urinary catheters in hospitalized Medicare patients. There is widespread evidence that catheters may lead to an increased risk of infection if they are in place for several days. In addition, there are prevention guidelines to assist physicians in determining how long a urinary catheter should be left in place that can prevent catheter-associated urinary tract infections. Therefore, we believe that catheter-associated urinary tract infections are reasonably preventable by following well-established prevention guidelines, and we are selecting this condition.

Concerning the request for the creation of a new code for ``inflammatory reaction from indwelling catheter,'' we recommend the commenter contact the CDC. The CDC is responsible for maintaining the diagnosis part of the ICD-9-CM codes. We encourage commenters to send specific requests for new or revised ICD-9-CM diagnosis codes to Donna Pickett, CDC, at 3311 Toledo Road, Room 2402, Hyattsville, MD 20782, or via e-mail to dfp4@cdc.gov. Additional information on requesting a new ICD-9-CM diagnosis code may be obtained from the Web site at: http://www.cdc.gov/nchs/icd9.htm .

The commenters are correct that prevention guidelines for avoiding catheter-associated urinary tract infections are scheduled to be updated by CDC's Healthcare Infection Control Practices Committee (HICPAC). The National Quality Forum (NQF) is currently working to update hospital-acquired infection definitions. The effort currently underway will update prevention guidelines that have been in place since 1981. We believe the ongoing effort to update prevention guidelines for avoiding catheter-associated urinary tract infections provides further evidence that this condition is a strong candidate to be selected because of how well it meets the statutory criteria.

We appreciate the many comments urging CMS to consider implementing exceptions for catheter-associated urinary tract infections when it is a hospital-acquired condition but is not preventable. We will carefully consider these suggestions as we plan for the implementation of this new requirement in FY 2009.

With respect to the comment about encouraging the use antibiotic- coated catheters, we continue to work in cooperation with device companies and other associations to ensure that Medicare beneficiaries receive the most current therapeutic modalities. We annually update Medicare inpatient hospital payment rates to reflect hospital resource use for the latest medical technology and other innovations in how care is delivered.

We do not agree there will be significant unintended consequences of selecting catheter-associated urinary tract infections. As stated earlier, we believe this condition is generally avoidable if medical professionals carefully follow longstanding prevention guidelines. We believe hospitals, physicians, and others that treat Medicare patients will focus on taking medically appropriate steps to determine the length of time a catheter is in place. We do not believe it is inappropriate to perform a urinalysis upon admission to the hospital if clinically indicated. We would not

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consider doing so an unintended consequence.

We appreciate all the public comments on this condition, and have considered all of these points of view. We believe this condition meets the criteria of the DRA:

There are unique codes that identify catheter-associated urinary tract infections that are currently considered to be a CC under the MS-DRGs;

Prevention guidelines currently exist and will be updated prior to the October 1, 2008 implementation date of this provision; and

As shown above, catheter-associated urinary tract infections are high cost/high volume conditions.

Therefore, in this final rule with comment period, we are selecting the condition of catheter-associated urinary tract infections to be subject to the provision beginning October 1, 2008. (b) Pressure Ulcers

Coding--Pressure ulcers are also referred to as decubitus ulcers. The following codes clearly identify pressure ulcers.

707.00 (Decubitus ulcer, unspecified site)

707.01 (Decubitus ulcer, elbow)

707.02 (Decubitus ulcer, upper back)

707.03 (Decubitus ulcer, lower back)

707.04 (Decubitus ulcer, hip)

707.05 (Decubitus ulcer, buttock)

707.06 (Decubitus ulcer, ankle)

707.07 (Decubitus ulcer, heel)

707.09 (Decubitus ulcer, other site)

Burden (High Cost/High Volume)--This condition is both high-cost and high volume. For FY 2006, there were 322,946 reported cases of Medicare patients who had a pressure ulcer as a secondary diagnosis. These cases had average charges for the hospital stay of $40,381.

Prevention guidelines--Prevention guidelines can be found at the following Web sites: http://www.npuap.org/positn1.html and http://www .ncbi.nlm.nih.gov/books/bv.fcgi?rid=hstat2.chapter.4409.

CC--Decubitus ulcer codes are classified as CCs under the CMS DRGs. Codes 707.00, 707.01, and 707.09 are CCs under the MS-DRGs. Codes 707.02 through 707.07 are considered MCCs under the MS-DRGs. As discussed earlier, MCCs result in even larger payments than CCs.

Considerations--Pressure ulcers are an important hospital acquired complication. Prevention guidelines exist (non-CDC) and can be implemented by hospitals. Clinicians may state that some pressure ulcers present on admission cannot be identified (skin is not yet broken (Stage I) but damage to tissue is already done and skin will eventually break down). However, by selecting this condition, we would provide hospitals the incentive to perform careful examination of the skin of patients on admission to identify decubitus ulcers. If the condition is present on admission, the provision will not apply. In the proposed rule, we proposed to include pressure ulcers as one of our initial hospital-acquired conditions. This condition can be clearly identified through ICD-9-CM codes. These codes are classified as a CC under the CMS DRGs and as a CC or MCC under the MS-DRGs. Pressure ulcers meet the burden criteria because they are both high cost and high frequency cases. There are clear prevention guidelines. While there is some question as to whether all cases with developing pressure ulcers can be identified on admission, we believe the selection of this condition will result in a closer examination of the patient's skin on admission and better quality of care. We welcomed comments on the proposed inclusion of this condition.

Comment: A majority of commenters supported the intent of selecting the condition of pressure ulcers, but had concerns about how the provision would be implemented in practice. A large majority of commenters believed hospitals will more carefully examine the skin of patients if this condition is selected. However, many commenters cited difficulty in detecting stage 1 pressure ulcers on admission, particularly in certain patient populations.

The commenters cited the Guidance to Surveyors for Long-Term Care Facilities (CMS Manual System Pub. 100-07, State Operations Provider Certification issued November 2004, page 5), noting CMS'' previous acknowledgment that some pressure ulcers are ``unavoidable.'' The commenters cited evidence of an increased risk of pressure ulcer reoccurrence after a patient has had at least one stage IV ulcer.

The commenters expressed concern about how this condition will be coded upon admission. The commenters also suggested that present-on- admission coding of pressure ulcers will rely solely on physicians' notes and diagnoses, according to Medicare coding rules. The commenters were concerned that the current ICD-9-CM codes for pressure ulcers are not precise enough to delineate differences in wound depth, which is an important factor for determining the severity of an ulcer.

The commenters recommended that CMS supplement ICD-9-CM codes for pressure ulcers with severity adjustments for complications and comorbidities that are present on admission. Because patients with pressure ulcers often have other complicating conditions, the commenters stated that it is unlikely that pressure ulcers would potentially be the only secondary diagnosis that would change the DRG assignment from one without a CC to one with a CC. Lastly, the commenters noted that accurate identification of a pressure ulcer requires the education and expertise of a trained physician.

The commenters suggested that CMS should exclude patients enrolled in the Medicare hospice benefit and patients with certain diagnoses that make them more highly prone to pressure ulcers such as hemiplegia, quadriplegia, wasting syndrome, with advanced AIDS and/or protein malnutrition associated with a variety of serious end stage illnesses.

Response: We appreciate the overwhelming public support for the intent of selecting this condition, provided we can address the concerns raised in the public comments. We acknowledge the commenters' concern that CMS previously stated some pressure ulcers are ``unavoidable.'' However, we believe improved screening to identify pressure ulcers upon admission for inpatient care will increase the quality of care. By screening patients entering the hospital for pressure ulcers, the ulcers will be discovered earlier and improve treatment of this preventable condition. We agree that the POA coding of pressure ulcers will rely on the attending physician, who has primary responsibility for documenting and diagnosing a patient's clinical conditions. Pressure ulcers that are identified through screening upon admission that are documented properly will continue to be assigned to a higher paying DRG.

With respect to the comment about patients with pressure ulcers having other complications and comorbidities, we note that many of the new MS-DRGs are subdivided into two or more severity levels. We will continue to evaluate the need for additional severity levels within base MS-DRGs. On the specific issue of the MS-DRGs that include pressure ulcers, we note that these MS-DRGs are already divided into three severity levels as follows:

MS-DRG 573 (Skin Graft &/or Debridement for Skin Ulcer or Cellulitis with MCC)

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MS-DRG 574 (Skin Graft &/or Debridement for Skin Ulcer or Cellulitis with CC)

MS-DRG 575 (Skin Graft &/or Debridement for Skin Ulcer or Cellulitis without CC/MCC)

We are aware that many patients with pressure ulcers may also have other comorbid and complicating conditions that will continue to assign the patient to a higher paying DRG. We do not believe this fact should preclude physicians and hospitals from screening patients for pressure ulcers upon admission. As we indicated in the proposed rule (72 FR 24726), we believe only a minority of cases will have one of the selected conditions as the only CC or MCC present on the claim. However, we believe it will continue to lead to improvements in the quality of care. We believe the selection of this condition will lead the physician and hospital to perform a proper skin exam upon admission, leading to earlier identification and treatment of pressure ulcers.

With respect to the comment that accurate identification of a pressure ulcer requires the education and expertise of a trained physician, we agree. Hospitals should be using properly educated and trained physicians to identify and treat pressure ulcers (as well as all other medical conditions).

We appreciate all the public comment on this condition, and have considered all of these points of view. We believe the condition of pressure ulcers meets the criteria of the DRA:

There are unique codes that identify pressure ulcers that are currently considered to be a CC or an MCC under the MS-DRGs;

Prevention guidelines to avoid pressure ulcers currently exist; and

As shown above, pressure ulcers are high-cost/high-volume conditions. Therefore, in this final rule with comment period, we are selecting the condition of pressure ulcers to be subject to the payment adjustment for hospital acquired conditions beginning October 1, 2008. We referred the matter concerning the need for additional, detailed ICD-9-CM codes to the CDC. We believe further specificity in the ICD-9- CM codes will aid in distinguishing early from late stage pressure ulcers prior to the implementation date of this provision on October 1, 2008. Serious Preventable Events

Serious preventable events are events that should not occur in health care. The injury prevention community has developed information on serious preventable events. CMS reviewed the list of serious preventable events and identified those events for which there was an ICD-9-CM code that would assist in identifying them. We identified four types of serious preventable events to include in our evaluation. These include leaving an object in a patient; performing the wrong surgery (surgery on the wrong body part, wrong patient, or the wrong surgery); air embolism following surgery; and providing incompatible blood or blood products. Three of these serious preventable events have unique ICD-9-CM codes to identify them. There is not a clear and unique code for surgery performed on the wrong body part, wrong patient, or the wrong surgery. Each of these events is discussed separately. (c) Serious Preventable Event--Object Left in during Surgery

Coding Retention of a foreign object in a patient after surgery is identified through ICD-9-CM code 998.4 (Foreign body accidentally left during a procedure).

Burden (High Cost/High Volume)--For FY 2006, there were 764 cases reported of Medicare patients who had an object left in during surgery reported as a secondary diagnosis. The average charges for the hospital stay were $61,962. This is a rare event. Therefore, it is not high volume. However, an individual case will likely have high costs, given that the patient will need additional surgery to remove the foreign body. Potential adverse events stemming from the foreign body could further raise costs for an individual case.

Prevention guidelines--There are widely accepted and clear guidelines for the prevention of this event. This event should not occur. Prevention guidelines for avoiding leaving objects in during surgery are located at the following Web site: http://www.qualityindicators.ahrq. gov/psi--download.htm.

CC--This code is a CC under the CMS DRGs as well as under the MS DRGs.

Considerations--There are no significant considerations for this condition. There is a unique ICD-9-CM code and wide agreement on the prevention guidelines. We proposed to include this condition as one of our initial hospital-acquired conditions. The cases can be clearly identified through an ICD-9-CM code. This code is a CC under both the CMS DRGs and the MS-DRGs. There are clear prevention guidelines. While the cases may not meet the high frequency criterion, they do meet the high-cost criterion. Individual cases can be high cost. In the proposed rule, we welcomed comments on including this condition as one of our initial hospital-acquired conditions.

Comment: A large majority of commenters supported CMS' efforts to identify the condition of ``object left in surgery'' as one that should not occur in the hospital setting. The commenters supported selecting this condition in this year's IPPS rule.

The commenters applauded CMS for identifying a hospital acquired condition that has discrete ICD-9-CM codes and known methods of prevention. In addition, a few commenters noted that prevention guidelines for this condition are fully identified and endorsed by the NQF. MedPAC also complimented CMS for its efforts to identify ``object left in surgery'' and stated that CMS should not allow a case to be classified as a CC/MCC if this ``never event'' occurs during a patient's stay.

The commenters urged CMS to make exceptions for objects deliberately left in place in surgery as opposed to accidental retained foreign objects. The commenters noted that a patient may return to the hospital months or years after an object was left in during surgery, and it is necessary to have POA codes to identify patients that return to a different hospital to have the object removed. All of the commenters recognized that this event can cause great harm to patients.

Response: We believe exceptions for this condition are not necessary. The code that identifies this event, 998.4 (Foreign body accidentally left during a procedure) specifically states that the object was accidentally left in during the surgery. This code would not be assigned if a device or implant was deliberately implanted into a patient. In addition, as stated earlier, we recognize the important role of the attending physician in designating whether or not the serious preventable event occurred during the current admission. We agree with the commenters that a patient may return to the hospital months or years after the surgery to have the foreign object removed. In this circumstance, the hospital would code the condition as present on admission and the provision would not apply. By documenting the event early, the correct POA code can be applied. We agree with the commenters that this serious preventable event should be selected as a hospital-acquired condition in this final rule with comment period. Therefore, we are including this condition in the list of those to be implemented in FY 2009.

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(d) Serious Preventable Event--Air Embolism

Coding--An air embolism is identified through ICD-9-CM code 999.1 (Complications of medical care, NOS, air embolism).

Burden (High Cost/High Volume)--This event is rare. For FY 2006, there were 45 reported cases of air embolism for Medicare patients. The average charges for the hospital stay were $66,007.

Prevention guidelines--there are clear prevention guidelines for air embolisms. This event should not occur. Serious preventable event guidelines can be found at the following Web site: http://www.qualityindicators.ahrq.gov/psi_download.htm .

CC--This code is a CC under the CMS DRGs and is an MCC under the MS-DRGs.

Considerations--There are no significant considerations for this condition. There is a unique ICD-9-CM code and wide agreement on the prevention guidelines. In addition, as stated earlier, the condition is a CC under the CMS DRGs and an MCC under the MS-DRGs. While the condition is rare, it does meet the cost burden criterion because individual cases can be expensive. Therefore, air embolism is a high- cost condition because average charges per case are high. In the proposed rule, we welcomed comments on the proposal to include this condition.

Comment: A large number of commenters supported CMS' efforts to select this condition as one that should not occur in the hospital setting. The commenters considered this an appropriate condition to include for the final rule. The commenters applauded CMS for identifying a hospital acquired condition that has discrete ICD-9-CM codes and known methods of prevention.

In addition, the commenters noted that prevention guidelines for this condition are fully identified and endorsed by the NQF. MedPAC also complimented CMS for its efforts to identify ``air embolism'' and stated that CMS should not allow a case to be classified as a CC/MCC if this ``never event'' occurs during a patient's stay.

The commenters urged CMS to make exceptions for situations when air embolism is technically unavoidable because of a special surgical procedure. All of the commenters recognized that this event can cause great harm to patients.

Response: We appreciate the support for the selection of this condition. We also welcome specific recommendations that would clearly define an appropriate exception to this condition, including any appropriate ICD-9-CM diagnosis and procedure codes which the commenter believes clearly define such an occurrence and the justification for an exception. At this point, we do not believe such an exception is necessary.

We agree with commenters that this serious preventable event should be included in the FY 2008 final rule. Therefore, we are including the condition of air embolism in the list of those to be implemented in FY 2009. (e) Serious Preventable Event--Blood Incompatibility

Coding--Delivering ABO-incompatible blood or blood products is identified by ICM-9-CM code 999.6 (Complications of medical care, NOS, ABO incompatibility reaction).

Burden (High Cost/High Volume)--This event is rare. Therefore, it is not high volume. For FY 2006, there were 33 reported cases of blood incompatibility among Medicare patients, with average charges of $46,492 for the hospital stay. Therefore, individual cases have high costs.

Prevention guidelines--There are prevention guidelines for avoiding the delivery of incompatible blood or blood products. The event should not occur. Serious preventable event guidelines can be found at the following Web site: http://www.qualityindicators.ahrq.gov/psi_download.htm

CC--This code is a CC under the CMS DRGs as well as the MS-DRGs.

Considerations--There are no significant considerations for this condition. There is a unique ICD-9-CM code which is classified as a CC under the CMS DRGs as well as the MS-DRGs. There is wide agreement on the prevention guidelines. While this may not be a high-volume condition, average charges per case are high. Therefore, we believe this condition is a high-cost condition and, therefore, meets our burden criterion. We proposed to include this condition as one of our initial hospital acquired conditions.

Comment: A large number of commenters supported CMS' efforts to identify ``blood incompatibility'' as one condition that should not occur in the hospital setting. The commenters considered this an appropriate condition to include for FY 2009. The commenters applauded CMS for identifying a hospital acquired condition that has discrete ICD-9-CM codes and known methods of prevention. In addition, the commenters noted that prevention guidelines for this condition are fully identified and endorsed by the NQF. MedPAC also complimented CMS for its efforts to identify ``blood incompatibility'' and stated that CMS should not allow a case to be classified as a CC/MCC if this ``never event'' occurs during a patient's stay.

The commenters urged CMS to make exceptions for situations when blood incompatibility is technically unavoidable in emergencies when patients deliberately receive unmatched blood. All of the commenters recognized that this event can cause great harm to patients.

Response: As suggested by commenters, hospitals should not be transfusing incompatible blood. The condition meets the criteria for being selected. It is a potential hospital acquired condition that has discrete ICD-9-CM codes and known methods of prevention. Prevention guidelines for this condition are fully identified and endorsed by the NQF. We acknowledge that there may a rare emergency where a hospital does not have compatible blood available for transfusion. We welcome specific recommendations that would define circumstances where blood incompatibility is unavoidable, including any appropriate ICD-9-CM diagnosis and procedure codes, which the commenters believe clearly define such an occurrence. If providers can provide such a clinical scenario that can be identified by existing or new ICD-9-CM codes, we will consider excluding this situation from the provision. We agree with the commenters that this serious preventable event should be included in the FY 2008 final rule. Therefore, we are including the condition of blood incompatibility in the list of those to be implemented in FY 2009. (f) Staphylococcus Aureus Bloodstream Infection/Septicemia

Coding--ICD-9-CM Code 038.11 (Staphylococcus aureus septicemia) identifies this condition. However, the codes selected to identify septicemia are somewhat complex. The following ICD-9-CM codes may also be reported to identify septicemia:

995.91 (Sepsis) and 995.92 (Severe sepsis). These codes are reported as secondary codes and further define cases with septicemia.

998.59 (Other postoperative infections). This code includes septicemia that develops postoperatively.

999.3 (Other infection). This code includes but is not limited to sepsis/septicemia resulting from infusion, injection, transfusion, and vaccination (ventilator-associated pneumonia is also included here).

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Burden (High Cost/High Volume)--CDC reports that there are 290,000 cases of staphylococcus aureus infection annually in hospitalized patients of which approximately 25 percent are bloodstream infections or sepsis. For FY 2006, there were 29,500 cases of Medicare patients who had staphylococcus aureus infection reported as a secondary diagnosis. The average charges for the hospital stay were $82,678. Inpatient staphylococcus aureus result in an estimated 2.7 million days in excess length of stay, $9.5 billion in excess charges, and approximately 12,000 inpatient deaths per year.

Prevention guidelines--CDC guidelines are located at the following Web site: http://www.cdc.gov/ncidod/dhqp/gl_intravascular.html.

CC--Codes 038.11, 995.91, 998.59, and 999.3 are classified as CCs under the CMS DRGs and as MCCs under the MS-DRGs.

Considerations--Preventive health care associated bloodstream infections/septicemia that are preventable are primarily those that are related to a central venous/vascular catheter, a surgical procedure (postoperative sepsis) or those that are secondary to another preventable infection (for example, sepsis due to catheter-associated urinary tract infection). Otherwise, physicians and other public health experts may argue whether septicemia is reasonably preventable. The septicemia may not be simply a hospital acquired infection. It may simply be a progression of an infection that occurred prior to admission. Furthermore, physicians cannot always tell whether the condition was hospital-acquired. We examined whether it might be better to limit the septicemia cases to a specific organism (for example, code 038.11 (Staphylococcus aureus septicemia)). CDC staff recommended that we focus on staphylococcus aureus septicemia because this condition is a significant public health issue. As stated earlier, there is a specific code for staphylococcus aureus septicemia, code 038.11. Therefore, the cases would be easy to identify. However, as stated earlier, while this type of septicemia is identified through code 038.11, coders may also provide sepsis code 995.91 or 995.92 to more fully describe the staphylococcus aureus septicemia. Codes 995.91 and 995.92 are reported as secondary codes and further define cases with septicemia. Codes 995.91 and 995.92 are CCs under the CMS DRGs and MCCs under the MS-DRGs.

998.59 (Other postoperative infections). This code includes septicemia that develops postoperatively.

999.3 (Other infection). This code includes but is not limited to sepsis/septicemia resulting from infusion, injection, transfusion, and vaccination (ventilator-associated pneumonia is also indexed here).

To implement this condition as one of our initial ones, we would have to exclude the specific code for staphylococcus aureus septicemia, 038.11, and the additional septicemia codes, 995.91, 995.92, 998.59, and 999.3.

We acknowledge that there are additional issues involved with the selection of this condition that may involve developing an exclusion list of conditions present on admission for which we would not apply a CC exclusion to staphylococcus aureus septicemia. For example, a patient may come into the hospital with a staphylococcus aureus infection such as pneumonia. The pneumonia might develop into staphylococcus aureus septicemia during the admission. It may be appropriate to consider excluding cases such as those of patients admitted with staphylococcus aureus pneumonia that subsequently develop staphylococcus aureus septicemia from the provision. In order to exclude cases that did not have a staphylococcus aureus infection prior to admission, we would have to develop a list of specific codes that identified all types of staphylococcus aureus infections such as code 482.41 (Pneumonia due to staphylococcus aureus). We likely would not apply the new provision to cases of staphylococcus aureus septicemia if a patient were admitted with staphylococcus aureus pneumonia. However, if the patient had other types of infections, not classified as being staphylococcus aureus, and then developed staphylococcus aureus septicemia during the admission, we would apply the provision and exclude the staphylococcus aureus septicemia as a CC. We were not able to identify any other specific ICD-9-CM codes that identify specific infections as being due to staphylococcus aureus.

Other types of infections, such as urinary tract infections, would require the reporting of an additional code, 041.11 (Staphylococcus aureus), to identify the staphylococcus aureus infection. This additional coding presents administrative issues because it will not always be clear which condition code 041.11 (Staphylococcus aureus) is describing. We do not believe it would be appropriate to make code 041.11, in combination with other codes, subject to the hospital- acquired conditions provision until we better understand how to address the administrative issues that would be associated with their selection. Therefore, we would exclude staphylococcus aureus septicemia cases with code 482.41 reported as being subject to the hospital- acquired conditions provision. Stated conversely, we would allow staphylococcus aureus septicemia to count as a CC if the patient was admitted with staphylococcus aureus pneumonia.

We recognize that there may be other conditions which we should consider for this type of exclusion. We proposed to include staphylococcus aureus bloodstream infection/septicemia (code 038.11) as one of our initial hospital-acquired conditions. We also proposed to exclude codes 995.91, 998.59, and 999.3 from counting as an MCC/CC when they were reported with code 038.11. The condition can be clearly identified through ICD 9 CM codes that are classified as CC under the CMS DRGs and MCCs under the MS-DRGs. The condition meets our burden criterion by being both high cost and high volume. There are prevention guidelines which we acknowledge are subject to some debate among the medical community. We also acknowledge that we would have to exclude this condition if a patient were admitted with a staphylococcus aureus infection of a more limited location, such as pneumonia. In the proposed rule, we encouraged commenters to make suggestions on this issue and to recommend any other appropriate exclusion for staphylococcus aureus septicemia. We also encouraged comments on the appropriateness of selecting staphylococcus aureus septicemia as one of our proposed initial hospital acquired conditions.

Comment: Many commenters opposed CMS' proposed selection of this condition as part of the FY 2008 final rule. There were a minority of commenters who strongly supported the selection of this condition. These commenters noted the existence of technologies that allow the physician to determine the presence of Staphylococcus Aureus upon admission. Many more commenters stated that accurately identifying staphylococcus aureus septicemia on admission will be difficult, particularly in patients who may have a staphylococcus aureus infection in a limited location. Several commenters referenced the FY 2008 IPPS proposed rule, which stated ``physicians cannot always tell whether the condition was hospital acquired.'' Other commenters also noted that there is still debate

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among physicians regarding the prevention guidelines for staphylococcus aureus septicemia. The proliferation of changes in coding guidelines presents coding problems for hospitals to accurately identify present- on-admission status according to some comments. Specifically, the commenters noted that codes to identify sepsis are very complex and have had recent changes. For instance, there is a code that currently includes septicemia that develops postoperatively, but does not clearly distinguish between intravascular and catheter-associated sources of septicemia. The commenters also suggested that additional coding may be necessary to accurately identify this condition in the many forms it often presents upon admission. Some commenters suggested that the addition of codes may create a challenge for coding staff to identify the correct code.

A large majority of commenters urged CMS to narrow the category for staphylococcus aureus septicemia to include only patients for whom it is reasonably clear that the hospital was the source of the infection and that it could have been reasonably prevented.

Response: We appreciate the plethora of comments regarding staphylococcus aureus septicemia. The commenters were very insightful and presented the challenges of selecting this condition in the FY 2008 final rule.

We agree that the recent proliferation of ICD-9-CM codes for this condition will make it difficult to code and could present an administrative burden on hospitals. In addition, we are sensitive to the difficulty of identifying when a disease has progressed to sepsis or septicemia. Given the course of progression to septicemia, it can be very difficult for a clinician to appropriately diagnose staphylococcus aureus septicemia as present on admission.

While we acknowledge the many concerns raised by the commenters, we continue to believe that hospital acquired staphylococcus aureus septicemia remains a significant public health issue. We are aware of the continued need to prevent Staphylococcus Aureus septicemia in the hospital setting. Therefore, we plan to engage in a collaborative discussion with relevant experts to identify the circumstances when staphylococcus aureus septicemia is preventable. If we can identify when staphylococcus aureus septicemia is a reasonably preventable condition and have codes to distinguish those situations, we will consider this condition for future years. We appreciate the many comments and suggestions as we consider staphylococcus aureus septicemia for selection in the future, and look forward to receiving more public input to identify only instances when this condition is preventable.

Therefore, we are not selecting this condition in this final rule with comment period. We plan to collaborate with the public on this important public health issue and continue to consider the condition for selection in the FY 2009 final rule. We encourage and welcome public comment to further evaluate this condition. (g) Ventilator Associated Pneumonia (VAP) and Other Types of Pneumonia

Coding--Pneumonia is identified through the following codes:

073.0 (Ornithosis with pneumonia)

112.4 (Candidiasis of lung)

136.3 (Pneumocystosis)

480.0 (Pneumonia due to adenovirus)

480.1 (Pneumonia due to respiratory syncytial virus)

480.2 (Pneumonia due to parainfluenza virus)

480.3 (Pneumonia due to SARS-associated coronavirus)

480.8 (Pneumonia due to other virus not elsewhere classified)

480.9 (Viral pneumonia, unspecified)

481 (Pneumococcal pneumonia [Streptococcus pneumoniae pneumonia])

482.0 (Pneumonia due to Klebsiella pneumoniae)

482.1 (Pneumonia due to Pseudomonas)

482.2 (Pneumonia due to Hemophilus influenzae [H. influenzae])

482.30 (Pneumonia due to Streptococcus, unspecified)

482.31 (Pneumonia due to Streptococcus, Group A)

482.32 (Pneumonia due to Streptococcus, Group B)

482.39 (Pneumonia due to other Streptococcus)

482.40 (Pneumonia due to Staphylococcus, unspecified)

482.41 (Pneumonia due to Staphylococcus aureus)

482.49 (Other Staphylococcus pneumonia)

482.81 (Pneumonia due to Anaerobes)

482.82 (Pneumonia due to Escherichia coli [E. coli])

482.83 (Pneumonia due to other gram-negative bacteria)

482.84 (Pneumonia due to Legionnaires' disease)

482.89 (Pneumonia due to other specified bacteria)

482.9 (Bacterial pneumonia unspecified)

483.0 (Pneumonia due to Mycoplasma pneumoniae)

There is not a unique code that identifies ventilator-associated pneumonia. The creation of a code for ventilator-associated pneumonia was discussed at the September 29, 2006 meeting of the ICD-9-CM Coordination and Maintenance Committee meeting. Many issues and concerns were raised at the meeting concerning the creation of this proposed new code. It has been difficult to define ventilator- associated pneumonia. We plan to continue working closely with the CDC to develop a code that can accurately describe this condition for implementation in FY 2009. CDC will address the creation of a unique code for this condition at the September 28-29, 2007 ICD-9-CM Coordination and Maintenance Committee meeting.

While we list 27 pneumonia codes above, our clinical advisors do not believe that all of the codes mentioned could possibly be associated with ventilator-associated pneumonia. Our clinical advisors specifically question whether the following codes would ever represent cases of ventilator-associated pneumonia: 073.0, 480.0, 480.1, 480.2, 480.3, 480.8, 480.9, and 483.0. Therefore, we have a range of pneumonia codes, all of which may not represent cases that could involve ventilator-associated pneumonia. In addition, we do not have a specific code that uniquely identifies cases of ventilator-associated pneumonia.

Burden (High Cost/High Volume)--CDC reports that there are 250,205 ventilator-associated pneumonias per year. Because there is not a unique ICD-9-CM code for ventilator-associated pneumonia, there is not accurate data for FY 2006 on the number of Medicare patients who had this condition as a secondary diagnosis. However, we did examine data for FY 2006 on the number of Medicare patients who listed pneumonia as a secondary diagnosis. There were 92,586 cases with a secondary diagnosis of pneumonia, with average charges of $88,781. According to the journal Critical Care Medicine, patients with ventilator-associated pneumonia have statistically significantly longer intensive care lengths of stay (mean = 6.10 days) than those who do not (mean = 5.32- 6.87 days). In addition, patients who develop ventilator-associated pneumonia incur, on average, greater than or equal to $10,019 in additional hospital costs compared to those who do not.\23\

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Therefore, we believe that this is a high-volume condition.

\23\ Safdar N.: Clinical and Economic Consequences of Ventilator-Associated Pneumonia: a Systematic Review, Critical Care Medicine, 2005, 33(10), pp. 2184-2193.

Prevention guidelines--Prevention guidelines are located at the following Web site: http://www.cdc.gov/ncidod/dhqp/gl_hcpneumonia.html. However, it is not clear how effective these

guidelines are in preventing pneumonia. Ventilator-associated pneumonia may be particularly difficult to prevent.

CC--All of the pneumonia codes listed above are CCs under the CMS DRGs and under the MS-DRGs, except for the following pneumonia codes which are non-CCs: 073.0, 480.0, 480.1, 480.2, 480.3, 480.8, 480.9, 483.0. However, as mentioned earlier, there is not a unique ICD-9-CM code for ventilator-associated pneumonia. Therefore, this condition does not currently meet the statutory criteria for being selected.

Considerations--Hospital-acquired pneumonias, and specifically ventilator-associated pneumonias, are an important problem. However, based on our work with the medical community to develop specific codes for this condition, we have learned that it is difficult to define what constitutes ventilator-associated pneumonia. Although prevention guidelines exist, it is not clear how effective these are in preventing pneumonia. Clinicians cannot always tell which pneumonias are acquired in a hospital. In addition, as mentioned above, there is not a unique code that identifies ventilator-associated pneumonia. There are a number of codes that capture a range of pneumonia cases. It is not possible to specifically identify if these pneumonia cases are ventilator-associated or arose from other sources. Because we cannot identify cases with ventilator-associated pneumonia and there are questions about its preventability, we did not propose to select this condition as one of our initial hospital-acquired conditions. However, we welcomed public comments on how to create an ICD-9-CM code that identifies ventilator-associated pneumonia, and we encouraged participation in our September 28-29, 2007 ICD-9-CM Coordination and Maintenance Committee meeting where this issue will be discussed. We indicated that we would reevaluate the selection of this condition in FY 2009.

Comment: Some commenters urged CMS to select ventilator-associated pneumonia at this time. Most commenters recommended that CMS delay selecting this condition until a unique code is established.

Some commenters submitted an evidence-based peer-reviewed American Association for Respiratory Care (AARC) Clinical Practice Guideline (CPG) on strategies that should be disseminated and available to hospitals for the prevention of ventilator associated pneumonia. The CPG can be found at http://www.rcjournal.com/cpgs/09.03.0869.html.

Concurrently, the AARC acknowledges that more research needs to be done in this area.

A majority of commenters believed this condition can be reasonably prevented through evidence-based medicine guidelines. These commenters noted that current unique codes for this condition are absent. These commenters urged CMS to consider the development of an explicit ICD-9- CM code for this ventilator-associated pneumonia and to select it at a later date.

Response: At the time of publication of this final rule with comment period, there is not a code associated with ventilator- associated pneumonia. Therefore, this condition does not currently meet the statutory criteria for being selected. However, the ICD-9-CM Coordination and Maintenance Committee will meet September 27-28, 2007, to discuss the creation of a unique ICD-9-CM code for this condition. Further information of the Committee's activities on diagnosis code issues can be found at the Web site: http://www.cdc.gov/nchs/icd9.htm.

We believe that once this condition has a unique code, it should be further considered for selection beginning in FY 2009.

We believe that ventilator-associated pneumonia meets some of the criteria for being selected. There are guidelines for prevention of ventilator-associated pneumonia within CDC evidence based guidelines for healthcare associated pneumonia. More information can be found at: http://www.cdc.gov/ncidod/dhqp/gl_hcpneumonia.html. Furthermore, we

are aware that the American Thoracic Society and the Infectious Disease Society of America collaborated to produce guidelines on the prevention of ventilator-associated pneumonia. As indicated above, most pneumonias are CCs. Therefore, it is reasonable to believe that ventilator- associated pneumonia will also be classified as a CC once a new code is created to identify it. At that time, we can further consider whether the condition is reasonably preventable and should be subject to this provision.

We appreciate all the public comment on this condition, and considered all of the respondents' point of view. While we acknowledge the clinical challenge of clearly identifying ventilator-associated pneumonia, we believe that once this condition has a unique ICD-9-CM code, coupled with well-known prevention guidelines that are the result of evidence-based medicine, we will give strong consideration for selecting this condition for FY 2009, and including it in the FY 2009 IPPS proposed rule. (h) Vascular Catheter-Associated Infections

Coding--The proposed rule noted that the code used to identify vascular catheter associated infections is ICD-9-CM code 996.62 (Infection due to other vascular device, implant, and graft). This code includes infections associated with all vascular devices, implants, and grafts. It does not uniquely identify vascular catheter associated infections. Therefore, there was not a unique ICD-9-CM code for this infection at the time of the proposed rule. CDC and CMS staff requested that the ICD-9-CM Coordination and Maintenance Committee discuss the creation of a unique ICD-9-CM code for vascular catheter associated infections because the issue is important for public health. The proposal to create a new ICD-9-CM was discussed at the March 22 23, 2007 meeting of the ICD-9-CM Coordination and Maintenance Committee. A summary of this meeting can be found at: http://www.cdc.gov/nchs/icd9.htm. In the proposed rule, we indicated that coders would have to

assign code 996.62 plus an additional code for the infection such as septicemia to identify vascular catheter-associated infections. Therefore, a list of specific infection codes would have to be developed to go along with code 996.62 if CDC did not create a code for vascular catheter-associated infections. If the vascular catheter- associated infection was hospital-acquired, the DRG logic would have to be modified so that neither the code for the vascular catheter associated infection along with the specific infection code would count as a CC. However, even if these actions were taken, we were concerned that code 996.62 is not specific to vascular catheter-associated infections.

Burden (High Cost/High Volume)--CDC reports that there are 248,678 central line associated bloodstream infections per year. It appears to be both high cost and high volume. However, we were not able to identify Medicare data on these cases because there is no existing unique ICD-9-CM code.

Prevention guidelines--CDC guidelines are located at the following Web site: http://www.cdc.gov/ncidod/dhqp/gl_intravascular.html.

CC--Code 996.62 is a CC under the CMS DRGs and the MS-DRGs. However, as stated earlier, this code is broader than vascular catheter associated infections. Therefore, at the time of the

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proposed rule, there was not a unique ICD-9-CM code to identify the condition, and it did not meet the statutory criteria to be selected. However, the proposed rule indicated that we will be seeking to create a code(s) to identify this condition and may select it as a condition under the provision beginning in FY 2009.

Considerations--There was not yet a unique ICD-9-CM code to identify this condition at the time of the proposed rule. In the proposed rule, we indicated that if a code were created prior to October 1, 2007, we would be able to specifically identify these cases. Some patients require long-term indwelling catheters, which are more prone to infections. Ideally catheters should be changed at certain time intervals. However, circumstances might prevent such practice (for example, the patient has a bleeding diathesis). In addition, a patient may acquire an infection from another source which can colonize the catheter. As mentioned earlier, coders would also assign an additional code for the infection, such as septicemia. Therefore, a list of specific infection codes would have to be developed to go along with code 996.62. If the vascular catheter-associated infection was hospital-acquired, the DRG logic would have to be modified so that neither the code for the vascular catheter-associated infection along with the specific infection code would count as a CC. Without a specific code for infections due to a catheter, it would be difficult to identify these patients. Given the current lack of an ICD-9-CM code for this condition, we did not propose to include it as one of our initial hospital-acquired conditions. However, we believed it showed merit for inclusion in future lists of hospital acquired conditions once we had resolved the coding issues and were able to better identify the condition in the Medicare data. We indicated that we would reevaluate the selection of this condition in FY 2009.

We encouraged comments on this condition which was identified as an important public health issue by several organizations that provided recommendations on hospital-acquired conditions. We indicated that we were particularly interested in receiving comments on how we should handle additional associated infections that might develop along with the vascular catheter-associated infection.

Comment: Some commenters stated there was not a unique ICD-9-CM code for vascular catheter-associated infection. Therefore, the condition does not meet the criteria for being selected. These commenters requested that CMS consider creating an explicit code for catheter-associated infections and selecting the condition at that time. One commenter recommended that CMS examine selecting vascular- catheter associated infections and identify the condition using the CPT codes for insertion of a central venous catheter. Other commenters recommend selecting the condition and rely on the use of specific codes for the insertion of catheters to supplement the existing code 996.62 (Infection and inflammatory reaction due to other vascular device, implant, and graft). The commenters believed that this alternative approach may reduce the need to rely on a unique code for catheter associated blood stream infection (CA-BSI). Some commenters noted that it is possible to screen for bloodstream infections upon admission. Other commenters suggested that CMS exempt vascular surgery, implantable device codes, and other obvious sources of existing conditions that cause blood stream infection prior to catheter placement. Finally, the commenters suggested that CMS exclude long-term catheter insertions such as the tunneled central venous catheter using codes 365.57 through 365.66.

Response: Since the publication of the FY 2008 IPPS proposed rule, CDC has created a new code for vascular catheter-associated infection. The new code 999.31, (Infection due to central venous catheter) will become effective on October 1, 2007. It is available for public viewing along with other new codes listed on the CMS Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/Downloads/new_diagnosis_codes_2007.pdf. This new code will address commenters concerns

regarding coding for this condition.

We appreciate all the public comment on this condition, and have considered all of these points of view. For the proposed rule, our only barrier to selecting vascular catheter-associated infections was the absence of a unique code to identify the condition. As CDC has since created a code to identify vascular catheter-associated infections, we believe the condition meets the criteria for being selected:

There are unique codes that identify vascular catheter- associated infections as a CC under the MS-DRGs;

Prevention guidelines exist to avoid vascular catheter- associated infections; and

As shown above, vascular catheter-associated infections are high-volume conditions.

At this time, we have not decided whether there are specific clinical situations where a vascular catheter associated infection would not be considered preventable. We will consider exceptions to the policy in the circumstances provided in the public comments. We will consider these suggestions before the provision becomes effective in FY 2009. (i) Clostridium Difficile-Associated Disease (CDAD)

Coding--This condition is identified by ICD-9-CM code 008.45 (Clostridium difficile).

Burden (High Cost/High Volume)--CDC reports that there are 178,000 cases per year in U.S. hospitals. For FY 2006, there were 110,761 reported cases of Medicare patients with CDAD as a secondary diagnosis, with average charges for the hospital stay of $52,464. Therefore, this is a high-cost and high-volume condition.

Prevention guidelines--Prevention guidelines are not available. Therefore, we do not believe this condition can reasonably be prevented through the application of evidence-based guidelines.

CC--Code 008.45 is a CC under the CMS DRGs and the MS-DRGs.

Considerations--CDAD is an emerging problem with significant public health importance. If found early CDAD cases can easily be treated. However, cases not diagnosed early can be expensive and difficult to treat. CDAD occurs in patients on a variety of antibiotic regiments, many of which are unavoidable, and therefore preventability is an issue. We did not propose to include CDAD as one of our initial hospital acquired conditions at this time, given the lack of prevention guidelines. We welcomed public comments on CDAD, specifically on its preventability and whether there is potential to develop guidelines to identify it early in the disease process and/or diminish its incidence. We indicated that we would reevaluate the selection of this condition in FY 2009.

Comment: Commenters noted the current clinical debate surrounding this condition reveals that it is very difficult to prevent in all cases; it can be prevalent within the hospital setting. In addition, some commenters noted this condition may be caused by the treatment protocol prescribed for a principal diagnosis; it can also occur if the patient is immune-compromised. Finally, some commenters stated that a significant percentage of CDAD is unavoidable, and it is difficult to distinguish community acquired from hospital acquired CDAD. Commenters

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also urged CMS to delay selection of this condition because there is a lack of unique codes, complication codes, and guidelines for prevention of this condition.

Response: This condition meets two of the three statutory criteria. There is an ICD-9-CM code for CDAD. The code is 008.45 (Clostridium difficile). Therefore, the condition can be clearly identified through the use of ICD-9-CM codes. Code 008.45 is also a CC under the CMS DRGs and the MS-DRGs. Also, as shown above, CDAD occurs with significant frequency in the Medicare population and is a high cost condition. However, prevention guidelines for this condition are currently unavailable. As suggested by the commenters, leading clinicians believe this condition may not be reasonably preventable because it can occur as a result of broad spectrum antibiotic administration, which is often unavoidable. Although we agree with these commenters, we are also aware of the public interest in this issue and will continue to be interested in selecting this condition if treatment protocols evolve to the point where CDAD is a preventable condition and prevention guidelines are developed.

We are not selecting this condition for implementation in the FY 2008 final rule. It does not currently meet the statutory guidelines for being selected because there are no prevention guidelines. Nevertheless, we will consider adopting this condition in the future if prevention guidelines to avoid CDAD are developed. (j) Methicillin-Resistant Staphylococcus Aureus (MRSA)

Coding--MRSA is identified by ICD-9-CM code V09.0 (Infection with microorganisms resistant to penicillins). One would also assign a code(s) to describe the exact nature of the infection.

Burden (High Cost/High Volume)--For FY 2006, there were 95,103 reported cases of Medicare patients who had MRSA as a secondary diagnosis. The average charges for these cases were $31,088. This condition is a high-cost and high-volume infection. MRSA has become a very common bacterium occurring both in and outside of the hospital environment.

Prevention guidelines--CDC guidelines are located at the following Web site: http://www.cdc.gov/ncidod/dhqp/pdf/ar/mdroGuideline2006.pdf.

CC--Code V09.0 is not a CC under the CMS DRGs and the MS-DRGs. The specific infection would be identified in a code describing the exact nature of the infection, which may be a CC.

Considerations--As stated earlier, preventability may be hard to ascertain since the bacteria have become so common both inside and outside the hospital. There are also considerations in identifying MRSA infections because hospitals would report the code for MRSA along with additional codes that would describe the exact nature of the infection. We would have to develop a list of specific infections that could be the result of MRSA. We did not propose to include MRSA as one of our initial hospital-acquired conditions because the condition is not a CC. We recognize that associated conditions may be a CC. In the proposed rule, we welcomed comments on the proposal not to include this condition. Should there be support for including this condition, we requested recommendations on what codes might be selected to identify the specific types of infections associated with MRSA.

Comment: Commenters displayed a high level of interest in this condition, not only as a hospital-acquired condition, but also as a broader public health problem that continues to affect Medicare beneficiaries. Commenters noted that MRSA is both high volume and high cost, referring to the language in the proposed rule. For this reason, many commenters believed this condition should be given a unique ICD-9- CM code to be tracked in FY 2008. Furthermore, the commenters urged CMS to include it on the list of conditions for FY 2009 for which reimbursement may be withheld. Medical device companies that provide products to screen for MRSA commented in support of selecting the condition.

However, a large number of commenters had reservations about selecting this condition because MRSA is not a CC or MCC under the new MS-DRGs. Most commenters acknowledged the clear prevention guidelines for MRSA. However, they contend that there remains debate on whether MRSA is reasonably preventable. These commenters indicated MRSA is ubiquitous and may be colonizing in so many potential patients that it is difficult to determine if it is acquired in a hospital. The commenters also noted current literature reveals a strain of community acquired MRSA that may be difficult to detect upon admission to the hospital.

Response: We acknowledge the strong public health interest in reducing the number of MRSA related infections. However, MRSA does not currently meet the statutory criteria to be selected. Although there is an ICD-9-CM code to identify MRSA and CDC has prevention guidelines to reduce its incidence, we do not believe that there is a consensus among public health experts that MRSA is preventable. The public comments and the literature on this condition reveal a vigorous debate over whether MRSA is really community-acquired rather than hospital acquired given the significant potential number of patients that can be colonized with MRSA prior to admission. While this concern may be possible to address through screening patients for MRSA upon admission, the condition is not currently identified as a CC or MCC under the MS-DRGs. If present as a secondary diagnosis, the presence of MRSA alone does not lead to higher Medicare payment. Our data do not suggest that presence of MRSA alone will lead to higher hospital costs that would justify classifying it as a CC or MCC. Therefore, as the condition is not an MCC or CC, it does not meet the statutory criteria for being selected at this time.

Although we are not selecting MRSA at this time, we believe it is a precursor to several other conditions that we have selected. MRSA may be a precursor to catheter associated urinary tract infections, vascular catheter-associated infections, and mediastinitis after coronary artery bypass graft (CABG) surgery--a surgical site infection that we have selected and is discussed in more detail below. (k) Surgical Site Infections

Coding--Surgical site infections are identified by ICD-9-CM code 998.59 (Other postoperative infection). The code does not tell the exact location or nature of the postoperative wound infection. The code includes wound infections and additional types of postoperative infections such as septicemia. The coding guidelines instruct the coder to add an additional code to identify the type of infection. To implement this condition we would have to remove both code 998.59 and the specific infection from counting as a CC if they occurred after the admission. We would have to develop an extensive list of possible infections that would be subject to the provision. We may also need to recommend the creation of a series of new ICD-9-CM codes to identify various types of surgical site infections, should this condition merit inclusion among those that are subject to the proposed hospital- acquired conditions provision.

Burden (High Cost/High Volume)--CDC reports that there are 290,485 surgical site infections each year. As stated earlier, there is not a unique code for surgical site infection. Therefore, we examined Medicare data on patients

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with any type of postoperative infection. For FY 2006, there were 38,763 reported cases of Medicare patients who had a postoperative infection. These patients had average charges for the hospital stay of $79,504. We are unable to determine how many of these patients had surgical site infections.

Prevention guidelines--CDC guidelines are available at the following Web site: http://www.cdc.gov/ncidod/dhqp/gl_surgicalsite.html .

CC--Code 998.59 is a CC under the CMS DRGs and the MS-DRGs.

Considerations--As mentioned earlier, code 998.59 is not exclusive to surgical site infections. It includes other types of postoperative infections. Therefore, code 998.59 does not currently meet the statutory criteria for being subject to the provision because it does not uniquely identify surgical site infections. To identify surgical site infections, we would need new codes that provide more detail about the type of postoperative infection as well as the site of the infection. In addition, one would report both code 998.59 as well a more specific code for the specific type of infection, making implementation difficult. While there are prevention guidelines, it is not always possible to identify the specific types of surgical infections that are preventable. Therefore, we did not propose to select surgical site infections as one of our proposed hospital- acquired conditions at this time. However, we welcomed public comments on whether we can develop criteria and codes to identify preventable surgical site infections that would assist us in reducing their incidence. We indicated that we were exploring ways to identify surgical site infections and would reevaluate this condition in FY 2009.

Comment: A number of commenters specifically requested that CMS consider selecting mediastinitis after coronary artery bypass graft (CABG) surgery. Commenters noted that mediastinitis is a postoperative infection that can arise after CABG.

Commenters stated that the condition meets the criteria set forth in the DRA. According to the comments, mediastinitis is a frequently occurring and costly infection that will develop after CABG surgery. The commenters noted that there are unique codes to identify mediastinitis and prevention guidelines that are backed by evidence based medicine have been developed.

Response: We agree that mediastinitis meets the statutory criteria for being selected.

Coding--There are unique ICD-9-CM codes to identify the condition. The ICD-9-CM code for mediastinitis is 519.2.

Burden (High Cost/High Volume)--We examined Medicare data on patients who received a CABG operation (with codes 36.10-36.19) and also had mediastinitis (ICD-9-CM code 519.2) as a secondary diagnosis. For FY 2006, there were 108 reported cases of Medicare patients who had this postoperative infection after CABG. These patients had average charges for the hospital stay of $304,747. Therefore, mediastinitis is a high-cost condition.

Prevention guidelines--The CDC surgical site infection prevention guidelines are backed by evidence based medicine. Further information can be found at: http://www.cdc.gov/ncidod/dhqp/gl_surgicalsite.html.

We are selecting this condition because it meets the statutory criteria and was suggested in the public comments. We would identify the coronary artery bypass graft procedures through procedure codes 36.10 through 36.19. Therefore, when a patient has a coronary artery bypass graft performed (code 36.10 through 36.19), and a secondary diagnosis of mediastinitis (code 519.2) is reported that was not present on admission, we will not count mediastinitis as an MCC beginning October 1, 2009.

``Surgical site infections'' is a broad category, and we were looking for assistance from the public for ways to identify specific surgical site infections. We appreciate the suggestion to select mediastinitis after CABG surgery when it is a hospital acquired condition. We are selecting this condition for implementation in this FY 2008 final rule. We welcome additional recommendations for other types of surgical site infections that could also be selected and look forward to working with stakeholders and the public as we consider additional surgical site infections in the future. (l) Serious Preventable Event--Surgery on Wrong Body Part, Patient, or Wrong Surgery

Coding--Surgery performed on the wrong body part, wrong patient, or the wrong surgery would be identified by ICD-9-CM code E876.5 (Performance of inappropriate operation). This diagnosis code does not specifically identify which of these events has occurred.

Burden (High Cost/High Volume)--As stated earlier, there are not unique ICD-9-CM codes which capture surgery performed on the wrong body part or the wrong patient, or the wrong surgery. Therefore, we examined Medicare data on the code for performance of an inappropriate operation. For FY 2006, there was one Medicare case reported with this code, and the patient had average charges for the hospital stay of $24,962. This event is rare. Therefore, it is not high volume. Individual cases could have high costs. However, we were unable to determine the impact with our limited data.

Prevention guidelines--There are guidelines to ensure that the correct surgery was performed on the correct patient or correct patient's body part. This event should not occur. Further information and prevention guidelines can be found at: http://www.ahrq.gov/clinic/ptsafety/ .

CC--This code is not a CC under the CMS DRGs and the MS-DRGs. Therefore, it does not meet the criteria for selection under section 1886(d)(4)(D)(iv) of the Act. However, Medicare does not pay for performing surgery on the wrong body part or patient, or performing the wrong surgery. These services are not considered to be reasonable and necessary and are excluded from Medicare coverage.

Considerations--There are significant considerations for the selection of this condition. There is not a unique ICD-9-CM code that would describe the nature of the inappropriate operation. All types of inappropriate operations are included in code E876.5. Unlike other conditions, performance of an inappropriate operation is not a complication of a prior medical event that was medically necessary. Rather, in this case, there was a needed intervention but it was done to either the wrong body part or the wrong patient, or was not the correct operation. Thus, a service was completed that was not reasonable and necessary and Medicare does not pay for any inpatient service associated with the wrong surgery. It is not necessary for us to select this condition because Medicare does not pay for it under any circumstances.

Comment: A majority of commenters agreed that there are not unique codes to identify wrong surgery. In addition, these commenters pointed out that there are guidelines to ensure that the correct surgery is being performed on the correct patient or correct patient's body part. These commenters stated that wrong surgery is a serious preventable event that should not occur.

One commenter urged CMS to rank the condition--surgery on wrong body part, wrong patient, or wrong surgery (wrong site surgery)--higher in our list of hospital-acquired conditions. This commenter stated that wrong site surgery may not be rare, but rather may be quite prevalent. The commenter disagreed with CMS' belief that wrong

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site surgery should not be considered as a complication because it is a risk of being in a hospital. The commenter recommended the development of specific codes for wrong site surgery.

Response: With respect to this latter comment, the commenter may have misunderstood our discussion of this issue in the proposed rule. We never asserted wrong site surgery is not a complication because it is a risk of being in a hospital. Rather, we stated the event itself is wrong and should never occur. Unlike CCs and MCCs, wrong surgery is not a complication of a prior medical event that was medically necessary. Wrong surgery is not a CC or an MCC because the entire event itself should never occur, is not reasonable and necessary and should not result in any payment to the hospital or physician. We are not selecting wrong surgery because it is not an event for which Medicare should pay less; it is an event for which Medicare should pay nothing at all.

As stated in the proposed rule, there is not a unique ICD-9-CM code that identifies surgery performed on the wrong body part or the wrong patient, or the wrong surgery. Code E876.5 (Performance of inappropriate operation) does not describe what specifically was wrong with the surgery, such as whether it was performed on the wrong side, the wrong patient, or if the wrong surgery were performed. In examining Medicare data on the code for performance of an inappropriate operation, we found only one case reported in FY 2006. We agree this is a serious issue that requires close examination and monitoring.

The proposed rule indicated that wrong surgery (right patient, wrong surgery, right surgery, wrong patient, etc.) is not a reasonable and necessary service. Therefore, it is not covered by Medicare and should not be paid. Wrong surgery is not a CC and does not meet the criteria of the statute. As stated above, there are generally recognized guidelines hospitals and physicians must follow to ensure that the correct surgery was performed on the correct patient or correct patient's body part. This event should not occur. If hospitals fail to ensure the correct surgery is performed, there are other provisions in the regulations to address this alarming event. For instance, a hospital must meet the CoPs in order to participate in Medicare. If wrong surgery was performed, the hospital could be out of compliance with the Surgical Services CoP, the Quality Assessment and Performance Improvement CoP, or potentially others. Performance of wrong surgery may suggest a systems failure or systems that do not comply with the CoPs that should be further investigated. We are interested in promoting a culture of safety and are interested in helping hospitals improve their performance. The hospital would have an opportunity to develop and present a plan of correction to avoid termination of its participation in Medicare by addressing the deficiencies that resulted in an incorrect surgery being performed. The final action that would be taken would depend on the individual circumstances and whether the hospital has addressed the problem to reduce the chance of a similar occurrence in the future. In any event, we reiterate that the way for Medicare to address wrong surgery is not through this provision that does not pay extra for preventable hospital complications when we should be paying nothing at all, but instead through Medicare's regulations that ensure that every Medicare provider meets basic quality of care standards. (m) Falls and Fractures, Dislocations, Intracranial Injury, Crushing Injury, and Burns

Coding--There is no single code that shows that a patient has suffered a fall in the hospital. Codes would be assigned to identify the nature of any resulting injury from the fall such as a fracture, contusion, concussion, etc. There is a code to indicate that a patient fell from bed, code E884.4 (Fall from bed). One would then assign a code that identifies the external cause of the injury (the fall from the bed) and an additional code(s) for any resulting injury (a fractured bone).

Burden (High Cost/High Volume)--As stated earlier, there is not a code to identify all types of falls. Therefore, in the FY 2008 IPPS proposed rule, we examined Medicare data on the number of Medicare beneficiaries who fell out of bed. For FY 2006, there were 2,591 cases reported of Medicare patients who fell out of bed. These patients had average charges of the hospital stay of $24,962. However, depending on the nature of the injury, costs may vary in specific cases.

Prevention guidelines--Falls may or may not be preventable. Serious preventable event guidelines can be found at the following Web site: http://www.qualityindicators.ahrq.gov/psi_download.htm.

CC--Code E884.4 is not a CC under the CMS DRGs or the MS-DRGs.

Considerations--There are not clear codes that identify all types of falls. Hospitals would also have to use additional codes for fractures and other injuries that result from the fall. In addition, depending on the circumstances, the falls may or may not be preventable. We did not propose the inclusion of falls as one of our initial hospital-acquired conditions because we could only identify a limited number of these cases, and they were not classified as CCs. However, we welcomed public comments on how to develop codes or coding logic that would allow us to identify injuries that result from falls in the hospital so that Medicare would not recognize the higher costs associated with treating patients who acquire these conditions in the hospital.

Comment: Several commenters stated that the category of falls is not appropriate for inclusion as one of the hospital-acquired conditions. Specifically, the commenters noted that it is impossible to prevent all falls, and the definition of what constitutes a ``preventable fall'' is not well-defined. Several commenters strongly recommended the inclusion of falls for the final rule because falls and their resulting injuries are an important public health safety issue. However, these commenters did not give further details or recommendations to CMS regarding how to identify falls and related injuries as a hospital-acquired condition that would be subject to this provision.

Response: With respect to the comment that not all falls are preventable, we reiterate that the statutory provision authorizes the Secretary to select conditions that ``could reasonably have been prevented through the application of evidence based guidelines.'' We believe that injuries that occur in the hospital due to falls are preventable. As discussed earlier, we received a couple of comments urging us to include falls as one of our hospital acquired conditions. We recognize that preventable injuries are an important patient safety issue. Therefore, we considered additional ways to identify patients who had preventable injuries that occurred in the hospital. We examined the use of a combination of External cause of injury codes and the specific injury to identify these cases. We identified five external causes of injury codes that would identify falls in a hospital. These include:

E884.2 Fall from chair

E884.3 Fall from wheelchair

E884.4 Fall from bed

E884.5 Fall from other furniture

E884.6 Fall from commode

These codes clearly identify certain types of falls. If coded for an inpatient, they could identify that the fall occurred in the hospital. If these codes appeared

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on a claim along with a fracture or trauma code that did not reflect that the condition was present on admission, we could conclude that the injury was a result of a fall in the hospital that should not be counted as an MCC or CC. However, we identified potential problems in using the external cause of injury codes. There is a separate field on the electronic claim to report one external cause of injury code. However, hospitals do not report the POA indicator with this field. Therefore, we will not be able to tell if the external cause of injury code is identifying an event that occurred before or after admission.

Hospitals can also report external cause of injury codes as a secondary diagnosis. If the hospital lists the external cause of injury code among the secondary diagnoses, the hospital would be assigning a Present on Admission indicator to the external cause of injury code. In these cases, we would be able to identify that one of the five types of falls indicated above occurred after admission. We could use this information along with the ICD-9-CM diagnosis code for the specific type of injury, such as a fracture, to not allow the specific injury to count as a MCC or CC, since it would be the result of a preventable injury. In our analysis of the use of an external cause of injury code, we believe this approach is too complicated to identify preventable injuries. Therefore, we focused on simply identifying injuries that should not occur during a hospitalization. If a preventable injury occurs during a hospitalization, it should be included on our list of hospital acquired conditions.

We reviewed diagnosis codes contained in the Injury and Poisoning Chapter of ICD-9-CM and attempted to develop a list of codes that could identify potential adverse events that may or may not have been the result of a fall occurring in the hospital setting. After reviewing each category of diagnosis codes, we identified the following injuries that should not occur during a patient's hospitalization. The generic categories of injuries are as follows:

Fractures--ICD-9-CM code range 800 through 829

Dislocations--ICD-9-CM code range 830 through 839

Intracranial injury--ICD-9-CM code range 850 through 854

Crushing injury--ICD-9-CM code range 925 through 929

Burns--ICD-9-CM code range 940 through 949

Other and unspecified effects of external causes--ICD-9-CM code range 991 through 994

In our view, the above conditions should not occur after admission to the hospital. That is, if the patient is admitted to the hospital without a crushing injury, a burn, fracture, dislocation, among others, we can see no reason why such an event would not be preventable while the patient is in the hospital. None of these injuries should occur after admission. We believe this range of conditions offers a relatively uncomplicated method to determine if an injury or trauma is acquired in the hospital. This range of conditions meets the statutory criteria for being selected when they are MCCs or CCs. First, they are identifiable with ICD-9-CM codes. Second, injuries that occur as a result of a fall in the hospital complicate the care and treatment of the patient. Fractures and dislocations and other injuries are common in the Medicare population. There were more than 175,000 fractures and other traumatic injuries in the above range of codes for FY 2006. Third, hospital acquired injuries included in this range of codes should not occur and are preventable. Although we have not identified specific prevention guidelines for the conditions described by the above range of codes, we believe these types of injuries and trauma should not occur in the hospital, and we look forward to working with CDC and the public in identifying research that has or will occur that will assist hospitals in following the appropriate steps to prevent these conditions from occurring after admission.

We welcome public comments on additions and deletions to this injury list as well as our findings on the use of a combination of external cause of injury codes and injury codes to identify patients that acquired an injury in the hospital due to a fall. We also welcome any additional suggestions to identify cases where preventable injuries, such as falls, occur during hospitalization. We will review all recommendations in the FY 2009 IPPS rule in order to further refine our policy to identify preventable injuries and ensure that Medicare does not pay extra by counting them as MCC or CCs. (n) Other Conditions Suggested Through Comment: Deep Vein Thrombosis (DVT)/ Pulmonary Embolism (PE)

Comment: A number of commenters encouraged CMS to select Venous Thromboembolism (VTE), which includes both Deep Vein Thrombosis (DVT) and Pulmonary Embolism (PE), as a preventable condition. The commenters noted that prophylactic measures exist to avoid these conditions and they are preventable if these steps are followed.

The commenters asserted that this condition meets the DRA criteria requirements for a condition eligible for a payment adjustment in that it involves high cost and high volume (according to the 2006 MedPAR data, DVT resulted in more than 180,000 discharges with a mean standardization cost of $17,410 and PE in more than 100,000 discharges with a mean standardization cost of $20,742), and results in assignment to a higher paying DRG if present as a secondary diagnosis. The commenters also noted that both DVT and PE have ICD-9-CM codes that are on the MCC and CC lists. In addition, this condition can be prevented in accordance with evidence-based guidelines. These commenters cited Geerts, et al., Prevention of Venous Thromboembolism: The Seventh ACCP Conference on Antithrombotic and Thrombolytic Therapy, Chest, 126: 338S-400S (2004). The commenters acknowledged DVT and PE are identified by multiple codes, but asserted that administrative issues surrounding the selection of this condition could be resolved. They requested that CMS consider selecting DVT and PE as preventable complications for which hospitals will not receive additional payments.

Response: We appreciate these comments suggesting that we add DVT and PE to our list of conditions that would be subject to the hospital acquired conditions provision. A DVT is a blood clot that forms in a vein, most commonly in the lower extremity. It can arise secondary to a number of clinical circumstances, including prolonged inactivity or bedrest, or from extended periods of time with the lower extremity in a bent position. It can also arise in the setting of a hypercoagulable state such as that which occurs with a number of malignancies, where the blood has an increased propensity to form clots, and it is also more common in patients taking oral contraceptives, particularly in conjunction with regular tobacco use. A PE is a clot that occurs in one of the pulmonary arteries that supplies a portion of the lung, most commonly when part or all of a DVT migrates to the pulmonary vessels from its original location, although it can also occur in the absence of a DVT, and it is a particularly serious event that is often life threatening. We refer readers to the current medical literature to further define DVT and PE.

We agree that there are circumstances where these conditions are preventable,

[[Page 47216]]

and where the condition meets the statutory criteria to be selected. These conditions can be identified by unique ICD-9-CM codes. DVT can be identified through codes 453.40 (Venous embolism and thrombosis of unspecified deep vessels of lower extremity), 453.41 (Venous embolism and thrombosis of deep vessels of proximal lower extremity), and 453.42 (Venous embolism and thrombosis of deep vessels of distal lower extremity). All three codes are on the CC list. PE is identified through codes 415.10 (Iatrogenic pulmonary embolism and infarction) and 415.19 (Other pulmonary embolism and infarction). Both of these codes are on the MCC list. The commenters provided Medicare data showing that these conditions are both frequent and high cost in the Medicare population. Finally, the commenters have identified prevention guidelines backed by evidence based medicine to avoid DVTs and PEs. Therefore, at least in some circumstances, these conditions meet the statutory criteria for being selected.

We appreciate the collaborative efforts of other organizations to further define the prevention guidelines for this condition. We recognize that routine admission physical examinations should include efforts to detect a DVT. Although we believe DVTs and PEs may be preventable in certain circumstances (such as when an otherwise healthy patient is having elective surgery on a lower extremity), it is possible that a patient may have a DVT upon admission that goes unidentified, and it is also possible that DVT may occur because of other circumstances, such as an occult malignancy. If a DVT is clinically suspected upon admission to the hospital, the definitive diagnosis of a DVT can be made with a Doppler ultrasound examination or intravenous venogram, or both. We anticipate that it is not feasible to perform these studies on every hospitalized patient. In the case of a patient who is admitted with a clinically unapparent DVT that is not detected, the hospital will have followed all typical patient care protocols yet the DVT went undiagnosed upon admission. It may remain undetected until the patient exhibits symptoms of either the DVT or a PE that is unrelated to the patient's principal diagnosis. In these circumstances, we believe the DVT or PE should continue to be counted as an MCC or CC because, in our view, the condition either was unidentifiable prior to admission or did not likely occur as a result of poor management of the patient while they were in the hospital. We believe it is very important to select DVTs and PEs only when they are preventable through following standard prevention guidelines. We will seek to identify clearly defined instances of preventable DVT and PE that should not occur in the hospital setting which will help to further increase hospital quality of care.

We appreciate suggestions on how to identify DVTs and PEs that are preventable hospital acquired conditions. If we can identify only those circumstances where DVTs and PEs are preventable and meet the statutory criteria for being selected, we likely would make them subject to the provision in the FY 2009 IPPS final rule. We welcome comments on this issue and look forward to working with stakeholders to identify instances of preventable DVTs and PEs prior to implementation of this provision on October 1, 2008. (o) Other Conditions Suggested Through Public Comment: Legionnaires' Disease

Comment: One commenter suggested that CMS select Legionnaire's disease. The commenter asserted that this condition is high cost/high volume: CDC estimates between 8,000 and 18,000 cases per year. Due to underreporting and underdiagnosis, only 2 to 10 percent of cases are reported. Death occurs in 10 to 15 percent of cases. In addition, the commenter cited established prevention guidelines: CDC prevention guidelines are available and widely distributed. Finally, the commenter stated that Legionnaires' disease is identified by ICD-9-CM code 482.84.

Response: While there may be a discrete ICD-9-CM code to identify Legionnaires' disease, it is not typically a hospital acquired condition. Legionnaires' disease is usually acquired outside of a hospital from a contaminated water supply that may or may not have any relation to a particular institution. Any outbreak of Legionnaires' disease suggests a significant public health emergency that should be addressed by public health resources rather than by a particular Medicare payment policy. (p) CMS Response to Additional Comments

We welcomed any comments on the clinical aspects of the conditions and on which conditions should be selected for implementation on October 1, 2008. We also solicited comments on any problematic issues for specific conditions that may support not selecting them as one of the initial conditions. We encouraged comments on how some of the administrative problems can be overcome if there is support for a particular condition.

Commenters did not raise any general administrative concerns. Rather, a number of commenters addressed the potential for an appeals process and POA coding issues. We have included the comment and response for each issue below:

Appeals Process:

Comment: A large number of commenters requested clarification from CMS on how hospitals appeal CMS decisions that a particular patient may fall under the hospital-acquired conditions policy and, therefore, is not eligible for higher payment through assignment to the higher CC/MCC level of the MS-DRG. They asked CMS to provide specific instructions for hospitals to follow for appealing a decision.

Response: We do not believe a separate appeals process is necessary for the payment adjustment for hospital-acquired conditions because existing procedures provide adequate opportunity for review. Under 42 CFR Sec. 412.60(d), a hospital has 60 days after the date of the notice of the initial assignment of a discharge to a DRG to request a review of that assignment. The hospital may submit additional information as a part of its request. A hospital that believes a discharge was assigned to the incorrect DRG as a result of the payment adjustment for hospital-acquired conditions may request review of the DRG assignment by its fiscal intermediary or MAC.

However, we note that section 1886(d)(7)(B) of the Act, as amended by section 5001(c)(2) of the DRA, provides that there shall be no administrative or judicial review of the establishment of DRGs, including the selection and revision of codes under the payment adjustment for hospital acquired conditions. Therefore, although a hospital may request review of a DRG assignment in a particular case, the statute does not provide for review of the codes we select to be subject to the payment adjustment for hospital-acquired conditions.

POA Coding

Comment: Commenters suggested that all secondary diagnoses coded as present on admission be used to support the development of new complication rate measures and other quality indicators in the future. They suggested that CMS should develop special Grouper logic to exclude similar ICD-9-CM codes. The commenters stated that reducing hospital payments for a condition present upon admission, but not documented, is too punitive.

[[Page 47217]]

Many commenters submitted the experiences of two States that already use present-on-admission coding. They believed it takes several years and intense educational efforts to achieve reliable data and therefore there must be a strong clinical training component.

The commenters recommended that CMS implement the collection of the POA indicator but delay the implementation of any conditions that are dependent on its use until physicians and hospitals have an appropriate level of experience.

Response: We refer commenters to the Change Request No. 5499 released on May 11, 2007, for answers to additional questions regarding present-on-admission coding. We remind commenters that the DRG payment adjustment based on the POA indicator is not applicable until October 1, 2008. It is important to note that hospitals will gain experience in reporting POA information during FY 2008 prior to it having a payment impact in FY 2009.

Prevention Guidelines

Comment: A small number of commenters questioned the feasibility and reliability of current prevention guidelines. The commenters supported CMS' goal of encouraging improvements in health care and reducing the number of preventable infections, but believed that hospitals must be reimbursed appropriately for providing the care patients need. The commenters believed that CMS should be sure that hospitals are not penalized for infections that originated outside the hospital or that are caused by factors beyond the hospital's control.

The commenters suggested that CMS should recognize that, even with the best infection control practices, some infections will occur anyway. They added that reducing payments for all cases in which those infections occur could harm hospitals' ability to purchase and provide advanced drugs and treatment modalities or invest in other infection control technologies.

Response: We address each concern regarding prevention guidelines in the respective response for each condition. We are committed to improving quality and decreasing the number of hospital-acquired conditions. In that goal, we have chosen these specific conditions because they fulfill the criteria outlined in the DRA: the conditions have unique codes that are MCCs or CCs; the conditions are high volume, high cost or both; and the conditions can be reasonably prevented through the application of evidence-based guidelines.

Academic Centers/Hospitals with high risk patients:

Comment: Commenters representing academic centers and hospitals with high risk patient populations urged CMS to consider excluding patients considered to be high risk such as those that are more susceptible to infections.

Response: As indicated above, we are selecting conditions that are ``reasonably preventable'' through application of evidence-based guidelines and meet the other statutory criteria. In response to comments on each of the conditions considered, we indicated that we are researching whether to establish exceptions to the conditions for specific clinical circumstances where the condition may not be preventable. The determination of whether a patient is ``high risk'' will depend on the specific circumstances of the patient and the condition under consideration. We do not believe it is possible to classify a patient generally as ``high risk'' in all the circumstances where the provision could potentially apply. As we indicated above, we welcome public comments on clinical scenarios where a specific condition may not be reasonably preventable in the hospital and how to identify and distinguish those circumstances from other situations where the condition is preventable. 7. Other Issues

Under section 1886(d)(4)(D)(vi) of the Act, ``[a]ny change resulting from the application of this subparagraph shall not be taken into account in adjusting the weighting factors under subparagraph (C)(i) or in applying budget neutrality under subparagraph (C)(iii).'' Subparagraph (C)(i) refers to DRG classifications and relative weights. Therefore, the statute requires the Secretary to continue counting the conditions selected under section 5001(c) of the DRA as MCCs or CCs when updating the relative weights annually. Thus, the higher costs associated with a case with a hospital-acquired MCC or CC will continue to be assigned to the MCC or CC DRG when calculating the relative weight but payment will not be made to the hospital at one of these higher-paying DRGs. Further, subparagraph (C)(iii) refers to the budget neutrality calculations that are done so aggregate payments do not increase as a result of changes to DRG classifications and relative weights. Again, the higher costs associated with the cases that have a hospital-acquired MCC or CC will be included in the budget neutrality calculation but Medicare will make a lower payment to the hospital for the specific cases that includes a hospital-acquired MCC or CC. Thus, to the extent that the provision applies and cases with an MCC or CC are assigned to a lower-paying DRG, section 5001(c) of the DRA will result in cost savings to the Medicare program. We note that the provision will only apply when the selected conditions are the only MCCs and CCs present on the claim. Therefore, if a nonselected MCC or CC is on the claim, the case will continue to be assigned to the higher paying MCC or CC DRG, and there will be no savings to Medicare from the case. We believe the provision will apply in a small minority of cases because it is rare that one of the selected conditions will be the only MCC or CC present on the claim.

To summarize, we appreciate all of the comments on hospital- acquired conditions and look forward to continued input as we plan to implement these hospital-acquired conditions. Below is the list of conditions that we are selecting in this FY 2008 final rule. These conditions will be made subject to the provision beginning on October 1, 2008 (FY 2009).

Serious Preventable Event--Object Left in Surgery

Serious Preventable Event--Air Embolism

Serious Preventable Event--Blood incompatibility

Catheter-Associated Urinary Tract Infections

Pressure Ulcers (Decubitus Ulcers)

Vascular Catheter-Associated Infection

Surgical Site Infection--Mediastinitis After Coronary Artery Bypass Graft (CABG) Surgery

Hospital Acquired Injuries--Fractures, Dislocations, Intracranial Injury, Crushing Injury, Burn, and Other Unspecified Effects of External Causes

We will also propose the following conditions for consideration in the FY 2009 IPPS proposed rule. We will work diligently to address issues surrounding these conditions and propose to select these conditions in the FY 2009 IPPS final rule.

Ventilator Associated Pneumonia (VAP)

Staphylococcus Aureus Septicemia

Deep Vein Thrombosis (DVT)/ Pulmonary Embolism (PE)

Finally, we list below the set of conditions that signal further analysis for future implementation.

Methicillin Resistant Staphylococcus Aureus (MRSA)

Clostridium Difficile-Associated Disease (CDAD)

Wrong Surgery--Provision not applicable because Medicare should not pay less; it should not pay at all.

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Table 1.--Hospital-Acquired Conditions (in rank order)

May be considered Condition

Considered in NPRM Proposed in NPRM Selected in FY

in future 2008 final rule rulemaking

1. Serious Preventable Event-- Yes............... Yes............... Yes............... N/A. Object left in surgery. 2. Serious Preventable Event-- Yes............... Yes............... Yes............... N/A. Air embolism. 3. Serious Preventable Event-- Yes............... Yes............... Yes............... N/A. Blood incompatibility. 4. Catheter-Associated Urinary Yes............... Yes............... Yes............... N/A. Tract Infections. 5. Pressure Ulcers (Decubitus Yes............... Yes............... Yes............... N/A. Ulcers). 6. Vascular Catheter-Associated Yes............... No (No FY 2008 Yes (Code Created N/A. Infection.

code).

for FY 2008). 7. Surgical Site Infection-- Yes (All surgical No (No unique Yes (Comments N/A. Mediastinitis after Coronary site infections, codes).

suggested Artery Bypass Graft (CABG)

not just

Mediastinitis surgery.

Mediastinitis).

which has unique code). 8. Falls........................ Yes............... No (Coding not Yes (Operational Expand to all unique).

difficulties will hospital acquired be overcome by FY injuries, adverse 2009).

events. 9. Ventilator Associated

Yes............... No (Coding not No (Coding not Yes--FY 2009 IPPS Pneumonia (VAP).

unique).

unique).

final rule (Pursuing code with CDC). 10. Staphylococcus Aureus

Yes............... Yes............... No (Must identify Yes--FY 2009 IPPS Septicemia.

subset where

final rule. preventable). 11. Deep Vein Thrombosis (DVT)/ No................ No................ No................ Yes--FY 2009 IPPS Pulmonary Embolism (PE).

final rule (Work to identify situations where it should be preventable). 12. Methicillin Resistant

Yes............... No................ No................ Yes. Staphylococcus Aureus (MRSA). 13. Clostridium Difficile-- Yes............... No................ No................ Yes. Associated Disease (CDAD). Other: Medicare Does not Pay For: 14. Wrong Surgery............... Yes............... No................ No................ Provision not Applicable. Medicare should not pay at all.

G. Changes to Specific DRG Classifications

1. Pre-MDCs: Intestinal Transplantation

In the FY 2005 IPPS final rule (69 FR 48976), we reassigned intestinal transplant cases from CMS DRG 148 (Major Small and Large Bowel Procedures with CC) and CMS DRG 149 (Major Small and Large Bowel Procedures without CC) to CMS DRG 480 (Liver Transplant and/or Intestinal Transplantation). In the FY 2006 IPPS final rule (70 FR 47286), we continued to evaluate these cases to see if a further DRG change was warranted. While we found that intestinal only transplants and combination liver-intestine transplants have higher average charges than other cases in CMS DRG 480, these cases are extremely rare (there were only 4 cases in FY 2004) and the insufficient number of cases did not warrant creating a separate DRG.

For FY 2008, we examined the September 2006 update of the FY 2006 MedPAR file and found 1,208 cases assigned to CMS DRG 480. In section II.C. of the preamble of the FY 2008 IPPS proposed rule, we proposed to split CMS DRG 480 into two severity levels: MS-DRG 005 (Liver Transplant and/or Intestinal Transplant with MCC) and MS-DRG 006 (Liver Transplant and/or Intestinal Transplant without MCC). The following table displays our results:

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 006--All cases............

446

10.05 $129,519 MS-DRG 006--Intestinal transplant

3

34 354,793 cases only...................... MS-DRG 005--All cases............

762

22.25 243,271 MS-DRG 005--Intestinal transplant

9

40.22 460,089 cases only...................... MS-DRG 005--Intestinal and liver

1

56 1,179,425 transplant......................

Under the MS-DRGs, 10 of 13 intestinal transplant cases are assigned to proposed MS-DRG 005 based on the secondary diagnosis of the patient. The three remaining intestinal transplant cases do not have an MCC and would

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be assigned to MS-DRG 006, absent further changes to the DRG logic. These three intestinal transplants have average charges of approximately $354,793 and an average length of stay of 34 days. Average charges and length of stay for these three cases are more comparable to the average charges of approximately $243,271 and average length of stay of 22.25 days for all cases assigned to proposed MS-DRG 005. For this reason, we proposed to move all intestinal transplant cases to MS-DRG 005. As part of the proposal, we proposed to redefine proposed MS-DRG 005 as ``Liver Transplant with MCC or Intestinal Transplant.'' The presence of a liver transplant with MCC or an intestinal transplant would assign a case to the higher severity level. We also proposed to redefine proposed MS-DRG 006 as ``Liver Transplant without MCC''.

Comment: Two commenters supported the proposed reassignment of intestinal transplants to MS-DRG 005. One commenter stated that CMS should continue to evaluate the frequency of this procedure and reassign it to an appropriate DRG reflective of its high resource utilization.

Response: We appreciate the support of the commenters and agree that when we receive sufficient data, we will again consider a separate intestinal transplant DRG.

Comment: One commenter supported separate MS-DRGs for intestinal transplants and combination liver-intestine transplants. The commenter cited that the data from the Milliman 2005 U.S. Organ and Tissue Transplant Cost Estimates and Discussion Research Report supports separate MS-DRGs. This report provided data for 58 intestine only transplants with estimated first year billed charges of $813,600 and 47 liver-intestine transplants with estimated first year billed charges of $830,200.

Response: The report submitted by the commenter does not indicate whether the patients cited in the study were Medicare. Further, it is not clear whether the identified costs were hospital inpatient only or total. For these reasons, we are not using these data to make an MS-DRG assignment. However, we are open to considering, to the extent feasible, reliable, validated data other than MedPAR data in annually recalibrating and reclassifying the DRGs.

In this final rule with comment period, we are adopting as final our proposal to reassign intestinal transplantation cases to MS-DRG 005. We are also redefining MS-DRG 005 as ``Liver Transplant with MCC or Intestinal Transplant'' and MS-DRG 006 as ``Liver Transplant without CC''. 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Implantable Neurostimulators

We received a joint request from three manufacturers to review the DRG assignment for cases involving neurostimulators. The commenters are concerned that:

Neurostimulator cases may be assigned to 30 different DRGs in 12 different MDCs depending upon the patient's principal diagnosis.

Neurostimulator cases represent a small proportion of the total cases in their assigned DRG and have higher costs.

The 11 new ICD-9-CM codes created beginning in FY 2007 that identify pain are assigned to MDC 23 (Factors Influencing Health Status and Other Contacts With Health Services) rather than MDC 1 (Diseases and Disorders of the Nervous System). The manufacturers were concerned that these pain codes will be a common principal diagnosis for patients who receive a neurostimulator and will be assigned to MDC 23, which contains a wide variety of dissimilar diagnoses. The new ICD- 9-CM codes are: 338.0 (Central pain syndrome), 338.11 (Acute pain due to trauma), 338.12 (Acute post-thoracotomy pain), 338.18 (Other acute postoperative pain), 338.19 (Other acute pain), 338.21 (Chronic pain due to trauma), 338.22 (Chronic post-thoracotomy pain), 338.28 (Other chronic postoperative pain), 338.29 (Other chronic pain), 338.3 (Neoplasm related pain (acute)(chronic)), and 338.4 (Chronic pain syndrome).

The manufacturers recommended that we:

Reroute all spinal and peripheral neurostimulator cases into a common set of base DRGs.

Reclassify ICD-9-CM pain codes 338.0 through 338.4 currently assigned to MDC 23 into MDC 1 when reported as the principal diagnosis.

Revise surgical CMS DRGs in MDC 1 based on whether the patient received a major device.

Split the single surgical CMS DRG in MDC 19 (Mental Diseases and Disorders) and MDC 23 into two CMS DRGs: one CMS DRG for minor procedures as defined by CMS DRGs 477 (Non-Extensive O.R. Procedure Unrelated to Principal Diagnosis) and CMS DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis) and one CMS DRG for major procedures.

Create a new CMS DRG in MDC 1 for major devices.

The manufacturers recognized that implementing a re-routing feature in the CMS DRG system would be a major undertaking and, alternatively, suggested reassigning the pain codes to MDC 1 as an interim step. In the FY 2008 IPPS proposed rule, we noted that we agreed with this suggestion. With respect to the suggestion to split the single surgical CMS DRG in MDCs 19 and 23 into two CMS DRGs and create a major device CMS DRG within MDC 1, in the FY 2008 IPPS proposed rule, we encouraged commenters to examine the assignment of neurostimulator cases under the MS-DRGs to determine whether the changes we proposed to adopt to better recognize severity in the CMS DRG system would address these concerns.

The implantation of a neurostimulator requires two types of procedures. First, the surgeons implant leads containing electrodes into the targeted section of the brain, spine, or peripheral nervous system. Second, a neurostimulator pulse generator is implanted into the pectoral region and extensions from the neurostimulator pulse generator are tunneled under the skin and connected with the proximal ends of the leads. Hospitals stage the two procedures required for a full system neurostimulator implant.

There are separate ICD-9-CM procedure codes that identify the implant of the leads and the insertion of the pulse generator. The three codes for the leads insertion are: 02.93 (Implantation or replacement of intracranial neurostimulator lead(s)); 03.93 (Implantation or replacement of spinal neurostimulator lead(s)); and code 04.92 (Implantation or replacement of peripheral neurostimulator lead(s). The five codes for the insertion of the pulse generator are: 86.94 (Insertion or replacement of single array neurostimulator pulse generator, not specified as rechargeable); 86.95 (Insertion or replacement of dual array neurostimulator pulse generator, not specified as rechargeable); 86.96 (Insertion or replacement of other neurostimulator pulse generator); 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator); and 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator).

The patient's principal diagnosis determines the MDC assignment. Implant of a cranial, spinal or peripheral neurostimulator will result in assignment of the case to a surgical DRG within that MDC. Although the manufacturers are correct that neurostimulator cases can potentially be assigned to many different CMS DRGs

[[Page 47220]]

based on the patient's principal diagnosis, they also provided data that showed that nearly 90 percent are assigned to 6 different CMS DRGs that cross two MDCs. In MDC 1, neurostimulator cases are assigned to four CMS DRGs: CMS DRG 7 (Peripheral and Cranial Nerve and Other Nervous System Procedures with CC); CMS DRG 8 (Peripheral and Cranial Nerve and Other Nervous System Procedures without CC); CMS DRG 531 (Spinal Procedures with CC); and CMS DRG 532 (Spinal Procedures without CC). In MDC 8 (Disease and Disorders of the Musculoskeletal System and Connective Tissue), neurostimulator cases are assigned to two CMS DRGs: CMS DRG 499 (Back and Neck Procedures Except Spinal Fusion with CC); and CMS DRG 500 (Back and Neck Procedures Except Spinal Fusion without CC).

With very limited exceptions, such as tracheostomies and certain types of transplants, the principal diagnosis is fundamental to the assignment of a case to an MDC within the DRG system. By relying on the patient's principal diagnosis, the DRG system will group together patients who are clinically similar. As indicated in the proposed rule, for this reason, we were concerned about adopting the suggestion that all neurostimulator cases be rerouted to a common DRG irrespective of the patient's principal diagnosis. We believe such a step would be fundamentally inconsistent with the idea of creating common groups of patients who are clinically similar based on diagnosis and procedures. For this reason, we do not believe that a rerouting step should be adopted that would group together all neurostimulator cases.

However, in the FY 2008 IPPS proposed rule, we agreed with the manufacturers' suggestion that the new ICD-9-CM codes created in FY 2007 for central and chronic pain syndrome and chronic pain (codes 338.0, 338.21 through 338.29, and 338.4) should be assigned to MDC 1 when present as the principal diagnosis. The manufacturers requested that we reclassify the pain codes (338.0 through 338.4) from MDC 23 to MDC 1. Our medical consultants advised that the acute pain codes (codes 338.11 through 338.19) should remain in MDC 23 because the acute pain is not a neurological condition. According to the manufacturers, the National Center for Health Statistics' (NCHS) choice in locating the pain codes within ICD-9-CM's Nervous System chapter has much clinical validity, particularly for chronic pain. The manufacturers further noted that acute pain is typically self-limited, a symptomatic response to an immediate insult that serves the body as a warning sign. However, chronic pain is unrelenting and serves no warning or protective function. It is a disease process of its own accord, according to the commenters.

The manufacturers described pain as follows. Broadly, there are two main categories of pain: Nociceptive and neuropathic. Nociceptive pain is caused by sensory neurons, called nociceptors, responding to tissue damage. This type of pain is the body's normal response to injury. The pain is usually localized and time-limited. That is, when the tissue damage heals, the pain typically resolves. Acute pain is typically nociceptive. In general, nociceptive pain is typically treated with anti-inflammatories and, in more severe cases, with opioids via a morphine pump for example.

In contrast, neuropathic pain is caused by malfunctioning or pathologically altered nervous pathways stemming from injury to the nervous system, either as a direct result of trauma to a nerve (phantom limb syndrome, reflex sympathetic dystrophy/complex regional pain syndrome after injury) or due to other medical conditions that cause damage to the nerve such as herpes (postherpetic neuralgia), diabetes (diabetic neuropathy), and peripheral vascular disease (critical limb ischemia). Failed back surgery syndrome (FBSS) is another common source of neuropathic pain. Typically, neuropathic pain is chronic and may persist for months or years beyond the healing of damaged tissue. Because the nerves themselves have been damaged, neuropathic pain can be considered its own disease process. Neuropathic pain may be more difficult to treat than nociceptive pain and has been shown to be more responsive to neurostimulation.

The pain codes, created effective October 1, 2006, are currently assigned to MDC 23. The neurostimulator cases with a principal diagnosis using the pain codes were assigned to CMS DRG 461 (O.R. Procedure with Diagnoses of Other Contact with Health Services) for the first time in FY 2007. As explained above, prior to our adoption of the new pain codes in FY 2007, these cases had historically been assigned to CMS DRGs 7 and 8 (Peripheral and Cranial Nerve and Other Nervous System Procedure with and without CC, respectively) in MDC 1. Adopting the commenters' recommendation would result in the neurostimulator cases being assigned to their historic CMS DRGs.

Our medical officers agreed that cases that use the new pain diagnosis codes for central and chronic pain syndrome and chronic pain (codes 338.0, 338.21 through 338.29, and 338.4) as a principal diagnosis should be assigned to MDC 1. For this reason, in the FY 2008 IPPS proposed rule, we proposed to assign cases with a principal diagnosis of central pain syndrome (code 338.0), chronic pain due to trauma (code 338.21), chronic post-thoracotomy pain (code 338.22), other chronic postoperative pain (code 338.28), other chronic pain (code 338.29), or chronic pain syndrome (code 338.4) to MDC 1, although we explained that we planned to monitor their use and may reassign them if needed.

Comment: Several commenters supported our proposal to assign diagnosis codes for central and chronic pain syndrome and chronic pain as a principal diagnosis to MDC 1. One commenter stated that this proposal recognizes the fundamentally neurologic nature of these cases.

Response: We appreciate the support of the commenters. Accordingly, in this final rule with comment period, we are adding diagnosis codes 338.0, 338.21, 338.22, 338.28, 338.29, and 338.4 when assigned as a principal diagnosis to MDC 1. b. Intracranial Stents

Effective October 1, 2004, the ICD-9-CM Coordination and Maintenance Committee created procedure code 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessel(s)). At the same time, we created code 00.65 (Percutaneous insertion of intracranial vascular stent(s)). It is our customary practice to assign new codes to the same DRG as their predecessor codes. The service described by code 00.62 was removed from code 39.50 (Angioplasty or atherectomy of other noncoronary vessel(s)), which is assigned to CMS DRG 533 (Extracranial Procedures with CC) and CMS-DRG 534 (Extracranial Procedures without CC) (MS-DRGs 37, 38, and 39 (Extracranial Procedures with MCC, with CC, and without CC/MCC, respectively, in this final rule with comment period) when the patient has a principal diagnosis in MDC 1. Therefore, we assigned code 00.62 to CMS DRGs 533 and 534 in MDC 1 beginning in FY 2005. In addition, we made code 00.65 a non-O.R. procedure for DRG assignment. We also assigned code 00.62 to the Non-Covered Procedure edit of the MCE, as Medicare had a national non-coverage determination for intracranial angioplasty and atherectomy with stenting.

Effective November 6, 2006, Medicare covers percutaneous transluminal angioplasty (PTA) and stenting of intracranial arteries for the treatment of

[[Page 47221]]

cerebral artery stenosis in cases in which stenosis is 50 percent or greater in patients with intracranial atherosclerotic disease when furnished in accordance with FDA-approved protocols governing Category B Investigational Device Exemption (IDE) clinical trials. CMS determined that coverage of intracranial PTA and stenting is reasonable and necessary under these circumstances. All other indications for PTA without stenting to treat obstructive lesions of the vertebral and cerebral arteries remain noncovered. This decision can be found online in the CMS Coverage Manual (Publication 100.3): http://www.cms.hhs.gov/Manuals/IOM/itemdetail.asp at section 20.7.B.5.

A manufacturer recently met with CMS to request that code 00.62 be reassigned to CMS DRGs 1 and 2 (Craniotomy Age > 17 with and without CC, respectively) (MS-DRGs 025 (Craniotomy and Endovascular Intracranial Procedures with MCC), 026 (Craniotomy and Endovascular Intracranial Procedures with CC), and 027 (Craniotomy and Endovascular Intracranial Procedures without CC/MCC) in this final rule with comment period) and CMS-DRG 543 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis) (MS-DRGs 023 and 024 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with MCC and without MCC, respectively, in this final rule with comment period). The manufacturer noted that other similar endovascular intracranial procedures that treat a cerebrovascular blockage are currently assigned to the craniotomy CMS DRGs. These endovascular-approach cases already assigned to the craniotomy CMS DRGs are identified by procedure codes 39.72 (Endovascular repair or occlusion of head and neck vessels), 39.74 (Endovascular removal of obstruction from head and neck vessel(s)), and 39.79 (Other endovascular repair (of aneurysm) of other vessels). Under the MS-DRGs in the FY 2008 IPPS proposed rule, we proposed the assignment of procedure codes 39.72, 39.74, and 39.79 to MS-DRGs 025, 026, and 027 and MS-DRGs 023 and 024. Although we have concerns about the assignment of additional endovascular procedures to an open surgical DRG, we agreed that there is clinical consistency between procedure codes 39.72, 39.74, and 39.79 and procedure code 00.62. For this reason, we agreed that procedure code 00.62 should be assigned to MS-DRGs 025, 026, and 027, and MS-DRGs 023 and 024, which are divided by the presence or absence of specific CCs.

In order to assure appropriate DRG assignment as described above, we proposed to make conforming changes to the MCE by removing code 00.62 from the Non-Covered Procedure edit. However, as intracranial PTA is only covered when performed in conjunction with insertion of a stent, we proposed to redefine the edit by specifying that code 00.62 must be accompanied by code 00.65 (Percutaneous insertion of intracranial vascular stent(s)). Should code 00.65 not be reported on the claim, the case would fail the MCE edit. For a full discussion of this change, we refer readers to the MCE discussion in section II.F.6. of the preamble of this final rule with comment period.

Although we proposed to assign endovascular intracranial procedures to the same MS-DRGs as craniotomy, we remained concerned that endovascular intracranial procedures are clinically different than open craniotomy surgical procedures and may have very different resource requirements. At the current time, there are an insufficient number of cases to warrant creation of a separate base DRG for endovascular intracranial procedures. However, as we indicated in the proposed rule, we intend to revisit the assignment of intracranial endovascular procedures at a later date when more data are available to analyze these cases.

Comment: Several commenters supported the proposal to assign endovascular procedure codes to open surgical DRGs. One commenter commended CMS for the proposal and stated that the reassignment places these cases in DRGs of more appropriate clinical and resource homogeneity (than their previous assignments to the extracranial procedure DRGs).

Response: We continue to have reservations about the classification of open craniotomy surgeries and endovascular cranial procedures within the same DRGs. However, we note that there is clinical consistency between procedure codes 39.72, 39.74, 39.79 (endovascular procedures on the head and neck), which are assigned to open surgical DRGs, and code 00.62 (an intracranial endovascular procedure). We will continue to monitor these DRGs for uniformity both from a clinical as well as a resource-consumption standpoint as more data become available.

In this final rule with comment period, for FY 2008, we are assigning code 00.62 to MS-DRGs 25, 26, and 27 as well as MS-DRGs 23 and 24, as we proposed and describe above. We note that the claims containing code 00.62 must be accompanied by code 00.65 in order to qualify as a covered procedure. As previously stated, the lack of code 00.65 on the claim will cause the claim to fail the MCE edit, and the claim will be denied. 3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat)-- Cochlear Implants

Cochlear implants were first covered by Medicare in 1986 and were assigned to CMS DRG 49 (Major Head and Neck Procedures) in MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat). CMS DRG 49 is the highest weighted DRG in that MDC. However, two manufacturers of cochlear implants contend that this DRG assignment is clinically and economically inappropriate and have requested that cochlear implant cases be reassigned from CMS DRG 49 to CMS DRG 543 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis).

The manufacturers stated that procedures assigned to CMS DRG 49 are performed mostly for diseases such as head and neck cancers, while procedures in CMS DRG 543 include operations on and inside the skull and implantation of complex devices, including intracranial neurostimulators. The manufacturers described the cochlear implant procedure as requiring incisions behind the ear to remove a section of the temporal bone, followed by microscopic neurotologic surgery under general anesthesia, and is typically completed in 2 to 4 hours to restore hearing to the profoundly deaf. For these reasons, these manufacturers believe cochlear implant procedures are similar to open craniotomies.

Based on their analysis of the FY 2005 MedPAR data, the manufacturers identified a total of 139 cochlear implant cases using ICD-9-CM procedure codes 20.96 (Implantation or replacement of cochlear prosthetic device NOS), 20.97 (Implantation or replacement of cochlear prosthetic device, single channel), and 20.98 (Implantation or replacement of cochlear prosthetic device, multiple channel). The manufacturers reported 121 out of 139 cochlear implant cases were assigned to CMS DRG 49 with average standardized charges of approximately $58,078.

When we reviewed the FY 2006 MedPAR data, we identified 104 cochlear implant cases assigned to CMS DRG 49. In the MS-DRGs in the FY 2008 IPPS proposed rule, CMS-DRG 49 is subdivided into two severity levels: MS-DRG 129 (Major Head and Neck

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Procedures with CC or MCC) and MS DRG 130 (Major Head and Neck Procedures without CC). The following table displays our results:

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 130--All cases............

1,095

3.04 $23,928 MS-DRG 130--Code 20.96 cases only

38

1.63 51,740 MS-DRG 130--Code 20.97 cases only

2

1.50 38,855 MS-DRG 130--Code 20.98 cases only

45

1.24 50,219 MS-DRG 129--All cases............

1,244

5.35 34,169 MS-DRG 129--Code 20.96 cases only

10

2.70 81,351 MS-DRG 129--Code 20.97 cases only

1

5.00 95,441 MS-DRG 129--Code 20.98 cases only

8

3.13 53.510

Under the proposed MS-DRGs, 19 out of 104 cochlear implant cases are assigned to MS-DRG 129 based on the secondary diagnosis of the patient. The 85 remaining cochlear implant cases do not have a CC or MCC and were proposed to be assigned to MS-DRG 130, absent further changes to the DRG logic.

The average charges of approximately $54,238 for cochlear implant cases are higher than the average charges of approximately $29,375 for the other cases in CMS DRG 49. However, the average charges are not as high as the average charges of approximately $78,118 for cases assigned to CMS DRG 543. Further, our medical advisors do not believe that surgery to implant a cochlear implant is clinically similar to an open craniotomy in MDC 1 because typically a craniotomy involves removing and then replacing a section of the skull in order to perform a procedure on or within the brain, whereas a cochlear implant involves drilling a hole in the mastoid bone in order to insert the implant into the inner ear.

We have been unable to address this issue under the current DRGs because there are not enough inpatient cochlear implant cases to warrant creation of a separate DRG. Although these cases will continue to have higher charges than other cases in their assigned DRG, in the FY 2008 proposed rule, we proposed to move the cochlear implant cases to the higher DRG severity level within CMS DRG-49. As part of this proposal, we indicated that we would redefine MS-DRG 129 as ``Major Head and Neck Procedures with CC or MCC or Major Device.'' The presence of a major head and neck procedure with a CC or MCC or major device would assign the case to the higher severity level within CMS-DRG 49.

Comment: Some commenters supported the proposed reassignment of cochlear implant cases to MS-DRG 129.

Response: We appreciate the commenters' support for the proposed MS-DRG assignment for these cases.

Comment: Two commenters expressed appreciation for CMS's recognition of the payment issues facing cochlear implants by proposing to classify these cases to MS-DRG 129. However, one of the commenters stated that, even with the proposed reassignment, the costs of these cases are nearly 60 percent higher than all cases within MS-DRG 129.

The commenters contended that these procedures should be assigned to MS-DRG 24 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with MCC). They pointed out that cases that have been assigned to DRG 543 in the CMS-DRGs are assigned to MS-DRGs 23 and 24 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with and without MCC) in the MS-DRGs. The commenters stated that cochlear implant procedures are clinically and resource coherent with other craniotomy procedures such as Kinetra[supreg] dual array deep brain stimulator and should be assigned to MS-DRG 024. One of the commenters indicated that the principal diagnosis codes for hearing loss are currently assigned to MDC 3, not MDC 1. They believed that this MDC assignment prevents cochlear implants from being assigned to MS-DRG 024. The commenters suggested that sensorineural hearing loss (codes 389.10-389.18) is a nervous system disorder that should be assigned to MDC 1. One commenter stated that cochlear implantation cases should be assigned as a pre-MDC based on complexity and should be assigned to a separate or different DRG that involves implantation of a complex neural stimulation device. Another commenter recommended that CMS develop a third level of complexity for major head and neck procedures and assign cochlear implants to the highest severity level.

Response: Our medical advisors do not believe that surgery to implant a cochlear implant is clinically similar to an open craniotomy in MDC 1. Typically, a craniotomy involves removing and then replacing a section of the skull in order to perform a procedure on or within the brain, whereas a cochlear implant involves entering the mastoid bone, not the intracranial space.

With regard to the MDC assignment, we believe that sensorineural hearing loss is due to a defect in the inner ear or the acoustic nerve and is a disorder of the ear that is appropriately assigned to MDC 3.

As the low volume of cochlear implant cases does not justify a new MS-DRG, the current base DRG assignment for cochlear implants is appropriate. In addition, MS-DRG 129 does not meet the criteria for a three-level split. Therefore, we do not believe there is a better alternative to the policy we proposed. Accordingly, in this final rule with comment period, we are assigning all cochlear implant cases to MS- DRG 129. MS-DRG 129 is redefined as ``Major Head and Neck Procedures with CC or MCC or Major Device.'' 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) a. Hip and Knee Replacements

In the FY 2006 IPPS final rule (70 FR 47303), we deleted DRG 209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) and created two new DRGs: 544 (Major Joint Replacement or Reattachment of Lower Extremity) and 545 (Revision of Hip or Knee Replacement). The two new DRGs were created because revisions of joint replacement procedures are significantly more resource intensive than original hip and knee replacement procedures. DRG 544 includes the following procedure code assignments:

81.51, Total hip replacement

81.52, Partial hip replacement

81.54, Total knee replacement

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81.56, Total ankle replacement

84.26, Foot reattachment

84.27, Lower leg or ankle reattachment

84.28, Thigh reattachment

DRG 545 includes the following procedure code assignments:

00.70, Revision of hip replacement, both acetabular and femoral components

00.71, Revision of hip replacement, acetabular component

00.72, Revision of hip replacement, femoral component

00.73, Revision of hip replacement, acetabular liner and/ or femoral head only

00.80, Revision of knee replacement, total (all components)

00.81, Revision of knee replacement, tibial component

00.82, Revision of knee replacement, femoral component

00.83, Revision of knee replacement, patellar component

00.84, Revision of knee replacement, tibial insert (liner)

81.53, Revision of hip replacement, not otherwise specified

81.55, Revision of knee replacement, not otherwise specified

Further, we created a number of new ICD-9-CM procedure codes effective October 1, 2005, that better distinguish the many different types of joint replacement procedures that are currently being performed. In the FY 2006 IPPS final rule (70 FR 47305), we indicated a commenter had requested that, once we receive claims data using the new procedure codes, we closely examine data from the use of the codes under the two new DRGs to determine if future additional DRG modifications are needed.

Further, the American Association of Hip & Knee Surgeons (AAHKS) recommended that we make further refinements to the DRGs for knee and hip arthroplasty procedures. AAHKS previously presented data to CMS on the important differences in clinical characteristics and resource utilization between primary and revision total joint arthroplasty procedures. AAHKS stated that CMS' decision to create a separate DRG for revision of total joint arthroplasty (TJA) in October 2005 resulted in more equitable reimbursement for hospitals that perform a disproportionate share of complex revision of TJA procedures, recognizing the higher resource utilization associated with these cases. AAHKS stated that this important payment policy change led to increased access to care for patients with failed total joint arthroplasties, and ensured that high volume TJA centers could continue to provide a high standard of care for these challenging patients.

AAHKS further stated that the addition of new, more descriptive ICD-9-CM diagnosis and procedure codes for TJA in October 2005 gave it the opportunity to further analyze differences in clinical characteristics and resource intensity among TJA patients and procedures. Inclusive of the preparatory work to submit its recommendations, the AAHKS compiled, analyzed, and reviewed detailed clinical and resource utilization data from over 6,000 primary and revision TJA procedure codes from 4 high volume joint arthroplasty centers located within different geographic regions of the United States: University of California, San Francisco, CA; Mayo Clinic, Rochester, MN; Massachusetts General Hospital, Boston, MA; and the Hospital for Special Surgery, New York, NY. Based on its analysis, AAHKS recommended that CMS examine Medicare claims data and consider the creation of separate DRGs for total hip and total knee arthroplasty procedures. CMS DRG 545 currently contains revisions of both hip and knee replacement procedures. AAHKS stated that based on the differences between patient characteristics, procedure characteristics, resource utilization, and procedure code payment rates between total hip and total knee replacements, separate DRGs were warranted. Furthermore, AAHKS recommended that CMS create separate base DRGs for routine versus complex joint revision or replacement procedures as shown below.

Routine Hip Replacements

00.73, Revision of hip replacement, acetabular liner and/ or femoral heal only

00.85, Resurfacing hip, total, acetabulum and femoral head

00.86, Resurfacing hip, partial, femoral head

00.87, Resurfacing hip, partial, acetabulum

81.51, Total hip replacement

81.52, Partial hip replacement

81.53, Revision of hip replacement, not otherwise specified

Complex Hip Replacements

00.70, Revision of hip replacement, both acetabular and femoral components

00.71, Revision of hip replacement, acetabular component

00.72, Revision of hip replacement, femoral component

Routine Knee Replacements and Ankle Procedures

00.83, Revision of knee replacement, patellar component

00.84, Revision of knee replacement, tibial insert (liner)

81.54, Revision of knee replacement, not otherwise specified

81.55, Revision of knee replacement, not otherwise specified

81.56, Total ankle replacement

Complex Knee Replacements and Other Reattachments

00.80, Revision of knee replacement, total (all components)

00.81, Revision of knee replacement, tibial component

00.82, Revision of knee replacement, femoral component

84.26, Foot reattachment

84.27, Lower leg or ankle reattachment

84.28, Thigh reattachment

AAHKS also recommended the continuation of CMS DRG 471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity) without modifications. CMS DRG 471 includes any combination of two or more of the following procedure codes:

00.70, Revision of hip replacement, both acetabular and femoral components

00.80, Revision of knee replacement, total (all components)

00.85, Resurfacing hip, total, acetabulum and femoral head

00.86, Resurfacing hip, partial, femoral head

00.87, Resurfacing hip, partial, acetabulum

81.51, Total hip replacement

81.52, Partial hip replacement

81.54, Total knee replacement

81.56, Total ankle replacement

As discussed in section II.C. of the preamble of this final rule with comment period, we proposed, and are adopting in this final rule with comment period, MS-DRGs to better recognize severity of illness for FY 2008. The MS-DRGs include two new severity of illness levels under the current base DRG 544. We also proposed to add three new severity of illness levels to the base DRG for Revision of Hip or Knee Replacement (currently DRG 545). The new MS-DRGs are as follows:

MS-DRG 466 (Revision of Hip or Knee Replacement with MCC)

MS-DRG 467 (Revision of Hip or Knee Replacement with CC)

MS-DRG 468 (Revision of Hip or Knee Replacement without CC/MCC)

MS-DRG 469 (Major Joint Replacement or Reattachment of Lower Extremity with MCC)

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MS-DRG 470 (Major Joint Replacement or Reattachment of Lower Extremity without MCC)

We found that the MS-DRGs greatly improved our ability to identify joint procedures with higher resource costs. The following table indicates the average charges for each new MS-DRG for the joint procedures.

MS-DRGs That Replace DRGs 544 and 535 With New Severity Levels

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 466.......................

3,886

9.55 $69,649.08 MS-DRG 467....................... 10,078

6.06 48,575.01 MS-DRG 468....................... 26,718

4.06 38,720.28 MS-DRG 483....................... 28,211

8.46 53,676.09 MS-DRG 484....................... 390,344

4.03 33,465.85

AAHKS analyzed Medicare data under the CMS DRG system and was unaware of how its analysis would change under the proposed MS-DRGs. Under the CMS DRGs, the AAHKS recommendation would replace 2 DRGs with 4 new ones. However, under the proposed MS- DRGs, the AAHKS recommendation would result in 5 DRGs becoming 12. Because AAHKS is recommending four new joint replacement DRGs (two for knees and two for hips), each would need to be subdivided into severity levels under our proposed MS-DRG system. Therefore, the four new joint DRGs could be subdivided into three levels each, leading to 12 new DRGs. For the proposed rule, we indicated that the changes we proposed to adopt are sufficiently better for recognizing severity of illness among the hip and knee replacement cases. We did not believe that there would be significant improvements in the proposed MS-DRGs' recognition of severity of illness from creating an additional 7 DRGs. However, we acknowledged the valuable assistance the AAHKS had provided to CMS in creating the new joint replacement procedure codes and modifying the joint replacement DRGs beginning in FY 2006. These efforts greatly improved our ability to categorize significantly different groups of patients according to severity of illness. In the proposed rule, we welcomed comments from AAHKS on whether the proposed MS-DRGs recognize patient complexity and severity of illness in the hip and knee replacement DRGs consistent with the concerns it expressed to us in previous comments. We also welcomed public comments from others on whether the proposed changes to the hip and knee replacement DRGs better recognize severity of illness and complexity of these operations in the Medicare patient population.

Comment: Two commenters supported CMSs' efforts to refine the DRG system to better identify costs associated with different joint procedures. The commenters encouraged CMS to continue working with the orthopedic community, including AAHKS, to monitor the need for additional new DRGs. The commenters stated that proposed MS-DRGs 466 through 470 are a good first step. However, they stated that CMS should continue to evaluate the data for these procedures and consider additional refinements to the MS-DRGs, including the need for additional severity levels.

Response: We agree that MS-DRGs better identify resource costs for joint procedures than do the CMS DRGs. The AAHKS and others are welcome to suggest additional refinements to us if they believe further improvements are needed.

Comment: One commenter (AAHKS) stated that it was pleased that CMS decided to recognize both surgical complexity and medical severity of illness in the MS-DRGs. The commenter stated that MS-DRGs are more reflective of procedural complexity than the CS-DRGs proposed last year. In addition, the commenter believed that the process is fairly straightforward, making it easier to understand, with the grouping logic available in the public domain. However, the commenter raised several concerns about the proposed joint replacement and revision MS- DRGs. AAHKS stated that its data suggest that all three base DRGs (primary replacement, revision of major joint replacement, and bilateral joint replacement) should be separated into three severity levels (that is, MCC, CC, and non-CC). We proposed three severity levels for revision of hip and knee replacement (MS-DRGs 466, 467, and 468). The commenter agreed with this 3-level subdivision.

The commenter recommended that the base DRG for the proposed two severity subdivision MS-DRGs for major joint replacement or reattachment of lower extremity with and without CC/MCC (MS-DRGs 483 and 484) be subdivided into three severity levels, as was the case for the revision of hip and knee replacement MS-DRGs. The commenter also recommended that the two severity subdivision MS-DRGs for bilateral or multiple major joint procedures of lower extremity with and without MCC (MS-DRGs 461 and 462) be subdivided three ways for this base DRG. The commenter acknowledged that the three-way split would not meet all five of the criteria for establishing a subgroup, and stated that these criteria were too restrictive, lack face validity, and create perverse admission selection incentives for hospitals by significantly overpaying for cases without a CC and underpaying for cases with a CC. The commenter recommended that the existing five criteria be modified for low volume subgroups to assure materiality. For higher volume MS- DRG subgroups, the commenter recommended that two other criteria be considered, particularly for nonemergency, elective admissions:

Is the per-case underpayment amount significant enough to affect admission vs. referral decisions on a case-by-case basis?

Is the total level of underpayments sufficient to encourage systematic admission vs. referral policies, procedures, and marketing strategies?

The commenter also recommended refining the five existing criteria for MCC/CC without subgroups as follows:

Create subgroups if they meet the five existing criteria, with cost difference between subgroups ($1,350) substituted for charge difference between subgroups ($4,000);

If a proposed subgroup meets criteria number 2 and 3 (at least 5 percent and at least 500 cases) but fails one of the others, then create the subgroup if either of the following criteria are met:

At least $1,000 cost difference per case between subgroups; or

At least $1 million overall cost should be shifted to cases with a CC (or

[[Page 47225]]

MCC) within the base DRG for payment weight calculations.

Response: In section II.B.3. of this preamble, we respond to the recommendation that we modify our five criteria for creating severity subgroups and state we do not believe it is appropriate to do so at this time. At this time, we believe the criteria we established to create subdivisions within a base DRG are reasonable and establish the appropriate balance between better recognition of severity of illness, sufficient differences between the groups, and a reasonable number of cases in each subgroup. However, we may consider further modifications to the criteria at a later date once we have had some experience with MS-DRGs created using the proposed criteria. We examined data for the base DRGs for MS-DRGs 461 and 462 (Bilateral or Multiple Major Joint Procedures of Lower Extremity with MCC and without MCC, respectively) as well as the base DRGs for MS-DRGs 469 and 470 (Major Joint Replacement or Reattachment of Lower Extremity with CC and without CC, respectively) for the proposed rule.

Our data did not support creating additional subdivisions based on the criteria we proposed.

Comment: Another commenter (AAHKS) continued to support the separation of routine and complex joint procedures. The commenter believed that certain joint replacement procedures have significantly lower average charges than do other joint replacements. The commenter's data suggest that more routine joint replacements are associated with substantially less resource utilization than other more complex revision procedures. The commenter stated that leaving these procedures in the revision MS-DRGs results in substantial overpayment for these relatively simple, less costly revision procedures, which in turn results in a relative underpayment for the more complex revision procedures.

Response: We examined data on this issue and identified two procedure codes for partial knee revisions that had significantly lower average charges than did other joint revisions. The two codes are as follows:

00.83 Revision of knee replacement, patellar component

00.84 Revision of total knee replacement, tibial insert (liner)

The following table illustrates our findings for MS-DRG 466 (Revision of Hip or Knee Replacement with MCC), MS-DRG 467 (Revision of Hip or Knee replacement with CC), and MS-DRG 468 (Revision of Hip or Knee Replacement without CC/MCC):

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 466--All cases............

3,886

9.55 $69,649.08 MS-DRG 466 with code 00.83 or

258

10.53 54,141.72 00.84 only...................... MS-DRG 467--All cases............ 10,078

6.06 48,575.01 MS-DRG 467 with code 00.83 or

955

5.47 31,191.04 00.84 only...................... MS-DRG 468--All cases............ 26,718

4.06 38,720.28 MS-DRG 468 with code 00.83 or

2,718

3.45 22,799.31 00.84 only......................

Cases with codes 00.83 and 00.84 have significantly lower charges than do other cases in these DRGs. For cases in MS-DRG 466, those with codes 00.83 or 00.84 have average charges of $54,141.72 compared to average charges of $69,646.08 for all cases within the DRG, a difference of $15,507.36. There is a difference of $17,383.97 for MS- DRG 467 and $15,920.97 for MS-DRG 468. The data suggest that these less complex partial knee revisions are less resource intensive than other cases assigned to MS-DRGs 466, 467, or 468. We examined other orthopedic DRGs to which these two codes could be assigned. As can be seen in the table below, these cases have very similar average charges to those in MS-DRG 485 (Knee Procedures with Principal Diagnosis of Infection with MCC), MS-DRG 486 (Knee Procedures with Principal Diagnosis of Infection with CC), MS-DRG 487 (Knee Procedures with Principal Diagnosis of Infection without CC), MS-DRG 488 (Knee Procedures without Principal Diagnosis of Infection with CC or MCC), and MS-DRG 489 (Knee Procedures without Principal Diagnosis of Infection without CC).

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 485--All cases............

916

12.69 $59,722.69 MS-DRG 485 with code 00.83 or

174

11.71 57,649.86 00.84 only...................... MS-DRG 486--All cases............

1,461

8.39 37,730.19 MS-DRG 486 with code 00.83 or

336

7.73 37,315.10 00.84 only...................... MS-DRG 487--All cases............

1,139

5.84 27,184.41 MS-DRG 487 with code 00.83 or

262

7.73 29,142.35 00.84 only...................... MS-DRG 488--All cases............

1,462

5.66 30,073.21 MS-DRG 488 with code 00.83 or

703

4.24 30,138.06 00.84 only...................... MS-DRG 489--All cases............

3,687

3.11 18,865.79 MS-DRG 489 with code 00.83 or

2,456

3.18 22,122.64 00.84 only......................

Given the very similar resource requirements of MS-DRG 485 and the fact that these DRGs also contain knee procedures, we will move codes 00.83 and 00.84 out of MS-DRGs 466, 467, and 468 and into MS-DRGs 485, 486, 487, 488, and 489. We will continue to monitor the revision DRGs to determine if additional modifications are needed.

Comment: One commenter expressed concern about the grouper logic for assigning cases to MS-DRG 471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity (current CMS-DRG 471)). Specifically, the commenter stated that the following bilateral joint replacements should be,

[[Page 47226]]

but are not, assigned to MS-DRGs 461 and 462.

A patient receives identical acetabular revisions of both hips (00.71 and 00.71).

A patient receives a total revision of one hip (00.70) and an acetabular revision of the other hip (00.71).

A patient receives both a total hip replacement (81.51) and a total knee replacement (81.54).

A patient receives both a total revision of one hip (00.70) and a total replacement of the other hip (81.51).

Response: We addressed this issue in the FY 2007 final rule and do not believe additional modifications are needed. We are providing the following summary of the previous action. After publication of the FY 2006 IPPS final rule, a number of hospitals and coding personnel advised us that the DRG logic for CMS DRG 471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity), which utilizes the new and revised hip and knee procedure codes under CMS DRGs 544 and 545, also includes codes that describe procedures that are not bilateral or that do not involve multiple major joints. CMS DRG 471 was developed to include cases where major joint procedures such as revisions or replacements were performed either bilaterally or on two joints of one lower extremity. We changed the logic for CMS DRG 471 in FY 2006 for the first time when we added the new and revised codes. The commenters indicated that, by adding the more detailed codes that do not include total revisions or replacements to the list of major joint procedures to CMS DRG 471, we were assigning cases to CMS DRG 471 that did not have bilateral or multiple joint procedures. For example, when a hospital reported a code for revision of the tibial component (code 00.81) and patellar component of the right knee (code 00.83), the FY 2006 DRG logic assigned the case to CMS DRG 471. The commenters indicated that this code assignment was incorrect because only one joint has undergone surgery, but two components were used. One commenter indicated that ICD-9-CM did not identify left/right laterality. Therefore, it was difficult to use the current coding structure to determine if procedures were performed on the same leg or on both legs. The commenters raised concern about whether CMS intended to pay hospitals using CMS DRG 471 for procedures performed on one joint. The commenters indicated that the DRG assignments for these codes would also make future data analysis misleading. The commenters recommended removing codes from CMS DRG 471 that do not specifically identify bilateral or multiple joint procedures so that it would only include cases involving the more resource intensive cases of bilateral or multiple total joint replacements and revisions.

We agreed that the new and revised joint procedure codes should not be assigned to CMS DRG 471 unless they include bilateral and multiple joints. Therefore, in the FY 2007 IPPS final rule, we removed the following codes from CMS DRG 471 that did not identify bilateral and multiple joint revisions or replacements:

00.71, Revision of hip replacement, acetabular component

00.72, Revision of hip replacement, femoral component

00.73, Revision of hip replacement, acetabular liner and/ or femoral head only

00.81, Revision of knee replacement, tibial component

00.82, Revision of knee replacement, femoral component

00.83, Revision of knee replacement, patellar component

00.84, Revision of total knee replacement, tibial insert (liner)

81.53, Revision of hip replacement, not otherwise specified

81.55, Revision of knee replacement, not otherwise specified

DRG 471 contains the following codes:

00.70, Revision of hip replacement, both acetabular and femoral components

00.80, Revision of knee replacement, total (all components)

00.85, Resurfacing hip, total, acetabulum and femoral head

00.86, Resurfacing hip, partial, femoral head

00.87, Resurfacing hip, partial, acetabulum

81.51, Total hip replacement

81.52, Partial hip replacement

81.54, Total knee replacement

81.56, Total ankle replacement

As a result of the removal of the identified codes from CMS DRG 471 in FY 2007, the reporting of one or more of the following hip or knee revision codes would be assigned to DRG 545: 00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55. This list included partial revisions of the knee and hip as well as unspecified joint procedures such as code 81.55 where it was not clear if the revision is total or partial.

Given this historical information of the changes we made in FY 2007, we will address the current commenter's concerns. The commenter's first scenario in which a patient received identical acetabular revisions of both hips 00.71 and 00.71 would not be assigned to CMS DRG 471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity), which becomes MS-DRGs 461 and 462. Even though this scenario identified revisions to two joints, they were both partial revisions that were less resource intensive than full bilateral or multiple joint revisions or replacements. In our view, the decision not to assign these cases to CMS DRG 471 was consistent with the public comments we received on the FY 2007 IPPS rule to ensure that CMS DRG 471 includes only full bilateral or multiple joint replacements or revisions. Similarly, the second scenario in which a patient receives a total revision of one hip (00.70) and a partial acetabular revision of the other hip (00.71) would not lead to the assignment of CMS DRG 471 for the same reason. As with the first scenario, code 00.71 was not included in CMS DRG 471. There was only one total and one partial joint revision in this scenario. Again, we believe that our decision not to assign these cases to CMS DRG 471 was consistent with the public comments to only include bilateral or multiple full revisions or replacements in this DRG. The third and fourth scenarios in which a patient received both a total hip replacement (81.51) and a total knee replacement (81.54) and another patient received both a total revision of one hip (00.70) and a total replacement of the other hip (81.51) would be assigned to CMS DRG 471. These are either full replacements or revisions on multiple joints. As we adopted the same logic to assign cases under the MS-DRGs as under the CMS DRGs, only full replacements or revisions of multiple joints will be included in MS-DRGs 461 and 462 (the MS-DRG analog to CMS DRG 471). Therefore, we are not making any revisions to the bilateral or multiple major joint procedures of lower extremity DRGs, MS DRG 461 and 462. The same procedure code DRG logic used in CMS DRG 471 will be applied to MS DRGs 461 and 462. b. Spinal Fusions

In the FY 2007 IPPS final rule (71 FR 47947), we discussed a request that urged CMS to consider applying a severity concept to all of the back and spine surgical cases, similar to the approach that was used in the FY 2006 final rule in refining the cardiac DRGs with an MCV. Specifically, the commenter recommended that the use of spinal devices be uniquely identified within the spine DRGs. The commenter's suggestion involved the development of 10 new spine DRGs as

[[Page 47227]]

well as additional modifications. One of these modifications included revising CMS DRG 546 (Spinal Fusions Except Cervical with Curvature of the Spine or Malignancy). The commenter stated CMS DRG 546 did not adequately recognize clinical severity or the resource differences among spinal fusion patients whose surgeries include fusing multiple levels of their spinal vertebrae.

We agreed with the commenter that it was important to recognize severity when classifying groups of patients into specific DRGs. In addition, in response to recommendations from MedPAC's March 2005 Report to Congress, we stated that we were conducting a comprehensive analysis of the entire DRG system to determine if we could better identify severity of illness. We further stated that until results from our analysis were available, it would be premature to implement a severity concept for the spine DRGs. Therefore, we did not make any adjustments to those DRGs at that time.

Under the MS-DRGs described in section II.D. of the preamble of the proposed rule, we proposed a number of refinements that would better recognize severity for FY 2008. The proposed MS-DRGs, which we are adopting in this final rule with comment period, included several refinements to the spine DRGs. These refinements are described in detail below.

In the FY 2006 IPPS final rule, we noted that there are numerous innovations occurring in spinal surgery such as artificial spinal disc prostheses, kyphoplasty, vertebroplasty and the use of spine decompression devices. As part of our analysis of the DRG system for the proposed rule, we did a comprehensive review of the DRGs for spinal fusion and other back and neck procedures to determine whether additional refinements beyond the proposed MS-DRGs were necessary. We studied data from the FY 2006 MedPAR file for the entire group of spine DRGs. This group included DRG 496 (Combined Anterior/Posterior Spinal Fusion), DRGs 497 and 498 (Spinal Fusion Except Cervical with and without CC, respectively), DRGs 499 and 500 (Back and Neck Procedures Except Spinal Fusion with and without CC, respectively), DRGs 519 and 520 (Cervical Spinal Fusion with and without CC, respectively), and DRG 546 (Spinal Fusion Except Cervical with Curvature of the Spine or Malignancy).

As indicated earlier, we proposed a two or three-way split for each of these spine DRGs to better recognize severity of illness, complexity of service, and resource utilization. In addition, we examined the procedure codes that identify multiple fusion or refusion of the vertebrae (codes 81.62 through 81.64) to determine if the data supported further refinement when a greater number of vertebrae are fused.

In applying the proposed MS-DRG logic, CMS DRG 497 and 498 were collapsed and the result was a split with two severity levels: proposed MS-DRG 459 (Spinal Fusion Except Cervical with MCC) and proposed MS-DRG 460 (Spinal Fusion Except Cervical without MCC). There were a total of 51,667 cases in proposed MS-DRGs 459 and 460. We identified 288 cases where nine or more (T1-S1) vertebrae were fused (code 81.64) that we proposed to assign to MS-DRGs 459 and 460. The average charges and length of stay for cases in these MS-DRGs were closer to the average charges and length of stay for cases in proposed MS-DRGs 456 through 458 (Spinal Fusion Except Cervical with Curvature of the Spine or Malignancy with MCC, with CC, and without CC, respectively). For example, in proposed MS-DRG 460, there were 238 cases with an average length of stay of 6.20 days and average charges of $110,908 when nine or more noncervical (T1-S1) vertebrae are fused. There were an additional 50 cases in which nine or more vertebrae were fused in proposed MS-DRG 459 with average charges of $171,839. Without any further modification to the proposed MS-DRGs, these cases would be assigned to proposed MS-DRGs 459 and 460 that have average charges of $59,698 and $99,298, respectively. However, we believe that the average charges for these cases ($142,871, $95,489, and $77,528, respectively) are more comparable to the average charges for cases in proposed MS- DRGs 456 through 458. We believe these data support assigning cases where nine or more noncervical (T1-S1) vertebrae are fused from MS-DRG 459 and 460 into MS-DRG 456 through 458. The table below represents our findings.

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 459 (Spinal Fusion Except

3,186

10.10 $99,298 Cervical with MCC)--All Cases... MS-DRG 459 (Spinal Fusion Except

50

13.00 171,839 Cervical with MCC)--Cases with Procedure Code 81.64 (Fusion or refusion of 9 or more vertebrae) MS-DRG 460 (Spinal Fusion Except

48,481

4.36 59,698 Cervical without MCC)--All Cases MS-DRG 460 (Spinal Fusion Except

238

6.20 110,908 Cervical without MCC)--Cases with Procedure Code 81.64 (Fusion or refusion of 9 or more vertebrae)...................... MS-DRG 456 (Spinal Fusion Except

548

14.79 142,871 Cervical with Curvature of the Spine or Malignancy with MCC)-- All Cases....................... MS-DRG 456 (Spinal Fusion Except

61

13.34 170,655 Cervical with Curvature of the Spine or Malignancy with MCC)-- Cases with Procedure Code 81.64 (Fusion or refusion of 9 or more vertebrae)...................... MS-DRG 457 (Spinal Fusion Except

1,500

8.14 95,489 Cervical with Curvature of the Spine or Malignancy with CC)-- All Cases....................... MS-DRG 457 (Spinal Fusion Except

146

8.88 125,722 Cervical with Curvature of the Spine or Malignancy with CC)-- Cases With Procedure Code 81.64 (Fusion or refusion of 9 or more vertebrae)...................... MS-DRG 458 (Spinal Fusion Except

1,340

4.58 77,528 Cervical with Curvature of the Spine or Malignancy without CC)-- All Cases....................... MS-DRG 458 (Spinal Fusion Except

81

6.21 123,823 Cervical with Curvature of the Spine or Malignancy without CC)-- Cases with Procedure Code 81.64 (Fusion or refusion of 9 or more vertebrae)......................

Therefore, we proposed to move those cases that include fusing or refusing nine or more noncervical (T1-S1) vertebrae from MS-DRGs 459 and 460 into MS DRGs 456 though 458. This modification would include revising the MS-DRG title to reflect the fusion or refusion of nine or more noncervical (T1-S1) vertebrae. The revised titles for proposed MS- DRGs 456 through 458 would be as follows:

[[Page 47228]]

MS-DRG 456 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC)

MS-DRG 457 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with CC)

MS-DRG 458 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions without CC/MCC)

In the FY 2008 IPPS proposed rule, we invited public comment on this topic as well as on the additional changes we proposed to the spine MS-DRGs discussed below.

Further analysis demonstrated that spinal fusion cases with a principal diagnosis of tuberculosis or osteomyelitis also have higher average charges than other cases in CMS DRG 497 (MS-DRGs 459 and 460 in this final rule with comment period) that were more similar to the cases assigned to CMS DRG 546 (MS-DRGs 456 through 458 in this final rule with comment period). Although the volume of cases is relatively low, the data show very high average charges for these patients. The following tables display our results:

Average MS-DRGs

Number of length of Average cases

stay charges

MS-DRG 459 (Spinal Fusion Except

3,186

10.10 $99,298 Cervical with MCC).............. MS-DRG 460 (Spinal Fusion Except

48,481

4.36 59,698 Cervical without MCC)........... MS-DRG 456 (Spinal Fusion Except

548

14.79 142,870 Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC)............................ MS-DRG 457 (Spinal Fusion Except

1,500

8.14 95,489 Cervical with Spinal Curvature or Malignancy or 9+ Fusions with CC)............................. MS-DRG 458 (Spinal Fusion Except

1,340

4.58 77,528 Cervical with Spinal Curvature or Malignancy or 9+ Fusions without CC/MCC).................

Tuberculosis and Osteomyelitis

Average Principal diagnosis

Number of length of Average cases

stay charges

Codes 015.02, 015.04, 015.05,

194

24.8 $128,073 730.08, 730.18 and 730.28.......

For this reason, we proposed to add the following diagnoses to the principal diagnosis list for MS-DRGs 456 through 458:

015.02, Tuberculosis of bones and joints, vertebral column, bacteriological or histological examination unknown (at present)

015.04, Tuberculosis of bones and joints, vertebral column, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture

015.05, Tuberculosis of bones and joints, vertebral column, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically

730.08, Acute osteomyelitis of other specified sites

730.18, Chronic osteomyelitis of other specified sites

730.28, Unspecified osteomyelitis of other specified sites.

For the complete list of principal diagnosis codes that lead to assignment of CMS DRG 546 (MS-DRGs 496 through 498 in this final rule with comment period), we refer readers to section II.D.4.b. of the preamble of the FY 2007 IPPS final rule (71 FR 47947).

Comment: One commenter expressed support of CMS' refinement of the DRGs for spinal procedures, and noted that it had made several recommendations in the past. Specifically, this commenter was pleased with the refinements to address multiple level procedures such as those in proposed MS-DRGs 456-458 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC/with CC/and without CC/ MCC, respectively), as well as the proposal to add specified diagnoses of tuberculosis and osteomyelitis to the list of principal diagnoses for MS-DRGs 456-458. The commenter also supported the proposal to move cases involving the use of motion-preserving spine devices into the higher severity level of MS-DRG 490.

This commenter suggested that MS-DRG 460 (Spinal Fusion Except Cervical without MCC) should include severity levels that distinguish with CC and without CC cases. The commenter urged CMS to create a CC split for this MS-DRG.

Response: We appreciate the commenter's support for the refinements proposed to the spine DRGs. The data analysis conducted in developing the MS-DRGs did not support a CC split for proposed MS-DRG 460. As stated in the FY 2008 proposed rule, in order to warrant creation of a CC or major CC subgroup within a base MS-DRG, the subgroup had to meet all five criteria. We refer readers to the FY 2008 proposed rule (72 FR 24705) and section II.D.3 of this final rule with comment period for a complete listing of the criteria. As stated in the proposed rule, the data did support a split for proposed MS-DRG 460 with two severity levels of with MCC and without MCC. Therefore, in this final rule with comment period we are implementing MS-DRG 460 as final policy.

Comment: One manufacturer requested that CMS reassign newly created procedure code 84.82 (Insertion or replacement of pedicle-based dynamic stabilization device(s)), effective October 1, 2007, from proposed MS- DRG 490 to MS-DRG 460. The commenter stated the surgical procedure requirements for code 84.82 are very similar to other procedures that were proposed for assignment to MS-DRG 460 as a result of the complexity and resources utilized. The commenter further noted that in the FY 2008 proposed rule (72 FR 24734) CMS reported a total of 83 cases identified by code 84.59 (Insertion of other spinal devices) a predecessor code to 84.82 and it is unknown whether the cases reported with code 84.59 truly reflect dynamic stabilization procedures.

Response: In developing the MS-DRGs, we conducted a comprehensive review of the entire group of spine DRGs and proposed a number of revisions to account for differences in level of severity, complexity, and resource utilization. We believe the proposed spinal MS-DRGs more appropriately classify the variety of emerging spinal technologies. In response to the uncertainty of correct coding and

[[Continued on page 47229]]

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

[[pp. 47229-47278]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates

[[Continued from page 47228]]

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accurate charge information for the reporting of pedicle-based dynamic stabilization devices by code 84.59, we refer the commenter to the ICD- 9-CM Coordination and Maintenance Committee Meeting's September 28-29, 2006 and March 22-23, 2007 interim coding advice regarding these devices, which was to continue using code 84.59 to describe this technology.

Effective October 1, 2007, new code 84.82 will be available to identify and describe procedures using pedicle-based dynamic stabilization devices more accurately. Our practice has been to assign a new code to the same MS-DRG as its predecessor code unless we have clinical information or cost data that demonstrates a different MS-DRG assignment is warranted. At this time, we have no information to suggest that ICD-9-CM code 84.82 should be reassigned from MS-DRG 490. As final policy for FY 2008, code 84.82 will be assigned to MS-DRG 490.

Comment: Two commenters indicated that they supported the reassignment of spinal fusion cases with a principal diagnosis of tuberculosis or osteomyelitis to MS-DRGs 456-458 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC/ with CC/and Without CC/MCC, respectively) to better recognize the utilization of resources involved with these cases, however they recommended that the MS-DRG titles be modified to reflect these conditions. One of the commenters suggested the following title modifications:

MS-DRG 456 (Spinal Fusion Except Cervical with Spinal Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions with MCC)

MS-DRG 457 (Spinal Fusion Except Cervical with Spinal Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions with CC)

MS-DRG 458 (Spinal Fusion Except Cervical with Spinal Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions without CC/MCC)

Response: We appreciate the commenter's support of the proposal to reassign cases with a principal diagnosis of tuberculosis or osteomyelitis to MS-DRGs 456-458. We also appreciate the suggestion for revising the DRG titles to better classify these patients. While we recognize the creative approach to modifying the code titles, we must limit the DRG titles to 68 characters.

We have reviewed the MS-DRG titles and are revising them as follows:

MS-DRG 456 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC)

MS-DRG 457 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions with CC)

MS-DRG 458 (Spinal Fusion Except Cervical with Spinal Curvature or Malignancy or 9+ Fusions without CC/MCC)

Therefore, effective October 1, 2007, the new titles for MS-DRGs 456-458 will be implemented as above. c. Spinal Disc Devices

Over the past several years, manufacturers of spinal disc devices have requested reassignment of DRGs for their products and applied for new technology add-on payment. CHARITETMis one of these devices. CHARITETMis a prosthetic intervertebral disc. On October 26, 2004, the FDA approved the CHARITETMArtificial Disc for single level spinal arthroplasty in skeletally mature patients with degenerative disc disease between L4 and S1. On October 1, 2004, we created new procedure codes for the insertion of spinal disc prostheses (codes 84.60 through 84.69). We provided the CMS DRG assignments for these new codes in Table 6B of the FY 2005 IPPS proposed rule (69 FR 28673). We received comments on the FY 2005 proposed rule recommending that we change the assignments for these codes from CMS DRG 499 (Back and Neck Procedures Except Spinal Fusion with CC) and CMS DRG 500 (Back and Neck Procedures Except Spinal Fusion without CC) to the CMS DRGs for spinal fusion, CMS DRG 497 (Spinal Fusion Except Cervical with CC) and CMS DRG 498 (Spinal Fusion Except Cervical without CC), for procedures on the lumbar spine and to CMS DRGs 519 and 520 for procedures on the cervical spine. In the FY 2005 IPPS final rule (69 FR 48938), we indicated that CMS DRGs 497 and 498 are limited to spinal fusion procedures. Because the surgery involving the CHARITETMArtificial Disc is not a spinal fusion, we decided not to include this procedure in these CMS DRGs. However, we stated that we would continue to analyze this issue and solicited further public comments on the DRG assignment for spinal disc prostheses.

In the FY 2006 final rule (70 FR 47353), we noted that, if a product meets all of the criteria for Medicare to pay for the product as a new technology under section 1886(d)(5)(K) of the Act, there is a clear preference expressed in the statute for us to assign the technology to a DRG based on similar clinical or anatomical characteristics or costs. However, for FY 2006, we did not find that the CHARITETMArtificial Disc met the substantial clinical improvement criterion and, thus, did not qualify as a new technology. Consequently, we did not address the DRG classification request made under the authority of this provision of the Act.

We did evaluate whether to reassign the CHARITETM Artificial Disc to different CMS DRGs using the Secretary's authority under section 1886(d)(4) of the Act (70 FR 47308). We indicated that we did not have Medicare charge information to evaluate CMS DRG changes for cases involving an implant of a prosthetic intervertebral disc like the CHARITETMand did not make a change in its CMS DRG assignments. We stated that we would consider whether changes to the CMS DRG assignments for the CHARITETMArtificial Disc were warranted for FY 2007, once we had information from Medicare's data system that would assist us in evaluating the costs of these patients.

As we discussed in the FY 2007 IPPS proposed rule (71 FR 24036), we received correspondence regarding the CMS DRG assignments for the CHARITETMArtificial Disc, code 84.65 (Insertion of total spinal disc prosthesis, lumbosacral). The commenter had previously submitted an application for the CHARITETMArtificial Disc for new technology add-on payments for FY 2006 and had requested a reassignment of cases involving CHARITETMimplantation to CMS DRGs 497 and 498. The commenter asked that we examine claims data for FY 2005 and reassign procedure code 84.65 from CMS DRGs 499 and 500 into CMS DRGs 497 and 498. The commenter again stated the view that cases with the CHARITETMArtificial Disc reflect comparable resource use and similar clinical indications as do those in CMS DRGs 497 and 498. If CMS were to reject reassignment of the CHARITETMArtificial Disc to CMS DRGs 497 and 498, the commenter suggested creating two separate DRGs for lumbar disc replacements.

On February 15, 2006, we posted a proposed national coverage determination (NCD) on the CMS Web site seeking public comment on our proposed finding that the evidence is not adequate to conclude that lumbar artificial disc replacement with the CHARITETM Artificial Disc is reasonable and necessary. The proposed NCD stated that lumbar artificial disc replacement with the CHARITETM Artificial Disc is generally not indicated in patients over 60 years old. Further, it stated that there is insufficient evidence among either the aged or disabled Medicare population to make a

[[Page 47230]]

reasonable and necessary determination for coverage. With an NCD pending to make spinal arthroplasty with the CHARITETM Artificial Disc noncovered, we indicated in the FY 2007 IPPS proposed rule that we did not believe it was appropriate at that time to reassign procedure code 84.65 from CMS DRGs 499 and 500 to CMS DRGs 497 and 498.

After considering the public comments and additional evidence received, we made a final NCD on May 16, 2006, that Medicare would not cover the CHARITETMArtificial Disc for the Medicare population over 60 years of age. For Medicare beneficiaries 60 years of age and under, local Medicare contractors have the discretion to determine coverage for lumbar artificial disc replacement procedures involving the CHARITETMArtificial Disc. The final NCD can be found on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewncd.asp:ncd_id-150.10&ncd_version1&basket=ncd%3A150%2E10%3A1%3ALumbar+Artificial+Disc+Replacement%280ADR%29 .

0ADR%29 .

it was not appropriate to consider a DRG revision at that time for the CHARITETMArtificial Disc, given the recent decision to limit coverage for surgical procedures involving this device. Although we had reviewed the Medicare charge data, we were concerned that there were a very small number of cases for patients under 60 years of age who had received the CHARITETMArtificial Disc. We believed it appropriate to base the decision of a DRG change on charge data only on the population for which the procedure is covered. We had an extremely small number of cases for Medicare beneficiaries under 60 on which to base such a decision. For this reason, we did not believe it was appropriate to modify the CMS DRGs in FY 2007 for CHARITETMcases.

For FY 2008, we proposed to collapse CMS DRGs 499 and 500 (Back and Neck Procedures Except Spinal Fusion With and Without CC, respectively) and identified a total of 74,989 cases. Under the proposed MS-DRGs (which we are adopting in this final rule with comment period), the result of the analysis of the data supports that these CMS DRGs split into two severity levels: MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC or MCC) and MS-DRG 491 (Back and Neck Procedures Except Spinal Fusion Without CC or MCC). We found a total of 53 cases that used the CHARITETMArtificial Disc. Without any further modification to the proposed MS-DRGs, average charges are $26,481 for 6 cases with a CC or MCC and $37,324 for 47 CHARITETMcases without a CC or MCC. (We find it counterintuitive that average charges for cases in the higher severity level are lower but checked our data and found it to be correct).

We also analyzed data for other spinal disc devices. Average charges for the X Stop Interspinous Process Decompression Device (code 84.58) are $31,400 for cases with a CC or MCC and $28,821 for cases without a CC or MCC. Average charges for other specified spinal devices described by code 84.59 (Coflex, Dynesys, M-Brace) are $34,002 for 18 cases with a CC or MCC and $33,873 for 65 cases without a CC or MCC. We compared these average charges to data in the proposed spinal fusion MS-DRGs 453 (Combined Anterior/Posterior Spinal Fusion With MCC), 454 (Combined Anterior/Posterior Spinal Fusion with CC), 455 (Combined Anterior/Posterior Spinal Fusion without CC/MCC), 459 (Spinal Fusion Except Cervical with MCC), and 460 (Spinal Fusion Except Cervical without MCC). These cases have lower average charges than the spinal fusion MS-DRGs. The following tables display the results:

Average MS-DRGs 490 and 491

Number of length of Average cases

stay charges

MS-DRG 490--All Cases............ 17,493

5.13 $29,656 MS-DRG 490--Cases with Procedure

6

3.33 26,481 Code 84.65 (CHARITE\TM\)........ MS-DRG 491--All Cases............ 57,496

2.27 17,789 MS-DRG 491--Cases with Procedure

47

2.43 37,324 Code 84.65 (CHARITE\TM\)........ MS-DRG 491--Cases without

57,449

2.27 17,773 Procedure Code 84.65 (CHARITE\TM\)................... MS-DRG 490--All Cases............ 17,493

5.13 29,656 MS-DRG 490--Cases with Procedure

179

2.65 31,400 Code 84.58 (X Stop)............. MS-DRG 490--Cases without

17,314

5.15 29,638 Procedure Code 84.58 (X Stop)... MS-DRG 491--All Cases............ 57,496

2.27 17,789 MS-DRG 491--Cases with Procedure

1,174

1.34 28,821 Code 84.58 (X Stop)............. MS-DRG 491--Cases without

56,322

2.29 17,559 Procedure Code 84.58 (X-Stop)... MS-DRG 490--All Cases............ 17,493

5.13 29,656 MS-DRG 490--Cases with Procedure

18

5.56 34,002 Code 84.59 (Coflex/Dynesys/M- Brace).......................... MS-DRG 490--Cases without

17,475

5.13 29,651 Procedure Code 84.59 (Coflex/ Dynesys/M-Brace)................ MS-DRG 491--All Cases............ 57,496

2.27 17,789 MS-DRG 491--Cases with Procedure

65

2.35 33,873 Code 84.59 (Coflex/Dynesys/M- Brace).......................... MS-DRG 491--Cases without

57,431

2.27 17,770 Procedure Code 84.59 (Coflex/ Dynesys/M-Brace)................

Average MS-DRGs 453, 454, 455, 459 and Number of length of Average 460

cases

stay charges

MS-DRG 453--Combined Anterior/

792

15.84 $180,658 Posterior Spinal Fusion With MCC MS-DRG 454--Combined Anterior/

1,411

8.69 116,402 Posterior Spinal Fusion With CC. MS-DRG 455--Combined Anterior/

1,794

4.84 85,927 Posterior Spinal Fusion Without CC/MCC.......................... MS-DRG 459--Spinal Fusion Except

3,186

10.10 99,298 Cervical with MCC............... MS-DRG 460--Spinal Fusion Except

48,481

4.36 59,698 Cervical without MCC............

The data demonstrate that the average charges for CHARITETMand the other devices are higher than other cases in proposed MS-DRGs 490 and 491 but lower than proposed MS-DRGs 453 through 455 and 459 and 460. For this reason, we do not believe that any of the cases that use these spine devices should be assigned to the spinal fusion

[[Page 47231]]

MS-DRGs. However, we do believe that the average charges for cases using these spine devices are more similar to the higher severity level in MS-DRG 490.

As such, in the FY 2008 IPPS proposed rule, we proposed to move cases with procedure codes 84.58, 84.59, and 84.65 into proposed MS-DRG 490 and revise the title to reflect disc devices. The proposed modified MS-DRG title would be: MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC or MCC or Disc Devices).

We believe these proposed changes to the spine DRGs are appropriate to recognize the similar utilization of resources, differences in levels of severity, and complexity of the services performed for various types of spinal procedures described above. We encouraged commenters to provide input on this approach to better recognize the types of patients these procedures are being performed upon and their outcomes.

Comment: Several commenters supported our proposal to recognize utilization of resources, differences in levels of severity, and the complexity of spinal procedures in proposed MS-DRGs 490 and 491. The commenters were pleased with the proposal to reassign cases identified by procedure codes 84.58 \24\, 84.59 and 84.65 to proposed MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC or MCC or Disc Devices). One commenter stated that the proposed refinements to MS-DRG 490 result in Medicare payment that better recognizes patient conditions and procedural complexity. Another commenter believed that the proposals will provide more appropriate payment and ensure patient access to spine technologies. This commenter commended CMS for its responsiveness in considering resource use associated with new technologies, such as spine motion preservation devices, and stated the proposal to assign higher payment rates will enable hospitals to provide Medicare patients with access to these technologies.

\24\ Effective October 1, 2007, procedure code 84.58 (Implantation of interspinous process decompression device) has been deleted and replaced by new procedure code 84.80 (Insertion or replacement of interspinous process device(s)).

Two commenters suggested CMS also consider moving cases with procedure code 84.62 (Insertion of total spinal disc prosthesis, cervical) into MS-DRG 490. The commenters stated that this procedure is clinically coherent with the other cases proposed for reassignment to this DRG. Many commenters also recommended that CMS continue analyzing claims data in the future to ensure appropriate DRG assignment for all spinal related procedures.

Response: We greatly appreciate the commenters' support of our proposal. We analyzed data for procedure code 84.62 and found 23 cases with an average length of stay of 1.48 days and average charges of $30,114 in MS-DRG 491. We also identified 4 cases in MS-DRG 490 with an average length of stay of 10.5 days and average charges of $104,313. The table below displays our results.

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 490--All cases............ 17,493

5.13 $29,655 MS-DRG 490--Cases with code 84.62

4

10.50 104,313 MS-DRG 490--Cases without code

17,484

5.13 29,633 84.62........................... MS-DRG 491--All cases............ 57,496

2.27 17,788 MS-DRG 491--Cases with code 84.62

23

1.48 30,114 MS-DRG 491--Cases without code

57,470

2.27 17,783 84.62...........................

We agree that cases with procedure code 84.62 appear to require greater utilization of resources than other cases in MS-DRG 491 and they are clinically similar to other spine disc prostheses cases we are assigning to MS-DRG 490. Therefore, in this FY 2008 final rule, we are moving cases identified by procedure code 84.62 from MS-DRG 491 to MS- DRG 490.

Comment: One commenter urged CMS to reconsider the placement of procedure code 84.65 (Insertion of total spinal disc prosthesis, lumbosacral) into MS-DRG 490. The commenter indicated this code represents technology that is a significant alternative to spinal fusion for a number of patients diagnosed with degenerative disc disease. The commenter noted that a total disc replacement is different from the other procedures included in MS-DRG 490 and is more complex. For example, excision of an intervertebral disc (code 80.51) represents only one component of a total disc replacement surgery; however, both procedures are assigned to the same DRG and receive the same payment. The commenter further noted that other procedures included in MS-DRG 490 do not involve the removal of a disc and including all of these procedures together is not an accurate reflection of clinical coherence.

According to the commenter, a variety of new artificial discs are leading to improvements in the area of total disc replacement procedures, including the ProDisc-L\TM\ Total Disc Arthroplasty. In addition, the commenter stated, ``appropriate Medicare payment is essential to ensure access to this alternative treatment and the diffusion of an innovative new technology.'' The commenter believed that the most appropriate MS-DRG assignment for code 84.65 is MS-DRG 460 (Spinal Fusion Except Cervical without MCC) and requested that CMS reassign procedure code 84.65 to MS-DRG 460 and modify the title to ``Spinal Fusion Except Cervical without MCC and Artificial Disc Replacement.''

Response: We disagree with the commenter that cases identified by procedure code 84.65 should be reassigned to MS-DRG 460 with a revised title. We provided the analysis in the FY 2008 IPPS proposed rule that demonstrated the average charges for code 84.65 were substantially lower than the average charges for the spinal fusion MS-DRGs but higher than the average charges for other cases in proposed MS-DRGs 490 and 491. As a result, we proposed to move cases identified by procedure code 84.65 into the higher severity level and modify the proposed title to reflect disc devices. We agree with the above statement, ``appropriate Medicare payment is essential to ensure access to this alternative treatment and the diffusion of an innovative new technology'' made by the commenter. The charge data do not support moving cases with procedure code 84.65 into the spinal fusion DRGs at this time. As a result, effective October 1, 2007, cases

[[Page 47232]]

identified by procedure code 84.65 will remain assigned to MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC or MCC or Disc Devices) with the modified title as proposed. d. Other Spinal DRGs

We did not identify any data to support moving cases in or out of CMS DRGs 496 (Combined Anterior/Posterior Spinal Fusion), 519 (Cervical Spinal Fusion with CC), or 520 (Cervical Spinal Fusion without CC)). Under the proposed MS-DRG system, we proposed to split CMS DRG 496 into three severity levels: MS-DRG 453 (Combined Anterior/Posterior Spinal Fusion with MCC), MS-DRG 454 (Combined Anterior/Posterior Spinal Fusion with CC), and proposed MS-DRG 455 (Combined Anterior/Posterior Spinal Fusion without CC). We also proposed to split CMS DRG 519 into three severity levels: MS-DRG 471 (Cervical Fusion with MCC), MS-DRG 472 (Cervical Fusion with CC), and MS-DRG 473 (Cervical Fusion without CC). In the FY 2008 IPPS proposed rule, we did not propose changes to these DRGs.

We did not receive any public comments on the above proposals to refine the remaining spinal DRGs. Therefore, in this final rule with comment period, we are adopting as final MS-DRGs 453, 454, 455, 471, 472, and 473. 5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly Differentiated Neoplasm): Endoscopic Procedures

Between last year's final rule and this year's proposed rule, we received a request from a manufacturer to review the DRG assignment of codes 33.71 (Endoscopic insertion or replacement of bronchial valve(s)), 33.78 (Endoscopic removal of bronchial device(s) or substances), and 33.79 (Endoscopic insertion of other bronchial device or substances) with the intent of moving these three codes out of CMS DRG 412 (History of Malignancy With Endoscopy) (MS-DRGs 843, 844, and 845 in this final rule with comment period). The requestor noted that CMS DRG 412 is titled to be a DRG for cases with a history of malignancy, and none of the three codes (33.71, 33.78, or 33.79) necessarily involve treatment for malignancies. In addition, the requestor believed the integrity of the DRG is compromised because the other endoscopy codes assigned to CMS DRG 412 are all diagnostic in nature, while codes 33.71, 33.78, and 33.79 represent therapeutic procedures.

The requestor also stated that while the diagnostic endoscopies in CMS DRG 412 do not have significant costs for equipment or pharmaceutical agents beyond the basic endoscopy, the therapeutic procedures described by codes 33.71, 33.78, and 33.79 involve substantial costs for devices or substances in relation to the cost of the endoscopic procedure itself. The requestor was concerned that, if these three codes continue to be assigned to CMS DRG 412, payment will be so inadequate as to constitute a substantial barrier to Medicare beneficiaries for these treatments.

ICD-9-CM procedure codes 33.71, 33.78, and 33.79 were all created for use beginning October 1, 2006. In the proposed rule, we stated that these codes have been in use only for a few months, and we had no data to make a different DRG assignment. We assigned these codes based on the advice of our medical officers to a DRG that included similar clinical procedures.

On the matter of codes 33.71, 33.78, and 33.79 being therapeutic in nature while all other endoscopies assigned to CMS DRG 412 are diagnostic, we disagreed with the commenter in the proposed rule. CMS DRG 412 includes procedure codes for therapeutic endoscopic destruction of lesions of the bronchus, lung, stomach, anus, and duodenum, as well as codes for polypectomy of the intestine and rectum. In addition, we note that there are codes for insertion of therapeutic devices currently located in this DRG.

In the proposed rule, we stated that it would be premature to assign these codes to another DRG without any supporting data. We indicated that we would reconsider our decision for these codes if we had data suggesting that a DRG reassignment was warranted. Therefore, aside from the proposed changes to the MS-DRGs, in the FY 2008 IPPS proposed rule, we did not propose to change the current DRG assignment for codes 33.71, 33.78, and 33.79.

Comment: We did not receive any specific comments addressing the published proposal. We did receive comments asking CMS to use external data to make DRG assignments until Medicare data are available.

Response: We reiterate that the new codes under discussion were created for use beginning October 1, 2006. Commenters did not provide any external data for us to evaluate. We have no data that would support a different DRG assignment for these codes. Therefore, codes 33.71 (Endoscopic insertion or replacement of bronchial valve(s)), 33.78 (Endoscopic removal of bronchial device(s) or substances), and 33.79 (Endoscopic insertion of other bronchial device or substances) will remain assigned to MS-DRGs 843, 844, and 845 (Other Myeloproliferative Disease or Poorly Differentiated Neoplasm Diagnosis w/MCC, w/CC or w/o CC/MCC respectively) until we have data that suggest a different DRG assignment would be warranted. 6. Medicare Code Editor (MCE) Changes

As explained under section II.B.1. of the preamble of this final rule with comment period, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), and demographic information are entered into the Medicare claims processing systems and are subjected to a series of automated screens. The MCE screens are designed to identify cases that require further review before classification into a DRG. For FY 2008, we proposed to make the following changes to the MCE edits. a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessel(s))

As discussed in II.G.2. of the preamble of this final rule with comment period, under MDC 1, code 00.62 is a covered service when performed in conjunction with code 00.65 (Percutaneous insertion of intracranial vascular stent(s)). Effective November 6, 2006, Medicare covers PTA and stenting of intracranial arteries for the treatment of cerebral artery stenosis in cases in which stenosis is 50 percent or greater in patients with intracranial atherosclerotic disease when furnished in accordance with the FDA-approved protocols governing Category B Investigational Device Exemption (IDE) clinical trials. CMS determined that coverage of intracranial PTA and stenting is reasonable and necessary under these circumstances. Therefore, we proposed to make a conforming change and to add the following language to this edit: Procedure code 00.62 (PTA of intracranial vessel(s)) is identified as a noncovered procedure except when it is accompanied by procedure code 00.65 (Intracranial stent).

We did not receive any public comments on this proposal. Therefore, for FY 2008, we are adopting as final our proposed revision of the coverage edit, recognizing procedure code 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessel(s)) as a covered procedure when reported in conjunction with procedure code 00.65 (Intracranial stent).

[[Page 47233]]

b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. Procedures Edit 10

When MCE Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. Procedures Edit 10 were created at the beginning of the IPPS, it was with the intent that they were to encourage hospitals to code as specifically as possible. While the codes on both edits are valid according to the ICD-9-CM coding scheme, more precise codes are preferable to give a more complete understanding of the services provided on the Medicare claims. When the MCE was created, we had intended that these specific edits would allow educational contact between the provider and the contractor. It was never the intention that these edits would be used to deny/reject or return-to-provider those claims submitted with non-specific codes. However, we found these two edits to be misunderstood, and found that claims were erroneously being denied, rejected, or returned. On November 11, 2006, CMS issued a Joint Signature Memorandum that instructed all fiscal intermediaries and all Part A and Part B Medicare Administrative Contractors (A/B MACs) to deactivate the Fiscal Intermediary Shared System Edits W1436 through W1439 and W1489 through W1491 which edited for Non-Specific Diagnoses and the Non-Specific Procedures.

Therefore, in the FY 2008 IPPS proposed rule, we proposed to make a conforming change to the MCE by removing the following codes from Edit 7: 00320 01590 01591 01592 01593 01594 01596 0369 0399 0528 05310 0538 05440 0548 0558 05600 0568 06640 07070 07071 0728 0738 07420 08240 0979 09810 09830 09950 0999 1009 1109 1129 1149 1279 129 1309 13100 1319 1329 1369 1370 1371 1372 1373 1374 138 1390 1391 1398 1409 1419 1429 1439 1449 1469 1479 1509 1519 1529 1539 1543 1579 1589 1590 1609 1619 1629 1639 1649 1709 1719 1729 1739 1749 1769 179 1809 1839 1874 1879 1889 1899 1909 1929 1949 1969 1991 20490 20491 20590 20591 20690 20691 20890 20891 2129 2139 2149 2159 2169 2189 2199 2229 2239 2249 2259 2279 22800 2299 2306 2319 2329 2349 23690 23770 23875 2390 2391 2392 2393 2394 2396 2397 2398 2399 2469 2519 25200 2529 2539 2549 25510 2569 2579 2589 2681 2709 2719 2729 2739 27540 2759 27650 27730 2779 2793 2799 28730 28800 28850 28860 28950 3239 3249 326 32700 32710 32720 32730 32740 3309 3319 3349 3359 34120

[[Page 47234]]

3419 3439 3449 34690 34691 3489 3499 3509 3519 3529 3539 3569 3579 3589 3599 3609 3619 3629 3639 3649 3659 3669 3679 3689 36900 36901 36902 36903 36904 36905 36906 36907 36908 36910 36911 36912 36913 36914 36915 36916 36917 36918 36920 36921 36922 36923 36924 36925 3693 3694 36960 36961 36962 36963 36964 36965 36966 36967 36968 36969 36970 36971 36972 36973 36974 36975 36976 3698 3699 3709 3719 3729 3739 3749 3759 3769 3779 3789 37960 3809 3819 3829 3839 3849 3859 3879 38800 38810 38830 38840 38860 38870 3889 38900 38910 3897 3899 41090 41091 41092 412 4149 4179 42650 4275 4279 42820 42830 42840 4289 4299 4329 43390 43490 4379 4389 4419 4429 4449 44620 4479 4519 45340 4539 4579 4599 4619 46450 46451 4749 4919 5169 51900 5199 5209 52100 52110 52120 52130 52140 5219 52320 52330 52340 5239 52400 52420 52430 52450 52460 52470 5249 52520 52540 52550 52560 5259 5269 5279 52800 5299 5309 53640 5379 5539 56400 5649 5679 5689 56960 5699 5739 57510 5759 5769 5779 5799 5859 5889 5890 5891 5899 5909 5959 5969 5989 59960 5999 60090 60091 6019 6029 60820 6089 6109 6169 6179 61800 6184 6189 6199 6209 62130 6219 62210 6229 6239

[[Page 47235]]

6249 6269 6279 62920 63390 63391 64090 64091 64093 64100 64110 64120 64130 64180 64190 64191 64193 64200 64210 64220 64230 64240 64250 64260 64270 64290 64300 64310 64320 64380 64390 64400 64410 64420 64600 64610 64620 64630 64640 64650 64660 64670 64680 64690 64700 64710 64720 64730 64740 64750 64760 64780 64790 64791 64792 64793 64794 64800 64810 64820 64830 64840 64850 64860 64870 64880 64890 64900 64910 64920 64930 64940 64950 64960 65100 65110 65120 65130 65140 65150 65160 65180 65190 65191 65193 65200 65210 65220 65230 65240 65250 65260 65270 65280 65290 65291 65293 65300 65310 65320 65330 65340 65350 65360 65370 65380 65390 65391 65393 65400 65410 65420 65430 65440 65450 65460 65470 65480 65490 65491 65492 65493 65494 65500 65510 65520 65530 65540 65550 65560 65570 65580 65590 65591 65593 65600 65610 65620 65630 65640 65650 65660 65670 65680 65690 65700 65800 65810 65820 65830 65840 65880 65890 65891 65893 65900 65910 65920 65930 65940 65950 65960 65980 65990 65991 65993 66000 66010 66020 66030 66040 66050 66060 66070 66080 66090 66100 66110 66120 66130 66140 66190 66191 66193 66200 66210 66220 66230 66300 66310 66320 66330 66340 66350 66360 66380 66390 66391 66393 66400 66410 66420 66430 66440 66441 66444 66450

[[Page 47236]]

66480 66490 66491 66494 66500 66510 66520 66530 66540 66550 66560 66570 66580 66590 66591 66592 66593 66594 66600 66610 66620 66630 66700 66710 66800 66810 66820 66880 66890 66891 66892 66893 66894 66900 66910 66920 66930 66940 66950 66960 66970 66980 66990 66991 66992 66993 66994 67000 67100 67110 67120 67130 67140 67150 67180 67190 67191 67192 67193 67194 67200 67300 67310 67320 67330 67380 67400 67410 67420 67430 67440 67450 67480 67490 67492 67494 67500 67510 67520 67580 67590 67600 67610 67620 67630 67640 67650 67660 67680 67690 67691 67692 67693 67694 677 6809 6819 6829 68600 6869 6949 7019 7049 7059 7069 70700 70710 7079 7149 71590 7179 71849 71850 71870 72230 72270 72280 72290 7239 7244 7289 73000 73010 73020 73030 73090 73091 73092 73093 73094 73095 73096 73097 73098 73099 73310 73340 73390 7359 73600 73620 73630 73670 7369 73810 7389 74100 74190 7429 7439 7449 7459 7469 74760 7489 74900 74910 7509 7519 7529 75310 75312 75320 7539 7559 75670 7579 7599 7600 7601 7602 7603 7604 7605 7606 76070 76072 76073 76074 76079 7608 7609 7610 7611 7612 7613 7614 7615 7616 7617 7618 7619 7629 7630 7631 7632 7633 7634 7635 7636 7637 76383 7639 76520 7679 7689 77010

[[Page 47237]]

7709 77210 7729 7759 7769 7779 7789 7799 78031 78051 78052 78053 78054 78055 78057 78058 78079 7825 78261 78262 78340 78830 78900 78930 78940 78960 79009 7901 7904 7905 7906 79091 79092 79099 7929 79380 79500 7954 7964 7969 7993 79989 7999 8290 8291 8398 8399 8409 8419 8439 8469 8479 8489 8678 8679 86800 86810 9009 9019 9029 9039 9048 9049 9050 9051 9052 9053 9054 9055 9056 9057 9058 9059 9060 9061 9062 9063 9064 9065 9066 9067 9068 9069 9070 9071 9072 9073 9074 9075 9079 9080 9081 9082 9083 9084 9085 9086 9089 9090 9091 9092 9093 9094 9095 9099 9219 9229 9239 9249 9269 9279 9289 9299 9349 9399 94100 94101 94102 94103 94104 94105 94106 94107 94108 94109 94200 94201 94202 94203 94204 94205 94209 94300 94301 94302 94303 94304 94305 94306 94309 94400 94401 94402 94403 94404 94405 94406 94407 94408 94500 94501 94502 94503 94504 94505 94506 94509 9460 9479 9490 9491 9492 9493 9494 9495 9519 9529 9539 9549 9559 9569 9579 95890 9599 9609 9639 9649 9659 9679 9699 9709 9739 9769 9779 9809 9849 9859 9889 9899 9929 9939 99520 99522 99523 99529 99550 99580 99590 99600 99630 99640 99660 99670 99680 99690 99700 99760

[[Page 47238]]

9989

In addition, we proposed to make a conforming change to the MCE by removing the following codes from Edit 10:

0650 0700 3500 3510 3520 3550 3560 3570 3610 3710 3770 3800 3810 3830 3840 3850 3860 3880 4040 4050 4100 4210 4240 4400 4440 4500 4590 0763 0769 4610 4620 4640 4650 4660 4680 5300 5310 5640 7550 7670 7700 7720 7760 7770 7780 7790 7800 7810 7820 7830 7840 7850 7870 7880 7890 0780 2630 7910 7920 7930 7940 7950 7960 7980 7990 8000 8010 8020 8040 8070 8080 8090 8100 8120 8130 8153 8155 8400 8440 8460 8469 8660 8670

Comment: Several commenters commended CMS for simplifying what they considered to be a burdensome edit that has ceased to serve its intended purpose.

Response: We appreciate the commenters' support for the removal of the specified codes from Edit 7 and Edit 10.

Comment: One commenter pointed out that code 015.95 (Tuberculosis of unspecified bones and joints, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically) was included on the list of nonspecific principal diagnoses in the MCE, but was not included in the list of codes to be deleted in the proposed rule.

Response: The commenter is correct; code 015.95 should have been included in the list of codes to be deleted from Edit 7. We have modified the list to include deletion of this code as part of the deletion of the edit in the MCE software.

After consideration of the public comments received, in this final rule with comment period, we are finalizing our deletion of the specified listed codes in Edit 7 (Non-Specific Principal Diagnosis) (including code 015.95) and in Edit 10 (Non-Specific O.R. Procedures) of the MCE. c. Limited Coverage Edit 17

Edit 17 in the MCE contains ICD-9-CM procedure codes describing medically complex procedures, including lung volume reduction surgery, organ transplants, and implantable heart assist devices which are to be performed only in certain pre-approved medical centers. CMS has established, through regulation (CMS-3835-F: Medicare Conditions of Participation: Requirements for Approval and Reapproval of Transplant Centers to Perform Organ Transplants, published in the Federal Register on March 30, 2007 (72 FR 15198)), a survey and certification process for organ transplant programs. The organs covered in this transplant regulation are heart, heart and lung combined, intestine, kidney, liver, lung, pancreas, and multivisceral. Historically, kidney transplants have been regulated under the End-Stage Renal Disease (ESRD) conditions for coverage. Other types of organ transplant facilities have been regulated under various NCDs.

The regulation becomes effective on June 28, 2007. Organ transplant programs will have 180 days from the June 28, 2007 effective date of the regulation to apply for participation in the Medicare program under the new survey and certification process. After these programs apply, we will survey and approve programs that meet the new Medicare conditions of participation. Until transplant facilities are surveyed and approved, kidney transplant facilities will continue to be regulated under the ESRD conditions for coverage, and other types of organ transplant facilities will continue to be regulated under the NCDs.

In the FY 2008 IPPS proposed rule, we proposed to add conforming Medicare Part A payment edits to the MCE, consistent with the requirements of the organ transplant regulation (CMS-3835-F), to ensure that Medicare covers only those organ transplants performed in Medicare approved facilities. We proposed to add the following procedure codes to the existing list of limited coverage procedures under Edit 17:

55.69, Other kidney transplantation

52.80, Pancreatic transplant, not otherwise specified

52.82, Homotransplant of pancreas

We did not receive any public comments on this portion of the proposed MCE revisions. Therefore, we will implement the changes as stated above by adding procedure codes 55.69, 52.80, and 52.82 to the list of limited coverage procedures in the MCE. d. Revision to Part 1, Pancreas Transplant Edit A

Effective for services performed on or after April 26, 2006, we published an NCD for Pancreas Transplants in section 260.3 of the Coverage Manual, stating that pancreas alone transplants are reasonable and necessary for Medicare beneficiaries in facilities that are Medicare-approved for kidney transplantation. In addition, patients must have a diagnosis of Type I diabetes mellitus. The complete NCD can be found at the following CMS Web site: http://www.cms.hhs.gov/mcd/

viewncd

[[Page 47239]]

.asp?ncd--id=260.3&ncd--version= 3&basket=ncd%3A260%2E3%3A3%3APancreas+Transplants.

Edit A in the MCE currently includes the following language and codes.

Procedure codes 52.80 (Pancreatic transplant, not otherwise specified) and 52.82 (Homotransplant of pancreas) are identified as non-covered procedures except for the following two conditions:

When either 52.80 or 52.82 are combined with the procedure code in Procedure list 2 and there is at least one principal or secondary diagnosis code present from both Diagnosis List 1 and Diagnosis List 2.

Procedure List 1:

Code 52.80

Code 52.82 Procedure List 2:

Code 55.69 Diagnosis List 1:

Codes 250.00 through 250.93

Diagnosis List 2:

Code 403.01

Code 403.11

Code 403.91

Code 404.02

Code 404.03

Code 404.12

Code 404.13

Code 404.92

Code 404.93

Codes 585.1 through 585.6

Code 585.9

Code V42.0

Code V43.89''

This technical correction was not included in the FY 2008 IPPS proposed rule because of the timing of the release of the NCD. However, we need to make a revision to Edit A in the MCE to conform to the changes in our national coverage of the pancreas alone (PA) procedure. This NCD was implemented on July 3, 2006, which prevented us from addressing the MCE edit in the FY 2007 IPPS final rule. However, because the MCE changes for FY 2007 are retroactive to April 26, 2006, both procedure codes 52.80 and 52.82 will still trigger a limited coverage edit when coverage criteria have been met. Therefore, we are removing Edit A in its entirety from the MCE. 7. Surgical Hierarchies

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, in cases involving multiple procedures, this result is sometimes 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.

For FY 2008, we did not propose any revisions of the surgical hierarchy for any MDC. In general, the MS DRGs that we proposed (and are adopting in this final rule with comment period) for use in FY 2008 and discussed in section II.D. of the preamble of this final rule with comment period follow the same hierarchical order as the CMS DRGs they are replacing, except for DRGs that were deleted and consolidated.

Comment: Two commenters supported no changes in the surgical hierarchy for FY 2008. However, one commenter stated that CMS should continue to revisit this issue on an annual basis.

Response: We will continue to conduct annual analysis of the surgical hierarchy in the MS-DRGs as we have with the CMS-DRGs and propose revisions when necessary. For FY 2008, there will no changes to the surgical hierarchy. 8. CC Exclusions List a. Background

As indicated earlier in the preamble of this final rule with comment period, under the IPPS DRG classification system, we have developed a standard list of diagnoses that are considered CCs. Historically, we developed this list using physician panels that classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or

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comorbidity. A substantial complication or comorbidity was defined as a condition that, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least 1 day in at least 75 percent of the patients. We refer readers to section II.D.2. and 3. of the preamble of this final rule with comment period for a discussion of the refinement of CCs in relation to the MS-DRGs we proposed and are adopting in this final rule with comment period for FY 2008. b. CC Exclusions List for FY 2008

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. As we indicated above, we developed a 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.

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:

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.\25\

\25\ See the FY 1989 final rule (53 FR 38485, September 30, 1988), for the revision made for the discharges occurring in FY 1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, September 1, 1995), for the FY 1996 revisions; the FY 1997 final rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, August 12, 2005), for the FY 2006 revisions; and the FY 2007 final rule (71 FR 47870) for the FY 2007 revisions. In the FY 2000 final rule (64 FR 41490, July 30, 1999, we did not modify the CC Exclusions List because we did not make any changes to the ICD-9-CM codes for FY 2000.

For FY 2008, as we proposed, we are making limited revisions to the CC Exclusions List to take into account the changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2007. (See section II.G.10. of the preamble of this final rule with comment period for a discussion of ICD-9-CM changes.) We are making these changes in accordance with the principles established when we created the CC Exclusions List in 1987. In addition, as discussed in section II.D.3. of the preamble of this final rule with comment period, we are indicating on the CC exclusion list some updates to reflect the exclusion of a few codes from being an MCC under the MS-DRG system that we are adopting for FY 2008.

Tables 6G and 6H, Additions to and Deletions from the CC Exclusion List, respectively, which are included in the Addendum to this final rule with comment period, will be effective for discharges occurring on or after October 1, 2007. Each of these principal diagnoses for which there is a CC exclusion is shown with an asterisk, and the conditions that will not count as a CC are provided in an indented column immediately following the affected principal diagnosis.

A complete updated MCC, CC, and Non-CC Exclusions List is available through the Internet on the CMS Web site at: http:/www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or after October 1,

2007, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

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 24.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 25.0 of this manual, which will include the final FY 2008 DRG changes, will be available in hard copy for $250.00. Version 25.0 of the manual is also available on a CD for $200.00; a combination hard copy and CD is available for $400.00. 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. 9. Review of Procedure Codes in CMS DRGs 468, 476, and 477

Each year, we review cases assigned to CMS DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these CMS DRGs. Under the MS-DRGs that we are adopting for FY 2008, discussed in section II.D. of the preamble of this final rule with comment period, CMS DRG 468 has a three-way split and becomes MS-DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 becomes proposed MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/ MCC). CMS DRG 477 becomes MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC).

MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly CMS DRGs 468, 476, and 477, respectively) are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These CMS DRGs are

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intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. MS-DRGs 984 through 986 (previously CMS DRG 476) are 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 MS-DRGs 981 through 983 and 987 through 989 (previously CMS DRGs 468 and 477), with MS-DRGs 987 through 989 (previously CMS DRG 477) assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis.\26\

\26\ 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 FY 1989 final rule (53 FR 38591). As part of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), and the FY 1998 final rule (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 final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule (67 FR 49999) we did not move any procedures from DRG 477. However, we did move procedure codes from DRG 468 and placed them in more clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), we moved several procedures from DRG 468 to DRGs 476 and 477 because the procedures are nonextensive. In the FY 2005 final rule (69 FR 48950), we moved one procedure from DRG 468 to 477. In addition, we added several existing procedures to DRGs 476 and 477. In the FY 2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and assigned it to DRGs 479, 553, and 554.

In the FY 2008 IPPS proposed rule, we did not propose to change the procedures assigned among these DRGs. We did not receive any public comments on this subject. Therefore, for FY 2008, we are not changing the procedures assigned among these DRGs. a. Moving Procedure Codes From CMS DRG 468 (MS-DRGs 981 Through 983) or CMS DRG 477 (MS-DRGs 987 through 989) to MDCs

We annually conduct a review of procedures producing assignment to CMS DRG 468 (MS-DRGs 981 through 983 in this final rule with comment period) or CMS DRG 477 (MS-DRGs 987 through 989 in this final rule with comment period) 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 in 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. In the FY 2008 IPPS proposed rule, we did not propose to remove any procedures from CMS DRG 468 (MS-DRGs 981 through 983 in this final rule with comment period) or CMS DRG 477 (MS-DRGs 987 through 989). We did not receive any public comments on this subject. Therefore, based on this year's review, we are not removing any procedures from these DRGs. b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 (MS-DRGs 981 through 983, 984 through 986, and 987 through 989)

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to CMS DRGs 468, 476, and 477 (MS-DRGs 981 through 983, 984 through 986, and 987 through 989, respectively, in this final rule with comment period), to ascertain whether 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.

We did not propose to move any procedure codes among these DRGs. We did not receive any public comments on this subject. Therefore, we are not moving any procedure codes from CMS DRG 476 (MS-DRGs 984, 985, and 986 in this final rule with comment period) to CMS DRG 468 (MS-DRGs 981, 982, and 983 in this final rule with comment period) or to CMS DRG 477 (MS-DRGs 987, 988, and 989 in this final rule with comment period), or from CMS DRG 477 (MS-DRGs 987, 988, and 989 in this final rule with comment period) to CMS DRGs 468 (MS-DRGs 981, 982, and 983 in this final rule with comment period) or to CMS DRG 476 (MS-DRGs 984, 985, and 986 in this final rule with comment period) for FY 2008. c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, as we proposed, we are not adding any diagnosis codes to MDCs for FY 2008. We did not receive any public comments on this subject. 10. Changes to the ICD-9-CM Coding System

As described in section II.B.1. of the preamble of this final rule with comment period, the ICD-9-CM is a coding system 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), the Centers for Disease Control and Prevention, 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

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standardizing coding applications and upgrading the quality of the classification system.

The Official Version of the ICD-9-CM contains the list of valid diagnosis and procedure codes. (The Official Version of the ICD-9-CM is available from the Government Printing Office on CD-ROM for $25.00 by calling (202) 512-1800.) The Official Version of the ICD-9-CM is no longer available in printed manual form from the Federal Government; it is only available on CD-ROM. Users who need a paper version are referred to one of the many products available from publishing houses.

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, 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 2008 at a public meeting held on September 28-29, 2006, and finalized the coding changes after consideration of comments received at the meetings and in writing by December 4, 2006. Those coding changes are announced in Tables 6A through 6F in the Addendum to this proposed rule. The Committee held its 2007 meeting on March 22-23, 2007. Proposed new codes for which there was a consensus of public support and for which complete tabular and indexing changes can be made by May 2007 will be included in the October 1, 2007 update to ICD-9-CM. Code revisions that were discussed at the March 22-23, 2007 Committee meeting could not be finalized in time to include them in the Addendum to the proposed rule. These additional codes are included in Tables 6A through 6F of this final rule with comment period and are marked with an asterisk (*).

Copies of the minutes of the procedure codes discussions at the Committee's September 28-29, 2006 meeting can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the

September 28-29, 2006 meeting 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. These Web sites also provide detailed information about the Committee, including information on requesting a new code, attending a Committee meeting, and timeline requirements and meeting dates.

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 2402, 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.brooks2@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2007. 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 final rule with comment period. 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 the FY 2008 IPPS proposed rule, we only solicited comments on the proposed classification of these new codes.

Comment: One commenter expressed concern that the 2-month timeframe between adoption of new ICD-9-CM codes and the effective date of new codes creates a disadvantage for the coding community because updating of facility-specific and industry information, such as education/ training materials and code books, is based on the final codes. The commenter noted that ICD-9-CM code changes discussed at the March 22- 23, 2007 ICD-9-CM Coordination and Maintenance Committee meeting were not listed in the FY 2008 IPPS proposed rule, so the coding community has 2 months, rather than 5 months, to update its coding products. The commenter recommended that CMS consider implementation of codes discussed at the spring meeting in April of the following year, rather than forcing the new codes into the October release.

Response: We are sympathetic to the commenter's concern that the short timeframe between adoption of new codes and the effective date of new codes may make it challenging to update coding products. However, this short time period has proven to be invaluable for collecting MedPAR data on new technologies as soon as possible. Therefore, we will continue our current process of attempting to expedite the creation of new ICD-9-CM codes.

For codes that have been replaced by new or expanded codes, and 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, 2007. Table 6D contains invalid procedure codes. These invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2007. 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 2008.

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 Spring meeting as part of the code revisions effective the following October. As stated previously, ICD -9-CM codes discussed at the March 22-23, 2007 Committee meeting that received consensus and that were finalized by May 2007, are included in Tables 6A through 6F of the Addendum to this final rule with comment period.

Section 503(a) of Pub. L. 108-173 included a requirement for updating ICD-9-CM codes twice a year instead of a single update on October 1 of each

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year. This requirement was 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 clause (vii) which states that the ``Secretary shall provide for the addition of new diagnosis and procedure codes on 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.'' This requirement improves the recognition of new technologies under the IPPS system by providing information on these new technologies at an earlier date. Data will be available 6 months earlier than would be possible with updates occurring only once a year on October 1.

While section 1886(d)(5)(K)(vii) of the Act states that the addition of new diagnosis and procedure codes on April 1 of each year shall not require the Secretary to adjust the payment, or DRG classification, under section 1886(d) of the Act until the fiscal year that begins after such date, we have to update the DRG software and other systems in order to recognize and accept the new codes. We also publicize the code changes and the need for a mid year systems update by providers to identify the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to identify and report the new codes.

The ICD-9-CM Coordination and Maintenance Committee holds its meetings in the spring and fall 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. 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, is published on the CMS and NCHS Web sites in May of each year. Publishers of coding books and software 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, 2005 ICD-9-CM Coordination and Maintenance Committee minutes. The public agreed that there was a need to hold the fall meetings earlier, in September or October, in order to meet the new implementation dates. 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 April update would have on providers.

In the FY 2005 IPPS final rule, we implemented section 1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Pub. L. 108-173, by developing a mechanism for approving, in time for the April update, diagnosis and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We also established the following process for making these determinations. Topics considered during the Fall ICD-9-CM Coordination and Maintenance Committee meeting are considered for an April 1 update if a strong and convincing case is made by the requester 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 are provided the opportunity to comment on this expedited request. All other topics are considered for the October 1 update. Participants at the Committee meeting are encouraged to comment on all such requests. There were no requests for an expedited April l, 2007 implementation of an ICD-9-CM code at the September 28-29, 2006 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2007.

We believe that this process captures the intent of section 1886(d)(5)(K)(vii) of the Act. 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 will identify 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.

Current addendum and code title information is published on the CMS Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along

with the Official ICD-9-CM Coding Guidelines, can be found on the Web site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and

deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors.

CMS also sends copies of all ICD-9-CM coding changes to its contractors for use in updating their systems and providing education to providers.

These same means of disseminating information on new, revised, and deleted ICD-9-CM codes will be used to notify providers, publishers, software vendors, contractors, and others of any changes to the ICD-9- CM codes that are implemented in April. The code titles are adopted as part of the ICD-9-CM Coordination and Maintenance Committee process. Thus, although we publish the code titles in the IPPS proposed and final rules, they are not subject to comment in the proposed or final rules. We will continue to publish the October code updates in this manner within the IPPS proposed and final rules. For codes that are implemented in April, we will assign the new procedure code to the same DRG in which its predecessor code was assigned so there will be no DRG impact as far as DRG assignment. Any midyear coding updates will be available through the Web sites indicated above and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. We will strive to have the April 1 updates available through these Web sites 5 months prior to implementation (that is, early November of the previous year), as is the case for the October 1 updates. 11. Other DRG Issues Addressed in the FY 2008 IPPS Proposed Rule a. Seizures and Headaches

After publication of the FY 2007 IPPS final rule (71 FR 47928), we received correspondence expressing concerns about the revisions we made to the seizure and headache DRGs effective on October 1, 2006. We created new DRGs

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562 (Seizure Age > 17 With CC), DRG 563 (Seizure Age > 17 Without CC), and DRG 564 (Headaches Age > 17) as an interim step to better recognize severity of illness among seizure and headache patients for FY 2007. Although national Medicare utilization data supported the revised DRGs, the commenter indicated that the change did not appropriately recognize hospital resources associated with the patients treated in the hospital's inpatient headache program. The commenter stated that patients who are admitted to the hospital's inpatient headache program suffer from chronic headache pain and require inpatient treatment that can last up to 12 days. The commenter noted that these patients are referred from around the country after several months of unsuccessful pain relief and treatment. The commenter indicated that the majority of patients treated at the hospital's inpatient headache program are drug dependent from being administered increasing dosages of pain relievers that have been unsuccessful in resolving chronic headache pain. Further, the commenter noted that the patients require detoxification before any headache treatment begins. The commenter urged CMS to subdivide the headache DRG to better recognize the higher level of severity associated with treating chronic headache patients in the hospital's program.

Although we are sympathetic to the commenter, it is not feasible to design a DRG system that addresses concerns that may be unique to one facility. Other than this one commenter, we did not receive any concern about our decision to create separate DRGs for seizures and headaches. However, we agreed to review this issue as part of our effort to redesign the DRG system to better recognize severity of illness for FY 2008.

As discussed in section II.C. of the preamble of this final rule with comment period, we are adopting MS-DRGs for FY 2008. While the CMS DRG structure did not support splitting the headache DRG based on the presence or absence of a CC, the MS-DRGs support the creation of a split for the headache DRGs based on whether the patient has a MCC as shown below:

Average MS-DRG

Number of length of Average cases

stay charges

MS-DRG 102 (Headaches with MCC)..

1,268

5.04 $19,077 MS-DRG 103 (Headaches without

14,277

3.22 11,989 MCC)............................

(The criteria for determining whether to subdivide a DRG are described in detail earlier in section II.D. of the preamble of this final rule with comment period.) Thus, we proposed to create two MS- DRGs for headaches under the MS-DRGs as shown below:

MS-DRG 102 (Headaches with MCC).

MS-DRG 103 (Headaches without MCC).

We believe this proposed structure would better recognize those headache patients who are severely ill and require more resources as described by the commenter. We refer the readers to section II.D. of the preamble of this final rule with comment period for a detailed discussion of the MS-DRGs.

Comment: Three commenters supported a DRG system that accounts for the severity of illness, intensity of service, and differences in the cost of care in treating headache patients. They strongly support CMS' proposal to revise its current headache classification, CMS DRG 564 (Headaches Age > 17), that was effective as of October 1, 2006 (FY 2007). One of the commenters stated that CMS DRG 564 does not adequately classify headache cases based on the presence or absence of complicating conditions and assumes a relatively short length of stay, resulting in inadequate payments to cover the costs of treating severely complex chronic headache patients that are referred to specialized treatment centers such as theirs. The commenters also agreed with the use of secondary diagnoses to improve payments and better account for severity within a DRG that is defined by the diagnosis of headache. However, the commenters indicated that certain secondary diagnoses related to medication overuse and dependency are not considered MCCs for headache cases. According to one of the commenters, the common secondary diagnosis codes used for patients with medication overuse and dependency are identified by the following ICD- 9-CM codes (a fifth digit representing the drug dependence as unspecified (0), continuous (1), episodic (2), or in remission (3) would be applied according to the physician documentation):

304.0x, Opioid type dependence.

304.1x, Sedative, hypnotic or anxiolytic dependence.

304.2x, Cocaine dependence.

304.3x, Cannabis dependence.

304.4x, Amphetamine and other psychostimulant dependence.

304.5x, Hallucinogen dependence.

304.6x, Other specified drug dependence.

304.7x, Combinations of opioid type drug with any other.

304.8x, Combinations of drug dependence excluding opioid type drug.

304.9x, Unspecified drug dependence.

The commenters recognize that most of the above listed conditions were included on the proposed CC list; however, none of them were included on the proposed MCC list. Therefore, the majority of patients treated in the commenter's specialized headache program will not qualify to be assigned to proposed MS-DRG 102 (Headache with MCC) and will be paid using proposed MS-DRG 103 (Headache without MCC)--the lower severity level. The commenter further noted that, in contrast to patients who primarily exhibit substance abuse, the headache patient does not primarily exhibit addictive disease, but is a desperate individual who takes increasing amounts of medication to control pain that has not successfully been controlled. In addition, the patient experiences withdrawal phenomena (sweating, shaking, crawling skin, sleeplessness, changes to blood pressure and pulse) as he or she attempts to reduce the drugs at the recommendation of the physician. The commenter noted that a chronic headache patient with a narcotics addiction is more costly to treat because, to ensure a successful treatment outcome, the patient must be effectively withdrawn from the offending medication, while simultaneously addressing the escalating pain and controlling it which requires inpatient hospitalization that can last up to 2 weeks.

Another commenter suggested that according to the MCCs identified, there appeared to be a significant variance in cost for headache patients whose stay involved an additional two days. This commenter encouraged CMS to examine the creation of a CC split under the current CMS DRG classification if the adoption of the MS-DRG system does not take place. The commenter stated the determination should consider whether the MCCs used in the MS-DRG

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analysis are on the current CMS DRG CC list.

One of the commenters provided several suggestions for how the proposed MS-DRG classification could more accurately identify case complexity for inpatient headache cases. The suggestions are described below.

1. Include the ICD-9-CM codes (304.00-304.93) on the list of MCCs. These conditions are true indicators of case complexity and patients with these complications should be paid at the higher severity level if there are only these two adult headache DRGs.

2. If the above suggestion of moving those codes to the MCC list has unintended consequences for a large number of the other (non- headache) DRGs, another approach would be to add a modifier to the CC list recognizing these codes as MCCs for cases in which the principal diagnosis is headache.

3. Add a third headache MS-DRG specifically for the opioid and other medication overuse codes.

The commenter indicated a preference for the third option stating that based on the data available and medical judgment, this MS-DRG would be the most clinically appropriate method to better recognize severity among headache cases. In addition, the commenter noted it is most consistent with efforts already underway in the ICD-10 classification system to identify medication overuse in patients with a principal diagnosis of headache, although ICD-10 is not yet available.

Response: We appreciate the commenter's support of the proposed MS- DRG classification system to better recognize severity of illness, intensity of service, and differences in the cost of care in treating headache patients. The commenters are correct that the drug dependency diagnosis codes (304.0x-304.9x) are not considered MCCs in the proposed MS-DRG system. As we discussed in the proposed rule (72 FR 24702), we categorized diagnoses as MCCs, CCs, and non-CC based on an iterative approach in which each diagnosis was evaluated to determine the extent to which its presence as a secondary diagnosis resulted in increased hospital resources.

We examined the MedPAR data for headache patients with drug dependency (codes 304.00-304.93). Our medical advisors also analyzed clinical issues surrounding patients who have these codes reported as a secondary diagnosis. After evaluation of the data and clinical issues, our medical advisors recommend that we not change the CC status for the drug dependency codes. Our analysis demonstrated approximately 254 cases in MS DRG 103 with an average length of stay of 4.9 days and average charges approximately $2,500 higher than without drug dependency. There were 25 cases in MS DRG 102 with an average length of stay of 7 days and average charges approximately $5,000 higher than all cases in MS-DRG 102. The results are shown in the table below.

Headaches

Average DRG

Number of length of Average cases

stay charges

MS-DRG 102 with MCC--All cases...

1,268

5.04 $19,077 MS-DRG 102 with MCC--With

25

7 24,061 secondary diagnosis of drug dependency codes 304.00-304.93.. MS-DRG 103 without MCC--all cases 14,277

3.22 11,989 MS-DRG 103 with MCC--With

254

4.9 14,447 secondary diagnosis of drug dependency codes 304.00-304.93..

The process used to subdivide a MS-DRG into severity levels based upon the presence of a CC or MCC included five criteria. All five criteria had to be met to satisfy the requirement of creating severity levels. We refer readers to section II.D.3. of the preamble to this final rule with comment period for a complete discussion of these criteria.

In studying the data for headaches, the number of cases that include secondary diagnoses of drug dependency does not meet the minimum requirement of 500 cases to create another subdivision. Therefore, only the ``with MCC'' and ``without MCC'' severity levels were established and proposed for headache cases.

We agree with the commenter that headache patients who suffer from medication overuse are not identical to substance abuse patients. However, if a headache patient presents to the hospital with withdrawal phenomena and it is the drug withdrawal symptoms that require attention and resolution prior to directing treatment towards the headache symptoms, the reason for the patient's admission (or principal diagnosis) appears to be the drug withdrawal. The Official ICD-9-CM Guidelines for Coding and Reporting instruct that the principal diagnosis is defined in the Uniform Hospital Discharge Data Set (UHDDS) as ``that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.'' Therefore, these headache patients are being admitted to address their drug dependency and drug withdrawal before any headache treatment can begin.

As discussed above, at this time, analysis of the data does not support assigning the drug dependency codes as MCCs. Secondly, there is not justification to warrant adding modifiers to the drug dependency codes that are currently on the CC list to consider those diagnoses as MCCs for headache cases only. (Further, modifiers are not used in ICD- 9-CM.) Lastly, the data does not support subdividing the proposed MS- DRGs for headaches into another severity level.

In this FY 2008 final rule, we are adopting the MS-DRGs. Therefore, effective October 1, 2007, the MS-DRGs for headache cases will be as follows:

MS-DRG 102 (Headaches with MCC)

MS-DRG 103 (Headaches without MCC).

Comment: One commenter applauded CMS for the changes in the DRG structure to better recognize differences in patient severity. This commenter recommended further refinements to proposed MS-DRG 100 (Seizures with MCC) and MS-DRG 101 (Seizures without MCC). According to the commenter, most Medicare patients who are assigned to the seizure DRGs are admitted to receive acute treatment that is typically provided in the general medical setting. Alternatively, the commenter stated that patients who suffer from uncontrolled seizures or intractable epilepsy are admitted to an epilepsy center for a comprehensive evaluation to identify the epilepsy seizure type, the cause of the seizure, and the location of the seizure. The commenter added that these patients are admitted to the hospital for 4 to 6 days with 24- hour monitoring that includes the use of EEG video monitoring along with cognitive testing and brain imaging procedures. The commenter noted that

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patients treated in an epilepsy center receive highly technical care that is comparable to the care received in a hospital's intensive care unit, and these patients are more costly to treat.

With the assistance of an outside reviewer, the commenter analyzed cost data for proposed MS-DRGs 100 and 101, which focused on a target group of patients identified with a diagnosis of epilepsy (diagnosis codes 345.0 through 345.9) or convulsions (diagnosis code 780.39) and the presence of EEG video monitoring (vEEG) (procedure code 89.10) or a Wada test (procedure code 89.19). The commenter stated that the patients identified with those codes are treated in specialized epilepsy centers. The commenter recommended that CMS further refine proposed MS-DRGs 100 and 101 by subdividing cases with the combination of a diagnosis of epilepsy and one of the diagnostic tests performed into separate DRGs defined as follows:

MS-DRG XXX (Epilepsy Evaluation with MCC)

MS-DRG XXX (Epilepsy Evaluation without MCC)

The commenter acknowledged that the target group of cases constitutes a small portion of the total cases found in MS-DRGs 100 and 101. However, the commenter noted that the diagnostic procedures described above (codes 89.10 and 89.19) are performed by a small minority of hospitals in the United States. The commenter believed that the recommendation to refine these DRGs would result in a minimal impact on other hospitals, while substantially improving the accuracy of payment to those hospitals specializing in epilepsy treatment.

Response: We appreciate the commenter's support of our efforts to better recognize severity in the DRG system and its recommendation to further refine the proposed seizure DRGs. Epilepsy is currently identified by ICD-9-CM diagnosis codes 345.0x through 345.9x. There are two fifth-digits that may be assigned to a subset of the epilepsy codes, depending on the physician documentation:

0--without mention of intractable epilepsy.

1--with intractable epilepsy.

According to the commenter, the specialized epilepsy centers focus on treating patients who suffer from intractable epilepsy. The data that the commenter reviewed included the range of epilepsy codes (345.0 through 345.9), the code for convulsions (780.39) and the codes for the diagnostic tests (89.10 and 89.19). The data that were submitted by the commenter did not clearly identify the specific epilepsy codes reviewed or the combination of the diagnostic procedures performed along with specified epilepsy codes. It was also unclear what secondary codes were reviewed in the analysis. As a result, we were unable to conduct our own analysis to evaluate the commenter's recommendation. In addition, we do not believe that we should make further changes to the MS-DRG assignments based on combinations of selected diagnoses. These types of analyses could be done with virtually any MS-DRG and would add significant complexity to the DRG system that we do not believe is warranted at this time. We encourage the commenter to provide the specific codes used in its analysis so we can examine this issue as we continue to make further refinements to the DRGs for FY 2009.

We also note that the topic of epilepsy has been discussed over the last couple of years at the ICD-9-CM Coordination and Maintenance Committee meetings due to confusion with physician documentation and the implications of coding a patient as having a one-time seizure versus ``labeling'' the patient as having the diagnosis of epilepsy. It is unclear if the data identifying these conditions are accurate and reliable as a result of this confusion.

In conclusion, as final policy for FY 2008, effective October 1, 2007, the following seizure DRGs are adopted as proposed:

MS-DRG 100 (Seizures with MCC).

MS-DRG 101 (Seizures without MCC). b. Devices That Are Replaced Without Cost or Where Credit for a Replaced Device Is Furnished to the Hospital (1) Background

We addressed the topic of Medicare payment for devices that are replaced without costs or where credit for a replaced device is furnished to the hospital in the FY 2007 IPPS final rule (71 FR 47962). In that final rule, we included the following background information:

In recent years, there have been several field actions and recalls with regard to failure of implantable cardiac defibrillators (ICDs) and pacemakers. In many of these cases, the manufacturers have offered replacement devices without cost to the hospital or credit for the device being replaced if the patient required a more expensive device. In some circumstances, manufacturers have also offered, through a warranty package, to pay specified amounts for unreimbursed expenses to persons who had replacement devices implanted. Nonetheless, we believe that incidental device failures that are covered by manufacturer warranties occur routinely. While we understand that some device malfunctions may be inevitable as medical technology grows increasingly sophisticated, we believe that early recognition of problems would reduce the number of people who would be potentially adversely affected by these device problems. The medical community needs heightened and early awareness of patterns of device failures, voluntary field actions, and recalls so that it can take appropriate corrective action to care for patients. Systematic efforts must be undertaken by all interested and involved parties, including manufacturers, insurers, and the medical community, to ensure that device problems are recognized, and are addressed as early as possible so that patients' quality of health care is protected and high quality medical care, equipment, and technologies are provided. We are taking several steps to assist in the early recognition and analysis of patterns of device problems to minimize the potential for harm from device related defects to Medicare beneficiaries and the public in general.

In recent years, CMS has recognized the importance of data collection as a condition of Medicare coverage for selected services. In 2005, we issued an NCD that expanded coverage of ICDs and also required registry participation when the devices were implanted for certain clinical indications. The NCD included this requirement in order to ensure that the medical care received by Medicare beneficiaries was reasonable and necessary and, therefore, that the provider or supplier would be appropriately paid. Presently, the American College of Cardiology [mu] National Cardiovascular Data Registry (ACC NCDR) collects these data and maintains the registry.

In addition to ensuring appropriate payment of claims, collection, and ongoing analysis of ICD implantation, registry data can facilitate public response to the quality of health care issues in the event of future device recalls. Analysis of registry data may uncover patterns of device malfunction, device related infection, or early battery depletion that would trigger a more specific investigation. Patterns found in registry data may identify problems in patient outcomes earlier than the currently available mechanisms, which do not systematically collect detailed information about each patient who receives an ICD.

We encourage the medical community to work to develop additional registries

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for implantable devices, so that timely and comprehensive information is available regarding devices, recipients of those devices, and patients' quality of health care status and medical outcomes. While participation in an ICD registry is required as a Medicare condition of coverage for ICD implantation for certain clinical conditions, we believe that the potential benefits of other data collection extend well beyond their application in Medicare's specific NCDs. As medical technology continues to advance swiftly, data collection regarding the short term and long term medical outcomes of new technologies, especially concerning implanted devices that may remain in the bodies of patients for their lifetimes, will be essential to the timely recognition of any specific device related problems, patterns of complications, and health-related outcomes. This information will facilitate early interventions to mitigate any harm potentially imposed upon Medicare beneficiaries and the public, and to improve the quality and efficiency of health care services provided.

Moreover, published data from registries may further help the development of high quality, evidence based clinical practice guidelines for the care of patients who may receive device implants. In turn, widespread use of evidence based guidelines may reduce variation in medical practice, leading to improved personal care and overall public health. Registry information may also contribute to the development of more comprehensive and refined quality metrics that may be used to systematically assess the collected data, and then improve the safety and quality of health care provided to Medicare beneficiaries. Such improvements in the quality of care that result in better personal health will require the sustained commitment of industry, payers, health care providers, and others to progressively work towards that goal, and to ensure excellent and open communication and rapid system wide responses.

One strategy for this data collection involves adding information to the claims forms. CMS has a long history of collecting hemoglobin or hematocrit data from ESRD patients on the claims form. Modification of claims forms was necessary to do that. CMS is exploring the use of claims data to collect other types of clinical or technical data such as device manufacturer and model number. The systematic recording of model numbers can enhance knowledge of device-related outcomes and complications. We look forward to further discussions with the public about new strategies to both recognize device related problems early as well as recognize health-related outcomes of new technologies.

In addition, we believe that the routine identification of Medicare claims for certain device implantation procedures in situations where a payment adjustment is appropriate may enhance the medical community's recognition of device related problems, potentially leading to more timely improvements in medical device technologies. This systematic approach, which enables hospitals to identify and then appropriately report selected services when devices are replaced without cost to the hospital, or with full or partial credit to the hospital for the cost of the replaced device, should provide comprehensive information regarding the hospitals' experiences with Medicare beneficiaries who have specific medical devices that are being replaced. Because Medicare beneficiaries are common recipients of implanted devices, the claims information may be particularly helpful in identifying patterns of device related problems early in their natural history, so that appropriate strategies to reduce future problems may be developed. One possible strategy would be for the Medicare program to use information obtained through the use of bar coding of medical devices. The FDA issued a final rule in the Federal Register on February 26, 2004 (69 FR 9119), that required bar codes for human drugs and biological product labels effective April 26, 2006. In the final rule, FDA deferred action on requiring bar codes for medical devices, noting the difficulty in standardizing medical devices, as compared to drugs and biologicals, which have the unique NDC numbering system. This rule can be reviewed on the Federal Register's Web site at: http://www.docket.access.gpo.gov/2004/04-4249.htm .

We intend to monitor FDA's work in this area to determine how this technology could help CMS promote higher quality through better clinical decision making and, as discussed below, assist in improving the accuracy of the Medicare payment system.

In addition to our concern for overall public health, we also have a fiduciary responsibility to the Medicare Trust Fund to ensure that Medicare pays only for covered services. Therefore, in the FY 2007 IPPS final rule, we indicated that we believe we need to consider whether it is appropriate to reduce the Medicare payment in cases in which an implanted device is replaced at reduced or no cost to the hospital or with partial or full credit for the removed device. Such consideration could cover certain devices for which credit for the replaced medical device is given, or medical devices that are replaced as a result of or pursuant to a warranty, field action, voluntary recall, or involuntary recall, and medical devices that are provided free of charge. We indicated that conveying this information to the Medicare beneficiary could provide for a reduction in the IPPS payment if we determine that the device is replaced without cost to the provider or beneficiary or when the provider receives full credit for the cost of a replaced device.

In FY 2007 IPPS final rule, we indicated a need to develop a methodology to determine the amount of the reduction to the otherwise payable IPPS payment for medical devices furnished to Medicare beneficiaries. We believe that this policy is appropriate because, in these cases, the full cost of the replaced device is not incurred and, therefore, an adjustment to the payment is necessary to remove the cost of the device. (2) Current and Proposed Policies

In the CY 2007 OPPS final rule (71 FR 68071 through 68077), we adopted a policy that requires a reduced payment to a hospital or ambulatory surgical center when a device is provided to them at no cost. From our experience with the OPPS, we understand that a manufacturer will often provide a credit or partial credit for the recalled device rather than a free replacement. In other situations, a manufacturer will provide either a full or partial credit for a device that needs to be replaced only during the manufacturer's warranty period. In either of these situations, the original implantation of the device was paid for either by Medicare, another third party on behalf of the beneficiary by making payment directly to the hospital, or the implantation was paid for directly by the beneficiary. Therefore, we believe that Medicare should not pay the hospital for the full cost of the replacement if the hospital is receiving a partial or full credit, either due to a recall or service during the warranty period. The device was already paid for at the time of initial implantation, and Medicare should retain the credit that is being provided to the hospital for service to a Medicare beneficiary.

Moreover, we also believe that a proposed adjustment is consistent with section 1862(a)(2) of the Act, which excludes from Medicare coverage an item or service for which neither the beneficiary, nor anyone on his or her behalf, has an obligation to pay.

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Payment of the full IPPS payment amount in cases in which the device was replaced under warranty or in which there was a full or partial credit for the price of the recalled or failed device effectively results in Medicare payment for a noncovered item. Therefore, in the FY 2008 IPPS proposed rule, we proposed to adjust the IPPS payment amount in these circumstances under the authority of section 1886(d)(5)(I) of the Act, which permits the Secretary to make ``exceptions and adjustments to such payment amounts * * * as the Secretary deems appropriate.''

Under the OPPS, we currently only apply the reduced payment amount in situations where the hospital received a replacement device at no cost or at full credit for the replacement device. Unlike the current OPPS policy, we proposed for purposes of the IPPS to apply the policy for partial as well as full credit for a replacement device. As we indicated above, our experience with the OPPS suggests that the policy should be applied beyond full replacement of a recalled device. We proposed to reduce the amount of the Medicare IPPS payment when a full or partial credit towards a replacement device is made or the device is replaced without cost to the hospital or with full credit for the removed device. However, we do not believe that the IPPS policy should apply to all DRGs and all situations in which a device is replaced without cost to the hospital for the device or with full or partial credit for the removed device. We recognize that, in many cases, the cost of the device is a relatively modest part of the IPPS payment. In other situations, we believe the amount of the credit will also be nominal. In these cases, we believe that the averaging nature of payments under the IPPS would incorporate any significant savings from a warranty replacement, field action, or recall into the payment rate for the associated DRG, and that no specific adjustment would be necessary or appropriate. For this reason, we proposed to apply the policy only to those DRGs under the IPPS where the implantation of the device determines the base DRG assignment and situations where the hospital received a credit equal to 20 percent or more of the cost of the device. We believe a credit that is equal to or more than this percentage is substantial, and Medicare should not pay for the full cost of these replacement devices because hospitals have received significant savings from the manufacturer for its replacement costs. In the proposed rule, we sought comment on the application of this percentage amount. We further believe that it is appropriate to limit application of the policy only to those DRGs where implantation of the device determines the DRG assignment. In making a decision to assign a case based on whether a device was implanted, we recognized that the device cost was a significant portion of the overall costs faced by the hospital that treats the case. Therefore, we believe that Medicare should not make full payment for those DRGs where the assignment of the case is made based on implantation of the device when the hospital is receiving either a full or significant partial credit for the device. In the proposed rule, we included a listing of the CMS DRGs (including the proposed new MS-DRG title) that would be subject to this policy.

CMS has requested and received new condition codes from the National Uniform Billing Committee (NUBC) to describe claims where a provider has received a device or product without cost. We will use these condition codes to reduce payment when the hospital used a device for which full or partial credit is given, or the item was replaced as a result of or under a warranty, field action, voluntary recall, involuntary recall, or otherwise provided free of charge. On November 4, 2005, we issued Change Request 4058, Transmittal 741, in the Medicare Claims Processing Manual. The effective date of this transmittal was April 1, 2006, and the implementation date was April 3, 2006. This transmittal specifies that the following two new condition codes have been created. They are defined below:

Condition Code 49--Product Replacement within Product Lifecycle. Replacement of a product earlier than the anticipated lifecycle due to an indication that the product is not functioning properly.

Condition Code 50--Product Replacement for Known Recall of a Product. The manufacturer or the FDA has identified the product for recall and therefore replacement.

This transmittal can be accessed at the following Web site: http://www.cms.hhs.gov/Transmittals/downloads/R741CP.pdf .

Hospitals must report these codes on any claim for IPPS services that includes a replacement device or product for which they received full or partial credit. Hospital billing offices would report one of these condition codes in addition to the specific code for the type of procedure performed (for example, replacement of a defibrillator). We proposed to require the hospital to provide invoices or other information indicating its normal cost of the device and the amount of the credit it received.

Under our policy, the fiscal intermediary (or, if applicable, the MAC) would process claims involving DRGs that are subject to this policy that include a device that is replaced without cost to the hospital for the device or with full or partial credit for the removed device as identified by condition codes 49 or 50. For a device provided to the hospital without cost, the fiscal intermediary (or, if applicable, the MAC) would subtract the cost of the device from the DRG payment. For a device for which the hospital received a full or partial credit, the fiscal intermediary (or, if applicable, the MAC) would subtract the amount credited from the DRG payment. CMS will issue specific claims processing instructions to Medicare contractors and hospitals on implementing this policy. We proposed to require the hospital to provide invoices or other information indicating the cost of the device and the amount of credit it received. In the proposed rule, we sought comment on the best approach to making this payment adjustment and what types of documentation hospitals should provide to the fiscal intermediary or MAC.

We proposed to invoke our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act to make this adjustment. The special exceptions and adjustment authority authorizes us to provide ``for such other exceptions and adjustments to [IPPS] payment amountsm * * * as the Secretary deems appropriate.'' We believe it would be appropriate to adjust payments for surgical procedures to replace certain devices by providing payments to hospitals only for the non-device-related procedural costs when such a device is replaced without cost to the hospital for the device or with full credit for the removed device.

Comment: Many commenters addressed this proposal. Some commenters suggested that CMS rescind the implementation of the proposed policy. Other commenters supported ``the goal of accurate payment for services provided and * * * the concept of a payment offset for devices that are replaced without cost or where a credit is furnished to the hospital for a replaced device.'' However, most commenters also suggested that, if CMS were to implement the policy, CMS reconsider the process.

The commenters believed that blanket implementation of the proposal ignores the underlying concept of the DRG payment system. They stated that DRG payments are fundamentally based on averages of historical costs and charges.

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They added that to reduce the payment for cases involving replacement of a medical device assumes that either these types of cases have not occurred in the past or are occurring at such a dramatic increase as to materially skew the averages used to develop the DRG weights. The commenters reiterated that CMS has stated that we believe device failures that are covered by manufacturers' warranties occur routinely. The commenter noted that this statement acknowledges that incidental device failure has occurred in the past and was likely covered by the manufacturer warranty. The commenter stated that, if so, this practice is part of the historical cost and charge data used to develop the current DRG weights for cases involving implantation, and that reduction of payment of certain cases involving a reimplantation would ignore the average DRG weight for those cases that already implicitly include this reduction.

Another commenter suggested that CMS develop a proxy to the full cost of the device by using a percentage of the DRG, based on historical data because Medicare does not reimburse providers at full cost. One commenter recommended that, if adopted, CMS include in this policy that these claims will not be included in the calculation of relative weights, as this will reduce payment of services for procedures with non-replacement devices.

Several commenters suggested that CMS should consider raising the proposed threshold from 20 percent to greater than 50 percent of the cost of the device. Given the administrative burden of manually processing these claims, the commenters believed that it is not worth the burden on the hospitals' or fiscal intermediaries' part if only a nominal portion of the cost of the device is at issue. Commenters further suggested that if CMS implements this policy, estimated costs should be calculated from the charges on the claims and the DRG payment only reduced by the device cost if the payment is greater than the cost of the case less the cost of the device.

Several commenters cited the administrative burden that would result with implementation of this policy. One commenter stated that the proposal would result in significant operational burden and would essentially delay payment for otherwise clean claims. The commenter encouraged CMS to obtain invoice cost information from hospitals by having the hospitals report returned devices with a specific code similar to the use of HCPCS code C9399 (outpatient reporting for new drugs without HCPCS codes). The commenter indicated that hospitals are able to report the HCPCS code and the NCD number for drugs in the remarks section of the claim form in form locator field 84. The commenter believed a similar approach can be used in the inpatient setting when either Condition Code 49 or 50 is present on the claim. This would trigger the hospital to report the percentage of the device credit in the remarks field. The commenter suggested that this approach would provide CMS with the data it needs while eliminating the need for hard copy invoices, which will significantly reduce the hospital reporting burden. Another commenter suggested using a similar approach--applying an average adjustment based on the previous year's experience with credits to arrive at an aggregate method for making payment adjustments rather than a claim-by-claim approach.

Some commenters raised concerns about the use of condition code 49 with devices that are returned within the warranty period. These commenters explained that the time from explant of a device, receipt of the device by the manufacturer, subsequent device analysis and issuance of the warranty results can often be eight weeks or longer. According to the commenters, a hospital will be unaware during this time whether a full, partial, or even zero credit will be made. The commenter suggested that hospitals be either: (1) Allowed to submit the claims immediately without condition code 49 and submit a claim adjustment with condition code 49 at a later date once the credit determination is made; or (2) allow hospitals to hold the claim until a determination is made on the level of the credit. Another commenter who suggested that CMS adopt this approach raised a concern about ``unintended consequences.'' The commenter expressed a concern that hospitals may not return a nonworking device to avoid the payment offset resulting in the manufacturer being unable to identify defects that need to be corrected. This commenter suggested that ``discouraging device return from hospitals'' would be ``detrimental to industry efforts at identifying trends and improving the long-term reliability of current and future products.'' The commenter suggested that allowing hospitals to submit a bill without Condition Code 49 and later submitting an adjustment claim with the code could avoid discouraging hospitals from returning devices that are replaced.

Other commenters raised concerns about the nomenclature that is used to describe Condition Code 49. These commenters were concerned that Condition Code 49 describes ``replacement of a product earlier than the anticipated lifecycle due to an indication that the product is not functioning properly.'' One commenter was concerned that submitting a bill immediately with Condition Code 49 would indicate a premature determination that a device was replaced due to improper functioning. Like the commenter above, this commenter was concerned that the manufacturer may make a later determination that the device was functioning properly or the warranty period had expired and hospital will have already billed using Condition Code 49. Another commenter suggested that a device may be replaced during a warranty period even though it is functioning properly (for example, the patient depleted a battery prematurely because of higher than normal energy needs). In this case, the commenter was concerned that Condition Code 49 will label the replacement as being due to a malfunction when it actually results from higher than normal use but proper functioning of the device. The commenter suggested alternative nomenclature for Condition Code 49 that focuses on the product being replaced earlier than its anticipated lifecycle as a result of either a product malfunction or higher than normal use.

Finally, some commenters raised concerns about the use of invoices to determine the level of the reduction in Medicare's payment. One commenter indicated that credits are derived using the original and current contract prices for the device being explained and the product price for the replacement device. According to this commenter, manufacturers can provide hospitals with the credit dollar amount and the percentage the credit represents of the full cost of the device. Based on that information, hospitals will easily be able to determine whether they need to submit a claim with Condition Code 49 (that is, the credit is equal to or greater than the threshold reduction where the policy applies) and can furnish Medicare without the dollar amount of the credit that is due.

Response: We disagree with the commenters who suggested that our proposal assumes that either device recalls or replacements have not occurred in the past or are occurring at such a dramatic increase as to materially skew the averages used to develop the DRG weights. Our policy assumes that hospital charges include the full cost of the device. Although the relative weights are based on estimated costs, charges are an important element of the relative weight methodology. We apply hospital cost-to-charge ratios to hospital

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charges to determine the DRG relative weight. If hospitals have uniform charging practices for all cases irrespective of whether they receive a device at no cost or with a partial credit, the CCR will be applied to a hospital charge that does not reflect that the hospital did not pay the full cost of the device. Under these circumstances, we believe it is appropriate that Medicare's payment should recognize a hospital's reduced cost for a device that it receives either at no or a substantially reduced cost.

We agree with the commenters who suggested that the proposed threshold should be raised from 20 percent to 50 percent or greater of the cost of the device. The commenters have raised valid issues about potential administrative burden and delays that could occur when determining whether a device was replaced due to a malfunction or due to higher than normal use. We agree that the policy should not apply if only a nominal portion of the cost of the device is at issue.

With respect to the suggestion that the policy should only apply if Medicare's payment is greater than estimated costs of the case (less the device) calculated from the charges on the claims, we believe the policy we have adopted to recognize the lower costs of replaced devices that are either replaced at no cost or partial cost is reasonable. However, we may consider this idea in the future as we continue to make refinements to our policy for full or partial credit devices.

We understand the commenters' concerns about potential delays that could occur while a returned device is being evaluated during a warranty service period. Of the suggestions we received to address this concern, we agree that hospitals should have the options of either: (1) Submitting the claims immediately without Condition Code 49 and a claim adjustment with Condition Code 49 at a later date once the credit determination is made or (2) holding the claim until a determination is made on the level of the credit. We believe that giving hospitals these options would address the concern of the commenter that hospitals may not return a non-working device for a replacement. Further, these ideas would facilitate more efficient administration of the policy by allowing the hospital to be provided with all of the information it needs to be paid correctly by Medicare without the need to suspend claims or delay payment. However, hospitals should note that if choosing option 1 above, the rules for submitting adjustment claims still apply and can be found at: http://www.cms.hhs.gov/manuals/downloads/clm104c01.pdf , section 130.2.

The commenters raise a valid point concerning the nomenclature for Condition Code 49 that only describes device malfunctions when the policy may apply to other situations. We will bring the concerns of the commenter to the National Uniform Billing Committee (NUBC) for further consideration. The NUBC is a committee brought together by the American Hospital Association and includes the participation of all major national provider and payer organizations. Their major role is to maintain the integrity of the UB 92 and (now UB 04) data set and to be a forum for discussions that lead to mutually agreed data elements for the claim as well as the data elements for other claim-related transactions.

With respect to the comments about using invoice information as documentation for the credit due to Medicare, we provided invoices as an example of the type of documentation a fiscal intermediary or MAC may require to determine the percentage credit. Our fiscal intermediaries (or MAC if applicable) are in the best position to evaluate and determine matters regarding the adequacy of documentation to determine Medicare payment. In this final rule with comment period, we are not requiring any specific documentation to determine whether the percentage credit will apply. Invoices or the documentation (including those suggested in the public comments) would be at the discretion of the fiscal intermediary or MAC.

Therefore, after consideration of the public comments received, for FY 2008, we are implementing the following decisions regarding returned devices. We are applying the policy to the MS-DRGs listed in the chart below; those cases being MS-DRGs where the implantation of the device determines the base DRG assignment. Further, we are applying the policy in situations where the hospital received a credit equal to 50 percent or more of the cost of the device. Hospitals have the option of either: (1) Submitting the claims immediately without condition code 49 and a claim adjustment with condition code 49 at a later date once the credit determination is made or (2) holding the claim until a determination is made on the level of the credit. Should hospitals choose option 1, we note that the rules for submitting adjustment claims do apply, and can be found at the Web site noted above. CMS will issue specific claims processing instructions to Medicare contractors and hospitals on implementing this policy.

DRGs Subject to Final Policy

MDC

MS-DRG

Narrative description of DRG

PRE.................................. 1 and 2............... Heart Transplant or Implant of Heart Assist System with and without MCC, respectively (former CMS-DRG 103, Heart Transplant or Implant of Heart Assist System). 1.................................... 25 and 26............. Craniotomy and Endovascular Intracranial Procedure with MCC or with CC, respectively (former CMS-DRG 1, Craniotomy Age > 17 with CC). 1.................................... 26 and 27............. Craniotomy and Endovascular Intracranial Procedure with CC or without CC/MCC, respectively (former CMS-DRGs 2, Craniotomy Age > 17 without CC). 1.................................... 40 and 41............. Peripheral & Cranial Nerve & Other Nervous System Procedure with MCC; or with CC or Peripheral Neurostimulator, respectively (former CMS-DRG, 7 Peripheral & Cranial Nerve & Other Nervous System Procedures with CC). 1.................................... 42.................... Peripheral & Cranial Nerve & Other Nervous System Procedure without CC/MCC (former CMS-DRG 8, Peripheral & Cranial Nerve & Other Nervous System Procedures without CC). 1.................................... 23 and 24............. Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with MCC or Chemotherapy Implant; and without MCC [or Chemotherapy Implant], respectively (former CMS-DRG 543, Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis). 3.................................... 129 and 130........... Major Head & Neck Procedures with CC/MCC or Major Device; or without CC/MCC, respectively (former CMS-DRG 49, Major Head & Neck Procedures).

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5.................................... 216, 217, and 218..... Cardiac Valve & Other Major Cardiothoracic Procedure with Cardiac Catheterization With MCC; or with CC; or without CC/MCC, respectively (former CMS-DRG 104, Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac Catheterization). 5.................................... 219, 220, and 221..... Cardiac Valve & Other Major Cardiothoracic Procedure without Cardiac Catheterization with MCC; or with CC, or without CC/MCC, respectively (former CMS-DRG 105, Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization). 5.................................... 237................... Major Cardiovascular Procedures with MCC or Thoracic Aortic Aneurysm Repair (former CMS-DRG 110, Major Cardiovascular Procedures with CC). 5.................................... 238................... Major Cardiovascular Procedures without MCC (former CMS-DRG 111, Major Cardiovascular Procedures without CC). 5.................................... 260, 261, and 262..... Cardiac Pacemaker Revision Except Device Replacement with MCC, or with CC, or without CC/ MCC, respectively (former CMS-DRGs 117, Cardiac Pacemaker Revision Except Device Replacement). 5.................................... 258 and 259........... Cardiac Pacemaker Device Replacement with MCC, and Without MCC, respectively (former CMS-DRG 118, Cardiac Pacemaker Device Replacement). 5.................................... 226 and 227........... Cardiac Defibrillator Implant without Cardiac Catheterization with MCC and without MCC, respectively (former CMS-DRG 515, Cardiac Defibrillator Implant without Cardiac Catheterization). 5.................................... 215................... Other Heart Assist System Implant (former CMS- DRG 525, Other Heart Assist System Implant). 5.................................... 222 and 223........... Cardiac Defibrillator Implant with Cardiac Catheterization with Acute Myocardial Infarction/Heart Failure/Shock with MCC and without MCC, respectively (former CMS-DRGs 535, Cardiac Defibrillator Implant with Cardiac Catheterization with Acute Myocardial Infarction/Heart Failure/Shock). 5.................................... 224 and 225........... Cardiac Defibrillator Implant with Cardiac Catheterization without Acute Myocardial Infarction/Heart Failure/Shock with MCC and without MCC, respectively (former CMS-DRG 536, Cardiac Defibrillator Implant with Cardiac Catheterization without Acute Myocardial Infarction/Heart Failure/Shock). 5.................................... 242, 243, and 244..... Permanent Cardiac Pacemaker Implant with MCC, with CC, and without CC/MCC, respectively (MS- DRG 551, Permanent Cardiac Pacemaker Implant with Major Cardiovascular Diagnosis or AICD Lead or Generator. 5.................................... 242, 243, and 244..... Permanent Cardiac Pacemaker Implant with MCC, with CC, and without CC/MCC, respectively (former CMS-DRG 552, Other Permanent Cardiac Pacemaker Implant without Major Cardiovascular Diagnosis). 8.................................... 461 and 462........... Bilateral or Multiple Major Joint Procedures of Lower Extremity with MCC, or without MCC, respectively (former CMS-DRG 471, Bilateral or Multiple Major Joint Procedures of Lower Extremity). 8.................................... 469 and 470........... Major Joint Replacement or Reattachment of Lower Extremity with MCC or without MCC, respectively (former CMS-DRG 544, Major Joint Replacement or Reattachment of Lower Extremity). 8.................................... 466, 467, and 468..... Revision of Hip or Knee Replacement with MCC, with CC, or without CC/MCC, respectively (former CMS-DRG 545, Revision of Hip or Knee Replacement).

To codify in regulations the policies for the IPPS discussed above, we are adding a new paragraph (g) to Sec. 412.2 and a new Sec. 412.89 to 42 CFR part 412, Subpart F. We are also making a technical, conforming change to the heading of Subpart F and adding an uncoded center heading before the proposed new Sec. 412.89. 12. Other MS-DRG Issues Raised in the Public Comments on the Proposed Rule a. Heart Transplants or Implants of Heart Assist System and Liver Transplants (Pre-MDC)

In our analysis of heart transplant or implant of heart assist system base DRGs and liver transplant base DRGs, we found that each warranted two subdivisions based on our five criteria for establishing the MS-DRGs discussed in section II.D. of this final rule with comment period. We proposed two MS-DRGs for heart transplant or implant of heart assist system: MS-DRG 001 (Heart Transplant or Implant of Heart Assist System with MCC) and MS-DRG 002 (Heart Transplant or Implant of Heart Assist System without MCC). We also proposed two MS-DRGs for liver transplant: MS DRG 005 (Liver Transplant with MCC or Intestinal Transplant) and MS-DRG 006 (Liver Transplant without MCC).

Comment: Two commenters responded to our proposal on the subdivision of heart transplant or implant of heart assist system. One commenter representing one of the manufacturers of left ventricular assist devices (LVAD) stated that this change seems to appropriately identify severity of illness based upon mean length of stay days and charges associated with implantable LVADs as long as hospitals accurately report and document complications.

Another commenter representing transplant surgeons recommended that CMS defer implementation of separate severity levels for heart transplant and liver transplants pending further study. The commenter stated that payment for the uncomplicated procedures--the without MCC group--are too low, resulting in financial instability for many centers and the creation of inappropriate patient selection incentives. The commenter submitted an analysis showing that of the 37 heart transplant centers for which data were available, 10 (27 percent) would undergo DRG payment reductions of more than 10 percent while, of the 52 liver transplant centers, 11 (19 percent) would experience reductions of more than 10 percent, with many experiencing reductions over 20 percent. The commenter indicated that transplant cases are relatively low volume which makes these DRGs more vulnerable to fluctuations.

The commenter stated that while the concept of dividing DRGs based on severity is conceptually sound in the context of admissions for many medical conditions and perhaps for certain surgical admissions, transplantation as a whole is an extremely complex process that generally involves patients with life threatening conditions. The commenter stated that the presence or absence of a condition on the MCC list is not a good predictor of inpatient hospital costs for liver and heart transplants. The commenter stated that one factor that

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influences hospital costs and lengths of stay is the characteristics of the donor organ. The commenter stated that the donor risk index and the model for end-stage liver disease (MELD) system which prioritizes patients waiting for liver transplants by severity of illness are two important factors for any severity index for transplant DRGs. This information is not identified in the MedPAR data.

Several commenters also stated that the use of certain donor organs increase in hospital costs for transplantation. A category of donor called DCD (donor after cardiac death) generally represents a donor with a severe brain injury who is taken to the operating room, removed from the ventilator, and who dies a cardiac, rather than a brain, death. Another category of donor called ECD (extended or expanded criteria donor) is generally older and sicker than a standard donor. Use of organs from DCD or ECD donors permits transplantations that may be more expensive, as the organs may not be optimal. The commenters suggested that we take these issues into consideration when making DRG assignments.

In addition, two commenters stated that a separate DRG may be needed to address the significantly higher costs associated with combined liver/kidney transplants. One of the commenters stated that the recent increases in volume justify creation of a separate DRG. Another commenter stated that the Milliman 2005 U.S. Organ and Tissue Transplant Cost Estimates and Discussion Research Report indicates a separate MS-DRG is warranted at a higher level. However, the commenter did not provide data on combined liver/kidney transplants from the report.

Response: We cannot use the factors suggested in the commenters to subdivide the transplant DRGs because they are not distinctly identified in the current ICD-9-CM coding system. The National Center for Health Statistics is responsible for the maintenance of the diagnosis codes. We have advised representatives from the transplant industry to approach the National Center for Health Statistics in order to request unique codes to identify cases that include factors such as a DCD or ECD donor or the patient's MELD score. Without specific data that show how these factors affect patient costs, we cannot use them to subdivide the transplant DRGs. Suggestions on coding issues involving diagnosis codes should be directed to: Donna Pickett, Co-chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: dfp4@CDC.gov.

The table below illustrates our findings on heart and liver transplant MS-DRGs:

Number of Average length Average MS-DRG

cases

of stay

charges

MS-DRG 001 (Heart transplant or implant of heart assist system

572

41.03 $442, 339 with MCC)...................................................... MS-DRG 002 (Heart transplant or implant of heart assist system

304

22.81

250,693 without MCC)................................................... MS-DRG 005 (Liver transplant with MCC or intestinal transplant).

762

22.25

243, 271 MS-DRG 006 (Liver transplant without MCC).......................

446

10.05

129,519

The data support the current MCC split for heart and liver transplants. Therefore, we disagree with the commenter who suggested that diagnosis codes do not explain patient resource cost for these DRGs. In addition, the MCC split was supported by another commenter that manufactures LVADs. In response to the comments about the impact on transplant centers, we note that the change to the MS-DRGs is redistributive within each base DRG. Payment for the high severity cases will increase, and it will decrease for other cases. In total, Medicare payments for transplants likely will be unchanged. Rather, Medicare's payment will be better directed to reflect patient severity of illness. In response to the comment about combined liver/kidney transplants, we believe these patients would have a secondary diagnosis that is an MCC that would result in the patient being assigned to MS- DRG 005. For instance, a common cause of combined liver and kidney failure is hepatorenal syndrome, in which the liver failure actually causes the kidney failure. In this case, the principal diagnosis is liver failure. The second diagnosis--kidney failure--is an MCC. Patients with combined liver/kidney failure are very sick patients, and we believe it is highly likely that if they are properly coded, all patients would be assigned to MS-DRG 005 and be paid the maximum amount for a patient receiving a liver transplant. At this time, we do not believe that a separate MS-DRG is needed for combined liver-kidney transplants.

With respect to the Milliman 2005 US Organ and Tissue Transplant Cost Estimates and Discussion Research Report discussed by the commenter, we are open to considering, to the extent feasible, reliable, validated data other than MedPAR data in annually recalibrating and reclassifying the DRGs. Because the commenter did not provide data on combined liver/kidney transplants from the report, we could not fully evaluate the commenter's claims. b. Gliadel[supreg] Wafer (MDC 1)

Gliadel[supreg] Wafer is the only implantable chemotherapy agent approved by FDA for the treatment of malignant brain tumors. This treatment is approved for newly diagnosed patients with high-grade malignant glioma and for patients with recurrent glioblastoma multiforme, which is the most fatal form of primary brain tumor. ICD-9- CM procedure code 00.10 (Implantation of chemotherapeutic agent) was created October 1, 2002 to uniquely identify this technology. In the FY 2008 IPPS proposed rule, we proposed to assign the technology to MS-DRG 23 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with MCC) and MS-DRG 24 (Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis without MCC).

Comment: One commenter, the manufacturer of the Gliadel[supreg] Wafer technology, recommended that CMS recognize the complexity and costs associated with implantation of Gliadel[supreg] Wafer and reassign all cases that use it to MS-DRG 23. The commenter also recommended that the MS-DRG titles for MS-DRG 23 and 24 be revised to:

MS-DRG 023, ``Craniotomy with Acute Complex Central Nervous System Principal Diagnosis with MCC or Major Device Implant''; and

MS-DRG 024, ``Craniotomy with Acute Complex Central Nervous System Principal Diagnosis without MCC.''

The commenter provided data showing a total of 502 cases receiving the Gliadel[supreg] Wafer. The majority of the patients, 84 percent (423 cases), were assigned to MS-DRG 24. For MS-DRG

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24, the commenter reported that the standardized average charges for Gliadel[supreg] cases were approximately $74,069, which is 27 percent greater than the average charges for non-Gliadel cases in MS-DRG 24 of approximately $58,181. Many commenters encouraged CMS to reassign these cases to MS-DRG 23.

Response: Based on our review on the FY 2006 MedPAR data, we found 73 Gliadel[supreg] cases assigned to MS-DRG 23 and 398 cases assigned to MS-DRG 24. The following table displays our results:

Number of Average length Average MS-DRG

cases

of stay

charges

MS-DRG 23--All cases............................................

2,950

13.63

$91,518 MS-DRG 23--Gliadel cases........................................

73

12.44

104,975 MS-DRG 24--All cases............................................

2,432

8.63

61,865 MS-DRG 24--Gliadel cases........................................

398

7.03

75,482

Under the MS-DRGs, 73 out of 471 Gliadel[supreg] cases are assigned to MS-DRG 023. The 398 remaining Gliadel[supreg] cases do not have an MCC and would be assigned to MS-DRG 024, absent further changes to the DRG logic.

The average charges of approximately $75,482 for Gliadel[supreg] cases are higher than the average charges of approximately $61,865 for the overall cases in MS-DRG 024 and are approximately midway between the with and without MCC severity levels. In this final rule with comment period, we are assigning all Gliadel[supreg] cases to MS-DRG 23. The title for MS-DRG 023 is changed to ``Craniotomy with Major Device Implant or Acute Complex Central Nervous System Principal Diagnosis with MCC or Chemo Agent Implant''. The presence of craniotomy with major device implant or acute complex central nervous system principal diagnosis with MCC or implantation of chemotherapeutic agent would assign a case to the higher severity level. c. Myasthenia Gravis and Acute and Chronic Inflammatory Demyelinating Neuropathies (AIDP-CIDP) (MDC 1)

Comment: One comment, a national association that represents neurologists and neuroscience professionals, was concerned that there are no separate DRGs for Myasthenia Gravis and Acute and Chronic Inflammatory Demyelinating Neuropathies (AIDP-CIDP). Myasthenia gravis is an autoimmune disease caused by antibodies that block receptors at the neuromuscular junction resulting in decreased activation of muscles by nerves, leading to varying degrees of muscle weakness. Acute inflammatory demyelinating neuropathy, also known as Guillain-Barre Syndrome, is caused by an autoimmune process that attacks the myelin sheaths around nerves, causing defective nerve transmission that leads to sensory loss and muscle weakness. Chronic inflammatory demyelinating neuropathy is a chronic, relapsing form of the acute syndrome.

We proposed to assign these conditions to MS-DRGs 56 and 57 (Degenerative Nervous System Disorders With and Without MCC, respectively). According to the commenter, cases with these conditions should not be assigned to an MS-DRG for degenerative nervous system disorders.

The commenter stated that a separate DRG needs to be established to recognize the substantially higher costs of treating patients with an acute exacerbation of myasthenia gravis. There are two ICD-9-CM diagnosis codes for myasthenia gravis: code 358.00 (Myasthenia gravis without (acute) exacerbation) and code 358.01 (Myasthenia gravis with exacerbation). According to the commenter, in addition to plasmapheresis, acute myasthenia gravis patients often require respiratory support, intensive care unit stays, and IVIG administration. The commenter requested that CMS review cost data for admissions under this diagnosis and determine whether these cases had costs that were substantially higher than other cases assigned to the same DRG.

The commenter stated that, similar to myasthenia gravis, AIDP and CIDP are highly likely to require respiratory support and intensive care unit stays with plasmapheresis or IVIG administration, or both, when presenting acutely or in acute exacerbation. The ICD-9-CM diagnosis code that is reported for AIDP is code 357.0 (Acute infective polyneuritis), and the appropriate diagnosis code for CIDP is code 357.81 (Chronic inflammatory demyelinatng polyneuritis). The commenter stated that the data on AIDP and CIDP are unavailable at this time. Therefore, the commenter requested that CMS track these cases in consideration of a separate DRG for AIDP/CIDP for next year.

Response: The commenter raised a concern that myasthenia gravis cases are being assigned to the degenerative nervous system disorders DRG, and did not believe that the condition should be assigned to that DRG. However, we would point out that myasthenia gravis cases are currently assigned to CMS-DRG 12 (Degenerative Nervous System Disorders). Moving to the MS-DRGs did not alter this DRG logic. We simply subdivided this DRG into two severity levels. Given the extensive changes we are making in moving to MS-DRGs we believe it is premature to consider refinements to this base DRG for myasthenia gravis cases. Rather, we will wait to gain experience under the MS-DRGs and determine whether further refinements are needed to the base DRGs. d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)

In our analysis of spinal procedures and peripheral and cranial nerve and other nervous system procedures based DRGs in MDC 1, we found that each warranted three subdivisions based on our five criteria. There are three MS-DRGs for spinal procedures: MS-DRG 28 (Spinal Procedures with MCC), MS-DRG 29 (Spinal Procedures with CC), and MS-DRG 30 (Spinal Procedures without CC). There are three MS-DRGs for peripheral and cranial nerve and other nervous system procedures: MS- DRG 40 (Peripheral and Cranial Nerve and Other Nervous System Procedures with MCC), MS-DRG 41 (Peripheral and Cranial Nerve and Other Nervous System Procedures with CC), and MS-DRG 42 (Peripheral and Cranial Nerve and Other Nervous System Procedures without CC).

For back and neck procedures based DRGs in MDC 8, we found that the base DRG warranted two subdivisions based on our five criteria. There are two MS-DRGs for back and neck procedures except spinal fusion: MS- DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Devices) and MS-DRG 491 (Back and Neck Procedures Except Spinal Fusion without CC/MCC).

Comment: Several commenters analyzed the effects of the MS-DRGs and contended that the payment levels for cases with implantable

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neurostimulator devices are, in many instances, inadequate to cover the cost of the device and the hospital procedure to implant it. The commenters stated that most neurostimulator cases are assigned to the lowest severity level in these DRGs and concluded that the average charges of these cases are more similar to the higher severity levels. The commenters recommended that CMS:

For spinal cord nonrechargeable stimulator cases in MDC 1: Reassign all full system implants which includes cases reported with ICD-9-CM procedure codes 03.93 (Implantation or replacement of spinal neurostimulator lead(s)) and 86.94 (Insertion or replacement of single array neurostimulator pulse generator, not specified as rechargeable), or 86.95 (Insertion or replacement of dual array neurostimulator pulse generator, not specified as rechargeable), to MS-DRG 29 and revise the title to ``Spinal Procedure with CC or Major Device Implant.''

For spinal cord rechargeable neurostimulator cases in MDC 1: Reassign all full-system implant cases reported with ICD-9-CM procedure codes 03.93 and 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator) or 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) to MS-DRG 28, and revise the title to ``Spinal Procedure with MCC or Major Device Implant.''

For spinal cord rechargeable neurostimulator cases in MDC 8: Reassign all full-system implant cases reported with ICD-9-CM procedure codes 03.93 and 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator) or 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) to MS-DRG 490.

For peripheral nonrechargeable neurostimulator cases in MDC 1: Reassign all full-system implant cases reported with ICD-9-CM procedure codes 04.92 (Implantation or replacement of peripheral neurostimulator lead(s)) and 86.94 or 86.95 to MS-DRG 041 and revise the title to ``Peripheral and Cranial Nerve and Other Nervous System Procedures with CC or Major Device Implant.''

For peripheral rechargeable neurostimulator cases in MDC 01: Reassign all full-system implant cases reported with ICD-9-CM procedure codes 04.92 and 86.97 or 86.98 to MS-DRG 040 and revise the title to ``Peripheral and Cranial Nerve and Other Nervous System Procedures with MCC or Major Device Implant.''

Two commenters recommended device-dependent surgical DRGs for these cases. Several commenters also provided an alternative option to the recommendations listed above:

Assign all full-system spinal cord stimulator cases (rechargeable and non-rechargeable) in MDC 1 to MS-DRG 029.

Assign all full-system Spinal cord stimulator cases (rechargeable and non-rechargeable) in MDC 8 to MS-DRG 490.

Assign all full-system peripheral neurostimulator cases (rechargeable and non-rechargeable) in MDC 1 to MS-DRG 041.

Maintain the new-technology add-on payment for rechargeable neurostimulators for one additional year because of limited data.

Response: We analyzed the FY 2006 MedPAR data for full system spinal and peripheral neurostimulators, both nonrechargeable and rechargeable, using the procedure codes listed above. We found that the majority of spinal neurostimulator cases in MDC 1 (113 cases) were assigned to MS-DRG 030. The majority of the peripheral neurostimulator cases (44 cases) were assigned to MS-DRG 042. The majority of the spinal neurostimulator cases (253 cases) in MDC 8 were assigned to MS- DRG 491. The following table displays our results:

Number of Average length Average MS-DRG

cases

of stay

charges

Spinal Procedures

MS-DRG 028--With MCC............................................

1,531

14.67 $88,392.05 MS-DRG 029--With CC.............................................

2,699

7.63 46,223.20 MS-DRG 030--Without MCC or CC...................................

3,540

3.67 27,081.14

Spinal Neurostimulators

MS-DRG 028--With MCC............................................

7

2.57 81,208.14 MS-DRG 029--With CC.............................................

29

3.10 68,090.03 MS-DRG 030--Without MCC/CC......................................

113

1.81 57,399.84

The average charges for the 113 spinal neurostimulator cases assigned to MS DRG 030 of approximately $57,400 are much higher than the average charges of approximately $27,081 for the overall charges in MS-DRG 030. The charges for these cases more closely approximate the charges for the other cases in the CC level, MS-DRG 029.

Number of Average length Average MS-DRG

cases

of stay

charges

Peripheral and Cranial Nerve Procedures

MS--DRG 040-With MCC............................................

4,300

13.59 $64,354.13 MS-DRG 041--With CC.............................................

7,388

7.53 37,421.99 MS-DRG 042--Without MCC/CC......................................

5,112

3.65 30,600.18

Peripheral Neurostimulators

MS-DRG 040--With MCC............................................

12

8.92 63,170.42 MS-DRG 041--With CC.............................................

24

4.96 45,118.04 MS-DRG 042--Without MCC/CC......................................

44

1.71 50,716.25

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The average charges for the 44 peripheral neurostimulator cases assigned to MS-DRG 042 of approximately $50,716 are much higher than the average charges of approximately $30,600 for the overall charges in MS-DRG 042. Further, they are even higher than the 24 MS-DRG 041 cases with a peripheral neurostimulator and a CC. The relationship between average charges for neurostimulator cases and the MS-DRG where they are assigned does not appear to be monotonic in this case. We believe the low volume of cases for this technology may explain this unusual pattern in average charges. One or a few cases with aberrant charges could potentially be skewing the data. Nevertheless, we do believe the data for the MS-DRG 042 peripheral neurostimulator cases does illustrate that their average charges should be reassigned to a higher severity level. Although average charges for peripheral neurostimulator cases without an MCC or CC appear to be midway between average charges for cases in MS-DRGs 040 and 041, we do not believe these cases should be assigned to the ``with MCC'' MS-DRG at this time. Before deciding whether further MS-DRG assignment is warranted, we prefer to have more data that demonstrates monotonicity in the average charges.

Number of Average length Average MS-DRG in MDC 8

cases

of stay

charges

MS-DRG 490--All cases...........................................

17,493

5.13 $29,656.66 MS-DRG 490--Spinal neurostimulator cases........................

49

3.69 62,385.33 MS-DRG 491--All cases...........................................

57,496

2.27 17,788.59 MS-DRG 491--Spinal neurostimulator cases........................

253

1.62 56,238.72

The average charges for the 253 spinal neurostimulator cases assigned to MS-DRG 491 in MDC 8 of approximately $56,239 are much higher than the average charges of approximately $17,789 for the overall charges in MS-DRG 491. The charges for these cases are also higher than the average charges of $29,656 for MS-DRG 490. We believe these cases should be assigned to MS-DRG 490 at this time.

In this final rule with comment period, we are assigning full system spinal cord nonrechargeable and rechargeable neurostimulator cases in MS-DRG 030 to MS-DRG 029 in MDC 1. ICD 9 CM procedure codes 03.93 and 86.94 or 86.95 or 86.97 or 86.98 must be reported in order for the spinal neurostimulator cases to be assigned to MS-DRG 029. We are defining MS-DRG 029 as ``Spinal Procedures with CC or Neurostimulator.'' The presence of a spinal procedure with CC or neurostimulator would assign the case to the second severity level.

We are also assigning full system peripheral nonrechargeable and rechargeable neurostimulator cases in MS-DRG 042 to MS-DRG 041 in MDC 1. ICD-9-CM procedure codes 04.92 and 86.94 or 86.95 or 86.97 or 86.98 must be reported in order for the peripheral neurostimulator cases to be assigned to MS-DRG 041. We are defining MS-DRG 041 as ``Peripheral and Cranial Nerve and Other Nervous System Procedures with CC or Neurostimulator.'' The presence of a peripheral and cranial nerve procedure with CC or neurostimulator would assign the case to the second severity level.

The full system spinal cord nonrechargeable and rechargeable neurostimulator cases in MS-DRG 491 are being assigned to MS-DRG 490. ICD-9-CM procedure codes 03.93 and 86.94 or 86.95 or 86.97 or 86.98 must be reported in order for the spinal neurostimulator cases to be assigned to MS-DRG 490. We are defining MS-DRG 490 as ``Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Devices or Neurostimulator.'' The presence of a back and neck except spinal fusion procedure with CC/MCC or disc devices or neurostimulator would assign the case to the second severity level.

We refer readers to section II.J. of the preamble to this final rule with comment period for new technology discussions about rechargeable neurostimulators. We will continue to monitor these low volume full system neurostimulator cases for further refinements if warranted. e. Stroke and Administration of Tissue Plasminogen Activator (tPA) (MDC 1)

In FY 2006, CMS created CMS DRG 559 (Acute Ischemic Stroke with Use of Thrombolytic Agent) by assigning diagnosis codes for embolic stroke codes plus procedure code 99.10 (Injection or infusion of thrombolytic agent) to this new CMS DRG. The coding content of CMS DRGs 14 (Intracranial Hemorrhage or Cerebral Infarction) was not modified-- cases that included a diagnosis code for embolic stroke but the patient was not administered a thrombolytic agent continued to be assigned to this DRG. CMS DRG 15 (Nonspecific CVA and Precerebral Occlusion without Infarct) also remained unchanged. Under the new MS-DRGs, the former CMS DRG 559 will have three severity levels: MS-DRG 061 (Acute Ischemic Stroke with Use of Thrombolytic Agent with MCC), MS-DRG 062 (Acute Ischemic Stroke with Use of Thrombolytic Agent with CC), and MS-DRG 063 (Acute Ischemic Stroke with Use of Thrombolytic Agent w/o CC/MCC).

Comment: One commenter agreed with CMS' proposal to take the severity of a patient's illness into account when establishing payment rates. The commenter noted that severely ill or complex patients require more intensive evaluation, treatment, and monitoring, resulting in higher costs. The commenter added that it is logical to reimburse hospitals at a higher rate for those patients who require more care.

However, the commenter expressed some concerns with the proposed payment rates for stroke patients with a CC or without a CC/MCC who are treated with tPA, noting that according to its calculations, reimbursement rates for MS-DRGs 062 and 063 will decrease. The commenter believed that this decrease could create a financial disincentive for hospitals if payment for MS-DRGs 062 and 063 fails to provide adequate reimbursement for those costs incurred by facilities that administer tPA.

Response: The cost of treating patients with tPA continues to be represented in MS-DRGs 061, 062, and 063, but the cases have been distributed according to the presence of an MCC, or a CC, or the lack of either an MCC or CC in MS-DRG 063 according to the historical data represented by MedPAR. Medicare likely will continue to pay the same amount for all patients treated with tPA. However, our payments will better reflect patient severity of illness by paying higher amounts for those cases where the patient has an MCC or CC than if they do not.

Comment: One commenter urged CMS to create a process that allows for periodic evaluation and updating of the MCC and CC lists, noting that CMS must

[[Page 47256]]

institute a process that allows for the addition of other conditions that create a special concern for one set of patients, including stroke patients, to the MCC and CC lists.

Response: As described in section II.D.3. of this preamble, we reviewed more than 13,000 diagnosis codes in order to establish the MCC and CC lists. This review activity is an ongoing, annual process, as CMS has reviewed portions of the diagnosis codes every year with regard to placement on the CC list. The difference is that this year more than 13,000 diagnosis codes were reviewed, and the designation has changed from simply ``CC'' to major comorbidity or complication (MCC) or comorbidity or complication (CC). We believe these lists to be comprehensive and we will continue to evaluate their content with regard to all patients.

Comment: One commenter expressed concern about the so-called ``drip and ship'' cases where tPA is administered in the emergency department at Hospital A, but the patient is immediately transferred to Hospital B, which has a stroke center. The commenter pointed out that many community hospitals do not have the necessary resources, including neurology expertise, to care for the critically ill stroke patient. However, the commenter added, with the support of a nearby stroke center, they are able to diagnose ischemic stroke and institute reperfusion (tPA) treatment within the critical three hour window. The commenter stated that transfer after administration of tPA is required by the need to closely monitor patients after reperfusion treatment. Given the critical need to minimize brain damage by immediately administering the tPA when indicated, the commenter stated that the original hospital where the patient presented with stroke symptoms must not delay treatment until after the patient is transferred.

When a patient is treated with reperfusion therapy in a local emergency department, but transferred and admitted to another hospital with the necessary stroke services, it is the understanding of the commenter that CMS' current policy, as implemented through the DRG GROUPER, requires that those cases be assigned to a stroke DRG that does not recognize the reperfusion therapy. The hospital to which the patient was ultimately admitted did not administer the reperfusion therapy, and the hospital which administered the thrombolytic drug did not admit the patient. The commenter noted that these patients are in the severely ill category and require the same high level of resources as any other patient who receives reperfusion therapy and who would normally be assigned to CMS DRG 559.

The commenter made the following suggestion: ``When a patient has been started on reperfusion therapy [tPA] at another hospital, as an outpatient, and is transferred to a hospital with a stroke center, the case should be assigned to one of the ``stroke-with-thrombolytic agent DRGs'' (MS-DRGs 061, 062, or 063).

Response: We previously considered this situation in 2005 when we created DRG 559 that separately distinguished stroke patients administered a thrombolytic agent. The commenter is suggesting that it is not the thrombolytic agent itself that raises the hospital's costs (although in our view, it is certainly an element of higher costs) but all of the other services that are provided by the receiving hospital to such a patient. Although we recognize the concerns of the commenter, the emergency room is already being compensated for the administration of the tPA. Therefore, we do not believe it would be appropriate for Medicare to pay for the same service at another facility. f. Gliasite [supreg] Radiation Therapy System (RTS) (MDC 1)

Comment: One commenter, the manufacturer of Gliasite [reg] Radiation Therapy System (RTS), wrote that this technology is used in the treatment of malignant brain cancer. The commenter indicated that patients who undergo this treatment require two admissions. The first admission includes tumor debulking and a special catheter is implanted. The following ICD-9-CM procedures are assigned to report the procedures performed: Code 01.59 (Other excision or destruction of lesion or tissue of brain) and code 01.27 (Insertion of catheter(s) into cranial cavity or tissue). Under the proposed MS-DRGs, the case for this admission with a principal diagnosis of glioblastoma and procedure codes 01.59 and 01.27 would be assigned to MS-DRGs 26 and 27 (Craniotomy and Endovascular Intracranial Procedures with and without MCC/CC, respectively).

The commenter added that the second admission usually occurs in a week or 10 days and entails liquid radioisotope infused into the special catheter. The patient is monitored for a few days and then the radioisotope is removed. ICD-9-CM procedure code 92.20 (Infusion of liquid brachytherapy radioisotope) and code 01.27 (Removal of catheter(s) from cranial cavity or tissue) would be assigned to identify the procedures performed in the second admission. Under the proposed MS-DRGs, for the second admission, the case with a principal diagnosis of glioblastoma and procedure codes 92.20 and 01.27 would be assigned to medical MS-DRGs 54 and 55 (Nervous System Neoplasm with and without MCC, respectively).

The commenter requested that CMS recognize the resources associated with infusion of radioisotope and establish two new surgical MS-DRGs for these admissions/treatments:

Liquid radiotherapy infusion for glioblastoma without tumor debulking.

Liquid radiotherapy infusion for glioblastoma with craniotomy, tumor debulking, and implantation of infusion catheter.

The commenter stated that the costs of the implant can be considered equivalent to the cost of an MCC and should be recognized in a surgical MS-DRG descriptor.

Response: The refinement of the DRGs is not based on the creation of any new logic under the MS-DRGs. We believe that it is not appropriate to make DRG revisions of this nature as part of the final rule since the base DRG has not changed for these cases. However, we will examine the need for further DRG refinements as we gain experience under the MS DRGs. g. Noninvasive Ventilation (MDC 4)

Comment: One commenter representing a national association requested the creation of a new DRG for noninvasive positive pressure ventilation (NPPV). According to the commenter, NPPV is an effective and preferred treatment in the management of patients with acute exacerbations of chronic obstructive pulmonary disease and other forms of respiratory failure.

Currently, this treatment is identified in ICD-9-CM by procedure code 93.90 (Continuous positive airway pressure (CPAP)) and does not require the use of mechanical ventilation via an endotracheal tube or tracheotomy. The commenter indicated that NPPV is a valuable and clinically appropriate option for patients who may require short term (00.52, Implantation or replacement of transvenous lead

[electrode] into left ventricular coronary venous system.

00.54, Implantation or replacement of cardiac resynchronization defibrillator pulse generator device only [CRT-D].

37.95, Implantation of automatic cardioverter/ defibrillator leads(s) only.

37.96, Implantation of automatic cardioverter/ defibrillator pulse generator only.

37.97, Replacement of automatic cardioverter/defibrillator leads(s) only.

37.98, Replacement of automatic cardioverter/defibrillator pulse generator only.

The commenter indicated that under the current CMS DRGs, the defibrillator generator and defibrillator lead replacements were included in DRG 551 with pacemaker implants. The commenter supported this new MS-DRG, which recognizes the distinct differences in resource utilization between pacemaker and defibrillator generators and leads. The commenter stated that CMS should consider additional refinements for the defibrillator generator and leads. In reviewing the standardized charges for the AICD leads, the commenter believed that the leads may be more appropriately assigned to another DRG such as MS- DRG 243 (Permanent Cardiac Pacemaker Implant with CC) or MS-DRG 258 (Cardiac Pacemaker Device Replacement with MCC). The commenter recommended that CMS consider moving the defibrillator leads back into a pacemaker DRG, either MS-DRG 243 or MS-DRG 258.

Response: We appreciate the commenter's support for the refinements made through the MS-DRGs to better identify differences in patient care costs associated with pacemakers and defibrillators. In our view, the data support separate DRGs for these very different devices. The commenter supported the proposed DRG change we made that removed both the defibrillator generators and leads from the pacemaker MS DRG and then recommended that we move the defibrillator leads only back into a pacemaker DRG. The commenter, as stated, had supported this change because the commenter believed that it better identified devices that were quite different. We proposed separating defibrillator and pacemaker devices because they are such different devices. Moving the defibrillator leads back into a pacemaker MS-DRG defeats the purpose of creating separate MS-DRGs for defibrillators and pacemakers. Therefore, we are finalizing MS DRG 245 as proposed with the leads and generator codes listed above. j. Artificial Heart (MDC 5)

Comment: One commenter requested that ICD-9-CM code 37.52 (Implantation of total replacement heart system) [which includes artificial heart] be moved from CMS DRG 525 (Other Heart Assist System Implant) to CMS DRG 103 (Heart Transplant or Implant of Heart Assist System). These CMS DRGs would be renumbered and renamed in the proposed MS-DRG system, with CMS DRG 525 becoming

[[Page 47258]]

MS-DRG 215 (Other Heart Assist System Implant) and CMS DRG 103 becoming MS-DRGs 001 (Heart Transplant or Implant of Heart Assist System with MCC) and 002 (Heart Transplant or Implant of Heart Assist System without MCC). The commenter stated that the change of MS-DRG assignment from MS-DRG 215 to MS-DRGs 001 or 002 will more accurately reflect the grouping of procedures for the implantation of a total replacement heart system with heart transplantation and other heart assist systems intended as destination therapy to more accurately recognize hospital resources for the treatment of end-stage heart failure. We received a similar comment from another manufacturer.

Response: Medicare does not currently cover artificial heart implants. ICD-9-CM procedure code 37.52 (Implantation of total replacement heart system) was created for potential use for discharges on or after October 1, 2003. However, code 37.52 was immediately put on the noncovered procedure list of the MCE as no device then existed that was deemed safe and effective as an artificial heart. The technology remains noncovered by Medicare. For this reason, we currently have no data to suggest that the DRG assignment for procedure code 37.52 needs to be changed.

Our review of the second manufacturer's product shows it to be a bi-ventricular device, not an artificial heart as described in their marketing literature. This commenter also is currently in the process of requesting coverage for its device. We recommend that the manufacturer of this device request to be added to the agenda of the ICD-9-CM Coordination and Maintenance Committee meeting of September 27, 2007. An ICD-9-CM procedure code will help us to determine whether a Medicare patient treated with this new technology should be assigned to a DRG other than the one that includes the predecessor code used to describe the service.

Comment: One commenter suggested that CMS reevaluate the appropriateness of including ICD-9-CM procedure code 37.62 (Insertion of nonimplantable heart assist system) in CMS DRG 525 (Other Heart Assist System Implant), which will become MS-DRG 215 (Other Heart Assist System Implant), and reassign code 37.62 to more accurately reflect hospital resource consumption of services involving mechanical support for cardiovascular failure. The commenter suggested that patients treated with a nonimplantable heart assist system are less costly than other patients in MS-DRG 215 and should be reassigned to a different DRG that would reflect its lower costs. Further, the commenter suggested that hospitals may not be using code 37.62 consistent with its intended purpose.

Response: The commenter has not provided a compelling justification for changing the placement of code 37.62. Our understanding is that this code describes use of a nonimplantable heart assist system to temporarily replace the heart's function. The function of the device to replace the heart means that there are only three potential MS-DRGs where code 37.62 could be assigned: MS-DRG 215 (Other Heart Assist System Implant) and MS-DRGs 001 and 002 (Heart Transplant or Implant of Heart Assist System with and without MCC, respectively). The commenter suggested that the code should be assigned to a lower paying MS-DRG than MS-DRG 215. However, the only other MS-DRGs to which the code could be assigned have even higher payment weights. Therefore, we are making no changes to the DRG assignment for code 37.62 for FY 2008. Although the commenter suggested potential problems with use of the code, the commenter did not suggest any potential solutions for how to address this problem. Therefore, we have no information upon which to take further action to address the commenter's concern. k. Vascular Procedures (MDC 5)

We proposed three MS-DRGs for vascular procedures: MS-DRG 252 (Other Vascular Procedures with MCC), MS-DRG 253 (Other Vascular Procedures with CC) and MS-DRG 254 (Other Vascular Procedures without CC/MCC).

Comment: One commenter evaluated the diagnoses associated with MS- DRGs 252, 253, and 254 to assess whether patients with diagnoses not on the CC or MCC lists were more costly to treat. The commenter selected the following 30 diagnosis codes:

250.70, Diabetes with peripheral circulatory disorders, type II or unspecified type, not stated as uncontrolled. 263.9, Unspecified protein-calorie malnutrition. 276.1, Hyposmolality and/or hyponatremia. 276.2, Acidosis. 276.51, Dehydration. 276.7, Hyperpotassemia. 276.8, Hypopotassemia. 280.0, Secondary to blood loss (chronic). 285.1, Acute posthemorrhagic anemia. 287.5, Thrombocytopenia, unspecified. 410.71, Subendocardial infarction, initial episode of care. 427.1, Paroxysmal ventricular tachycardia. 427.31, Atrial fibrillation. 440.1, Atherosclerosis of renal artery. 440.24, Atherosclerosis of the extremities with gangrene. 444.22, Arterial embolism and thrombosis, lower extremity. 458.9, Hypotension, unspecified. 491.21, Obstructive chronic bronchitis with (acute) exacerbation. 496, Chronic airway obstruction, not elsewhere classified. 511.9, Unspecified pleural effusion. 518.0, Pulmonary collapse. 599.0, Urinary tract infection, site not specified. 682.6, Other cellulitis and abscess, leg, except foot. 682.7, Other cellulitis and abscess, foot, except toes. 707.15, Ulcer of other part of foot. 785.4, Gangrene. 790.7, Bacteremia. 996.62, Infection and inflammatory reaction due to vascular device, implant and graft. 997.1, Cardiac complications. 998.11, Hemorrhage complicating a procedure.

[[Page 47259]]

The commenter recommended that CMS should:

Reassign vascular procedure cases containing two or more of the identified diagnosis codes from MS-DRG 253 to MS-DRG 252.

Reassign vascular procedure cases containing two or more of the identified diagnosis codes from MS-DRG 254 to MS-DRG 253.

Response: In our proposed rule analysis, we found that the vascular procedures DRG warranted three subdivisions according to our five criteria. Nineteen of the 30 diagnosis codes suggested by the commenter already appear on the CC or MCC list and will result in a patient being assigned to either MS-DRG 252 or MS-DRG 253. The remaining 11 diagnosis codes do not appear on either list. These codes are: 250.70, 276.51, 276.7, 276.8, 280.0, 287.5, 427.31, 440.1, 458.9, 496, and 707.15.

Although the commenter has identified common diagnoses in this patient population, our medical advisors reviewed the clinical issues and claims data for cases reporting each of the conditions not on the MCC or CC list as a secondary diagnosis. After evaluating the claims data and analyzing the clinical issues, our medical advisors recommend that we not change the CC status for the codes mentioned above. They do not believe there is sufficient justification for making these codes CCs. We do not believe that we should make further changes to the MS- DRG assignments based on combinations of selected diagnoses. These types of analyses could be done with virtually any MS-DRG and would add significant complexity to the DRG system that we do not believe is warranted at this time. We reiterate that the MS-DRGs--like the predecessor CMS-DRGs--are intended to establish an average payment based on groups of patients that are similar in costs and clinical characteristics. Over time, we found that the CMS DRGs did not sufficiently recognize differences in patient severity of illness, and we proposed to adopt the MS-DRGs as an alternative to achieve this objective. While we acknowledge that further potential improvements may be warranted as we have more experience with the new system, we have significant concerns about selectively analyzing specific diagnoses within a given MS-DRG to change their DRG assignment. Although we have increased the assigned severity level for a limited number of cases, these decisions recognize that the patient was more complex than was suggested by their secondary diagnosis either because of a specific procedure (in the case of intestinal transplants) or the type of technology used to treat their condition (in the case of cochlear implants and spinal stabilization devices).

We refer readers to section II.D.2.a. of this preamble for complete information on the CC list. l. Coronary Artery Stents (MDC 5)

Effective for cases discharged on or after October 1, 2005 (FY 2006), the ICD-9-CM Coordination and Maintenance Committee created a series of adjunct codes further describing procedures on the vascular system. These codes were at the 00.4 subcategory (Adjunct vascular system procedures), with codes 00.40 through 00.43 describing the number of vessels upon which a procedure was performed, and codes 00.45 through 00.48 describing the number of stents which were inserted. As these codes were deemed to be adjunct codes that supplemented the information describing a patient's hospital treatment, they were not considered procedure codes that would affect DRG assignment. However, coders were encouraged to thoroughly and completely code all hospital stays, in case this information would be used for future DRG determination. We received comments on the proposed MS-DRGs concerning the DRG assignment for procedures on multiple coronary vessels and insertion of multiple stents in coronary arteries.

Comment: Commenters have analyzed standardized charges in the FY 2006 MedPAR data for percutaneous transluminal coronary angioplasty (PTCA) in conjunction with codes indicating insertion of drug-eluting or non-drug-eluting coronary artery stent(s) and the use of codes indicating procedures on multiple vessels and/or insertion of multiple stents. These commenters believe that mean standardized charges for these combination codes vary substantially from the mean standardized charges associated with the DRGs to which they are proposed to be assigned. The DRGs under consideration in this section for drug-eluting stents are MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug- Eluting Stent with MCC) (formerly CMS DRG 557 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with Major Cardiovascular Diagnosis)) and MS-DRG 247 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without MCC) (formerly CMS DRG 558 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without Major Cardiovascular Diagnosis)). The DRGs under consideration in this section for non-drug-eluting stents are MS-DRG 248 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC) and MS- DRG 249 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC). (These were either formerly CMS DRG 555 (Percutaneous Cardiovascular Procedures with Major Cardiovascular Diagnosis) or CMS DRG 556 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent without Major Cardiovascular Diagnosis), respectively.)

The commenters recommended that PTCA code 00.66 (Percutaneous transluminal coronary angioplasty [PTCA] or coronary atherectomy) in combination with a code for insertion of a drug-eluting or non-drug- eluting stent, plus adjunct codes indicating procedures on multiple vessels and insertion of multiple stents be assigned to MS-DRGs 246 and 248 as described above. They stated that their analysis of standardized charges for PTCA with insertion of a drug-eluting or non-drug-eluting stent(s) in multiple vessels or with insertion of multiple stents vary substantially from the mean standardized charges associated with the DRGs to which they are proposed to be assigned. The commenters found that the variation in charges between the subgroups and the overall DRG average meet CMS' criteria for moving cases between DRGs, and suggested that cases with multiple vessels and multiple stents be moved up to the first DRG in the series. That is, cases with insertion of drug-eluting stents in MS-DRG 247 would be assigned to MS-DRG 246, and cases with non-drug-eluting stents in MS-DRG 249 would be assigned to MS-DRG 248. In each of the MS-DRGs, cases where multiple vessels are treated or multiple stents are placed would be assigned to the ``with MCC'' MS-DRG rather than the ``without MCC'' MS-DRG.

Response: We reviewed the MedPAR data in response to these comments and found that PTCAs with four or more vessels or four or more stents were more comparable in average charges to the higher weighted DRG in the group. These data are summarized in the following tables.

[[Page 47260]]

Number of Average length Average MS-DRG

cases

of stay

charges

MS-DRG 246--All cases...........................................

31,204

6.34 $64,009.36 MS-DRG 246--Cases with codes 00.66 and 36.07 with 4 or more

1,425

5.68

78,02.93 vessels (code 00.43) and 4 or more stents (code 000.48)........ MS-DRG 247--All cases...........................................

267,684

2.24 40,857.34 MS-DRG 247--Cases with codes 00.66 and 36.07 with 4 or more

8,095

2.33 61,666.34 vessels (code 00.43) and 4 or more stents (code 000.48)........ MS-DRG 248--All cases...........................................

4,710

6.53 56,671.61 MS-DRG 248--Cases with codes 00.66 and 36.06 with 4 or more

112

6.38 69,431.81 vessels (code 00.43) and 4 or more stents (code 000.48)........ MS-DRG 249--All cases...........................................

27,914

2.55 35,577.22 MS-DRG 249--Cases with codes 00.66 and 36.06 with 4 or more

232

3.76 54,203.87 vessels (code 00.43) and 4 or more stents (code 000.48)........

In both cases, we believe that the average charges for cases where four or more vessels are treated or four or more stents are placed more closely approximate average charges in the higher weighted MS-DRG. Therefore, we are assigning these cases to the higher weighted MS-DRG according to the following logic.

Claims containing code 00.66 for PTCA, and code 36.07 (Insertion of drug-eluting coronary artery stent(s)), and code 00.43 (Procedure on four or more vessels) or code 00.48 (Insertion of four or more vascular stents) are assigned to MS-DRG 246. In addition, claims containing code 00.66 for PTCA, and code 36.06 (Insertion of non-drug-eluting coronary artery stent(s)), and code 00.43 or code 00.48 are assigned to MS-DRG 248.

We are also making conforming changes to the MS-DRG titles as follows: MS-DRG 246 is titled ``Percutaneous Cardiovascular Procedures with Drug-Eluting Stent(s) with MCC or 4 or more Vessels/Stents''. The title for MS-DRG 247 will remain unchanged. MS-DRG 248 is titled ``Percutaneous Cardiovascular Procedures with Non Drug-Eluting Stent(s) with MCC or 4 or more Vessels/Stents''. The title for MS-DRG 249 will remain unchanged. This DRG modification is based on newly created codes that were developed to provide additional detail on the number of vessels treated and the number of stents inserted. The DRG combines two distinct concepts: the insertion of four or more stents or the performance of a vascular procedure on four or more vessels, in order to determine the DRG assignment. Although we are adopting this DRG change for FY 2008, we plan to continue examining whether this revision of the DRG definition captures a relatively homogeneous group of cases. We currently only have one year of data on these new codes. Therefore, we plan to revisit this issue further in next year's proposed rule when we have a second year of data to better distinguish the different types of cases that are treated with this technology. m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)

Comment: Several commenters expressed concern that the relative weights for MS-DRGs 237 and 238 (Major Cardiovascular Procedures with MCC and without MCC, respectively), formerly CMS-DRGs 110 and 111 (Major Cardiovascular Procedures with CC and without CC, respectively) do not reflect the severity of illness and the resource use required for such complex care. One commenter noted that regardless of the DRG assignment, the cost of the endovascular graft or device does not change, nor is it insignificant. The commenter further stated that MS- DRGs 237 and 238 do not adequately factor into the relative weights that the device is not incidental to treatment; it is a major component of the treatment.

Response: New MS-DRGs 237 and 238 are exactly the same as their predecessor CMS DRGs 110 and 111 in content. Using historic Medicare charges and hospital cost report data submitted to us by hospitals, we have included the cost of the device into the MS-DRG relative weights.

Comment: Several commenters suggested that MS-DRGs 237 and 238 should be divided into three levels of severity: ``with MCC'', ``with CC'', and ``without CC/MCC'' and noted that it is important that CMS be consistent and not create inequities with regard to major surgical procedures. One commenter stated that patients with aortic aneurysm fall naturally into three clinical categories, with patients who are genetically predisposed to an aneurysm are likely to be younger (between 50 and 60 years of age, not between 70 and 80 years of age) and are more likely to be healthier than the typical aneurysm patient. Those cases are suggested for an MS-DRG without CC/MCC. The commenter added that the other cases would fall into the ``with MCC'' or ``with CC'' MS-DRGs based on the severity of their CCs.

Response: When we consolidated all existing DRGs into the base DRGs, we removed all demarcations that had been added over the years, including considerations for age, gender, and discharge disposition, as well as elimination of the current split based on the presence or absence of a CC, burns, trauma, AMI, major cardiovascular condition, among others. We then applied the severity criteria described elsewhere in this preamble, and stated that in order to warrant creation of a CC or major CC subgroup within a base MS-DRG, the subgroup had to meet all five criteria. The commenter states that genetically predisposed patients tend to be younger. Although age is a variable that would be available in the Medicare claims data, genetic predisposition to a certain class of diseases generally cannot be identified in the ICD-9- CM coding system. Therefore, as we are not able to identify those patients, we cannot subdivide these MS-DRGs using genetic predisposition as criterion.

We considered subdividing MS-DRGs 237 and 238 into three DRGs for the proposed rule. However, MS-DRGs 237 and 238 did not meet the criteria for a 3-way split.

Comment: Two commenters suggested that instead of ``with MCC'' in the surgical DRGs, CMS should establish a list of devices that would be equivalent to the MCC categorization and further subdivide the MS-DRGs based on the presence of ``with Major Device.'' Specifically, they suggested that endovascular devices or grafts used during cardiovascular procedures should be considered major devices. Therefore, they added, when a major device or implantable graft is used in a cardiovascular repair procedure, such as those performed to repair an abdominal or thoracic aortic aneurysm, CMS should assign those cases to MS-DRGs where the DRG title has been changed to reflect that the costs of the device are similar to the costs of an MCC.

[[Page 47261]]

Response: We believe the commenter is suggesting that we establish a list of major devices and use them as a proxy for MCCs. We will take this suggestion under consideration in future reviews of the MS-DRGs.

We looked at data to review the differences between endovascular graft repair of abdominal aortic aneurysm (code 39.71) and endovascular graft repair of thoracic aortic aneurysm (code 39.73). Our findings are represented in the table below.

Number of Average length Average MS-DRG

cases

of stay

charges

MS-DRG 237--All cases...........................................

20,789

11.47 $93,824.52 MS-DRG 237--Cases with code 39.71 (abdominal)...................

1,484

8.95 89,929.39 MS-DRG 237--ases with code 39.73 (thoracic).....................

277

10.98 119,120.51 MS-DRG 238--All cases...........................................

42,797

4.88 51,410.12 MS-DRG 238--Cases with code 39.71 (abdominal)...................

14,091

2.58 55,798.25 MS-DRG 238--Cases with code 39.73 (thoracic)....................

877

4.95 72,426.29

Review of these data shows that the 887 thoracic cases in MS-DRG 238 have average charges that are between both groups. We believe that the data indicate that endovascular repair of the thoracic aorta cases should be assigned to MS-DRG 237.

Therefore, we are assigning procedure code 39.73 (Endovascular implantation of graft in thoracic aorta) to MS-DRG 237 in FY 2008. n. O.R. Procedures for Obesity (MDC 10)

Comment: One commenter was concerned with the conditions that are classified as MCCs and CCs for MS-DRGs 619, 620, 621 (O.R. Procedures for Obesity with MCC, with CC, and without CC/MCC, respectively), previously CMS DRG 288. The commenter fully supported efforts to base payments on patient severity, but states that some of the proposed changes do not appear to achieve that goal. The commenter acknowledged the three severity levels added to former CMS DRG 288 (O.R. Procedures for Obesity). However, the commenter stated that all of the morbidly obese Medicare patients will have one or more serious comorbidities. The commenter was concerned about the application of the complete MCC and CC list to MS-DRGs 619, 620, and 621. The commenter stated that the following codes, which are on the MCC and CC lists, should not be considered MCCs or CCs for these bariatric DRGs because these conditions are ``contraindications'' to performing bariatric surgery:

Diabetes codes 250.10 through 250.13; 250.20 through 250.23; and 250.30 through 250.33 (all MCCs).

Coronary atherosclerosis codes 414.02 through 414.04; and 414.06 and 414.07 (all CCs).

Aneurysm and dissection of heart codes 414.10 (CC), 414.12 (MCC), and 414.19 (CC).

The commenter also requested that the following codes be classified as CCs for these bariatric DRGs:

Diabetes codes--250.00 through 250.93.

Obstructive sleep apnea--327.23.

Hypertensive disease--401.0 through 405.99.

Cirrhosis of liver without mention of alcohol--571.5.

Biliary cirrhosis--571.6.

Other chronic nonalcoholic liver disease--571.8.

Unspecified chronic liver disease without mention of alcohol--571.9.

Response: Our clinical advisors disagree with the recommendations to change the diabetes, coronary atherosclerosis, and aneurysm and dissection codes from MCCs and CCs to non-CCs for the bariatric MS- DRGs. They believe these conditions represent significant CCs in the general patient population and the data we used to perform this analysis support their judgment. Although we do have secondary diagnosis codes that are ``exclusions'' (not counted as an MCC or a CC if they are related to the principal diagnosis), we have not analyzed whether to classify a particular diagnosis as an MCC or a CC for purposes of determining if a particular type of surgery should be performed. However, we believe the commenter indicates that our decision to classify these conditions as MCCs or CCs is correct by suggesting that the presence of these conditions is so significant in increasing severity of illness that it is a contraindication to surgery. We expect that physicians will not order surgical procedures that are contraindicated merely because the case would be assigned to a higher-paying DRG.

Our medical advisors evaluated the request to make the codes specified above CCs. Our medical advisors reviewed claims data and clinical issues for cases reporting codes 250.00 through 250.93; 327.23; 401.0 through 405.99; and 571.5 as secondary diagnoses. After evaluating the claims data and analyzing the clinical issues, our medical advisors recommend that we not change the CC status for codes 250.00 through 250.93; 327.23; 401.0 through 405.99; and 571.5. They do not believe there is sufficient justification for making these codes CCs at this time. o. Penile Restorative Procedures (MDC 12)

Comment: One commenter, a national organization representing the prosthetic urology community applauded CMS for moving forward to ensure that Medicare payments for inpatient services are appropriate and accurately reflect the severity and resources required for patient care. The commenter supported the proposal to implement MS-DRGs on October 1, 2007. However, the commenter indicated that the cost of implants and prosthetics used in penile implant procedures are comparable to the resources utilized in a patient with a MCC or CC diagnosis. Generally, the commenter suggested that in surgical MS-DRGs where implants and prostheses are part of the ICD-9-CM procedure code title that CMS should consider revising the MS-DRG titles to account for the costs associated with surgical procedures that use an implant or prosthesis. As an example, the commenter expressed support for the proposed modification to MS-DRG 129 (Major Head and Neck Procedure with CC/MCC or Major Device). The commenter believed that, when a major implant/prosthesis/device demonstrates costs that are greater than or similar to the difference between the relative weights of a CC/MCC DRG versus a without CC/MCC DRG pair, CMS should recognize the device or implant in the MS-DRG titles and reassign these cases. Specifically, the commenter recommended that the title for proposed MS-DRG 709 (Penis Procedures with CC or MCC) be revised to add the phrase ``or major device or implant'' and include all cases where an implantable prosthesis is used in a penile restorative procedure.

Response: We appreciate the commenter's support for MS-DRGs and

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its general suggestions for future refinements. The commenter did not provide specific examples of types of implants and prosthesis which they want to have evaluated for possible DRG reassignment. We are not clear as to whether or not there will be ICD- 9-CM procedure codes for these specific implants. It is premature to modify the MS-DRG titles at this time without more specific information and analysis.

Comment: This same commenter also urged CMS to review clinically significant conditions for penile restorative procedures on the proposed MCC and CC lists.

Response: We refer readers to section II.D.3. of this final rule with comment period for a complete discussion on the public comments received on the MCC and CC lists. We welcome any specific recommendations for future revisions and refinements to the MCC and CC lists. p. Female Reproductive System Reconstruction Procedures (MDC 13)

Comment: Two commenters requested that CMS establish levels within MS-DRG 748 (Female Reproductive System Reconstruction Procedures). The commenters noted that all of the other proposed MS-DRGs for surgical male and female reproductive system procedures have either ``MCC or CC'' subdivisions. The commenters believed that CMS may have made an oversight by not establishing severity levels within this MS-DRG.

Response: As stated in the FY 2008 proposed rule, in order to warrant creation of a CC or MCC subgroup within a base MS-DRG, the subgroup has to meet all five criteria. In developing the proposed MS- DRGs, this base DRG did not meet three of the five criteria required to subdivide a DRG into additional severity subgroups. MS-DRG 748 failed the following three criteria:

At least 5 percent of the patients in the MS-DRG fall within the MCC or CC subgroup.

At least 500 cases are in the MCC or CC subgroup.

There is a $4,000 difference in average charge between subgroups.

We refer readers to section II.D.3 of the FY 2008 proposed rule (72 FR 24705) for a complete listing of the criteria.

As such, effective October 1, 2007, we are adopting the MS-DRGs as final policy and MS-DRG 748 will remain as proposed with the following title: MS-DRG 748 (Female Reproductive System Reconstruction Procedures). q. Urological and Gynecological Disorders With Grafts or Prosthesis (MDCs 13 and 14)

Comment: We received comments commending CMS for the creation of new ICD-9-CM procedure codes that identify the use of grafts or prosthetics in female pelvic prolapse repair procedures. The commenters acknowledged that the use of these new codes will result in better data collection, outcomes research, and improve the quality of health care for women. However, the commenters indicated that the cost of implants and prosthetics used in treating various urological and gynecological conditions are comparable to the resources utilized in a patient with an MCC or CC diagnosis. Specifically, the commenters recommended that the titles for the following proposed MS-DRGs be revised to add the term, ``or major device'' to account for cases where a graft or prosthesis is used.

MS-DRG 333 (Rectal Resection with CC).

MS-DRG 662 (Minor Bladder Procedures with Major CC).

MS-DRG 707 (Major Male Pelvic Procedures with CC or Major CC).

MS-DRG 709 (Penis Procedures with CC or Major CC).

MS-DRG 746 (Vagina, Cervix & Vulva Procedures with CC or Major CC).

Response: We appreciate the commenter's support of the new procedure codes and the suggestion to revise the proposed MS-DRG titles. The newly created codes describing the use of grafts or prosthetics are restricted to female pelvic prolapse repair procedures and are not effective until October 1, 2007. As a result, there is no data available for analysis at this time. We will evaluate these recommendations as we obtain additional data using the MS-DRGs to determine if future changes to the above mentioned MS-DRGs are warranted. r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)

We received comments concerning the appropriate assignment within the MS-DRGs of patients receiving High-dose Interleukin-2 (IL-2).

In the FY 2004 final rule (68 FR 45360, August 1, 2003), we discussed the creation of a specific code to identify IL-2 (procedure code 00.15, High-dose infusion of Interleukin-2 (IL-2)) and the subsequent modification of existing CMS DRG 492 (Chemotherapy with Acute Leukemia as Secondary Diagnosis) by adding code 00.15 to the DRG logic and changing the title to ``Chemotherapy with Acute Leukemia or with use of High Dose Chemotherapy Agent''. This drug is marketed as Proleukin(copyright). Under the proposed MS-DRGs, CMS DRG 492 would be replaced by MS-DRG 837 (Chemotherapy with Acute Leukemia as Secondary Diagnosis or with High Dose Chemotherapeutic Agent with MCC), MS-DRG 838 (Chemotherapy with Acute Leukemia as Secondary Diagnosis with CC or High Dose Chemotherapeutic Agent), or MS-DRG 839 (Chemotherapy with Acute Leukemia as Secondary Diagnosis without CC/MCC).

Administration of high-dose Interleukin-2 (HD-IL-2) is a hospital inpatient-based regimen that can produce durable remissions of metastatic renal cell cancer and metastatic melanoma in a subset of patients. In contrast to traditional cytotoxic chemotherapies which target cancer cells directly, HD-IL-2 enhances the body's natural cancer defenses by stimulating the growth and activity of cancer- killing white blood cells. HD-IL-2 therapy is associated with severe complications that can include: hypotension, metabolic acidosis, acute renal failure, arrhythmia, myocardial inflammation, coagulation defects, hyperthyroidism, psychosis, respiratory distress syndrome, catheter related septicemia, hyperbilirubinemia and thrombocytopenia.

To safely administer HD-IL-2, the FDA-approved label states that HD-IL-2 ``should be administered in a hospital setting under the supervision of a qualified physician experienced in the use of anticancer agents. An intensive care facility and specialists skilled in cardiopulmonary or intensive care medicine must be available.'' Strict nursing protocols must be followed in order to minimize adverse events such as cardiac arrhythmias as well as severe hypotension.

Because it is associated with such severe side effects, HD-IL-2 therapy requires substantially greater resource utilization, including longer hospital stays and additional nursing support, than conventional chemotherapy. Conventional chemotherapy may be administered to patients either on an outpatient basis or through a series of short (that is, 1 to 3 day) inpatient stays. By contrast, FDA approval for high-dose IL-2 refers specifically to the following protocol:

``Each course of high-dose IL-2 therapy is administered during two separate hospital admissions, with an average length of stay of six to seven days each. For the first cycle, Interleukin-2 is administered every 8 hours over a 5-day period. Patients are then discharged to rest at home for

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several days, and then readmitted for a second cycle consisting of an identical dosing regimen. These two cycles comprise the first course of high-dose IL-2 therapy, which may be repeated after 8 to 12 weeks if the patient is responding.''

Based on data from peer reviewed publications, some centers may administer IL-2 ``off-label'' in low- or intermediate-dose regimens. For such off-label uses, IL-2 is either not administered as a bolus, or in a much lower-dose bolus. Because low- or intermediate-dose IL-2 therapy poses a lower risk of serious side effects, its administration is less resource intensive in terms of patient monitoring, nursing support, and length of stay.

A specific code was created for the administration of High-dose Interleukin-2 beginning with cases discharged on or after October 1, 2003. Code 00.15 (High-dose infusion interleukin-2 (IL-2)) came from existing code 99.28 (Injection or infusion of biological response modified [BMR] as an antineoplastic agent), which had been created for use on or after October 1, 1994. However, as there may be some confusion in the industry concerning the differentiation and correct coding of ``high-dose'' IL-2 therapy from less resource intensive uses, some non-high-dose cases have probably been incorrectly billed under 00.15 as high-dose cases when they should have been classified to code 99.28. Code 00.15 is specifically titled ``High-dose infusion Interleukin-2'' and contains inclusion terms specifying ``Infusion (IV Bolus, CIV) interleukin.'' A specifically written ``excludes note'' in the Tabular section of the Procedure Manual sends Coders to code 99.28 to correctly describe the administration of low-dose infusion Interleukin-2. This confusion has possibly caused Medicare to overpay for some non-high-dose cases as if they were high dose cases, and may have reduced the reported average charges and costs of true high-dose IL-2 therapy [in the MedPAR data files]. If reported average charges do not reflect true high-dose IL-2 therapy, the result of this coding inaccuracy may be causing the IPPS relative weight to reflect a blend of the costs of patient treated with high-dose and low-dose administration of IL-2.

To address this incorrect coding issue, CMS will clarify the ICD-9- CM coding system by making additional entries in both the Index and Tabular portions of the Procedure section of the code book. Procedure code 00.15 should only be billed for ``bolus, high-dose IL-2.'' Cases must satisfy the following four criteria, as documented in the medical record, to qualify for use of code 00.15 as ``bolus, high-dose IL-2'':

Bolus infusions given over no more than 30 minutes at a dose of no less than 600,000 IU/kg (weight adjusted);

Placement and utilization of a central line;

Administration in a hospital setting under the supervision of a qualified physician experienced in the use of anticancer agent with an intensive care facility and specialists skilled in cardiopulmonary or intensive care medicine available, and

A planned 5-day treatment protocol.

Comment: Commenters indicated that the administration of High-dose IL-2 is an extremely complicated and advanced therapy, requiring much stricter nursing protocols to prevent or manage the expected complications which accompany this type of cytotoxic therapy. The commenters also noted that HD-IL-2 cases are assigned to a CMS DRG for chemotherapy that, in their view, is clinically inappropriate. The commenters stated that technologies should be assigned to clinically consistent DRGs. Therefore, the commenters added, when a therapy differs clinically and in resource allocation from the other cases assigned to the same base DRG, adoption of a new DRG for that technology is warranted. Commenters urged CMS to reassess whether cases using HD-IL-2 and other treatments involving advanced technologies are assigned to appropriate DRGs and to create new, clinically appropriate DRGs for all advanced therapies.

Response: The cost of treating patients with HD-IL-2 continues to be represented in MS-DRGs 837, 838, and 839, but the cases have been distributed according to the presence or absence of an MCC, a CC, or the lack of either a comorbidity or complication according to the historical data represented by MedPAR. Medicare likely will continue to pay the same amount for all patients in these MS-DRGs. However, our payments will better reflect patient severity of illness by paying higher amounts for those cases where the patient has an MCC or CC than if they do not. The data suggest that it is appropriate to divide CMS DRG 492 based on severity levels, so for the MS-DRG system, new MS-DRGs 837, 838, and 839 were created, as described above. Our findings are represented in the following table.

Number of Average length Average MS-DRG

cases

of stay

charges

MS-DRG 837--All cases...........................................

1,525

22.62 $107,269.93 MS-DRG 837--Cases with IL-2 Infusion (Code 00.15)...............

56

8.11 73,104.34 MS-DRG 837--Cases without IL-2 Infusion (Code 00.15)............

1,469

23.17 108,600.39 MS-DRG 838--All cases...........................................

855

9.15 46,596.45 MS-DRG 838--Cases with IL-2 Infusion (Code 00.15)...............

555

4.78 44,008.54 MS-DRG 838--Cases without IL-2 Infusion (Code 00.15)............

522

11.94 48,247.36 MS-DRG 839--All cases...........................................

1,307

6.04 22,693.30 MS-DRG 839--Cases with IL-2 Infusion (Code 00.15)...............

20

4.40 38,002.15 MS-DRG 839--Cases without IL-2 Infusion (Code 00.15)............

1,287

6.07 22,455.40

These data suggest that average charges for patients receiving HD- IL-2 are either comparable or lower than other patients within assigned MS-DRGs 837 and 838. For this reason, we believe most cases treated with HD-IL-2 will be paid adequately under the MS-DRGs. The remaining 20 cases in MS-DRG 839 have average charges that are more than $15,000 higher than other cases within this MS-DRG. The average charges for these cases are closer to those for MS-DRG 838.

In spite of the possibility of erroneous coding of low-dose IL-2 cases to procedure code 00.15 instead of the more appropriate code 99.28 as discussed above, the data do not currently suggest a problem with Medicare payment for most of the HD-IL-2 cases assigned to MS-DRGs 837, 838, and 839. However, the data do suggest that the costs of cases of IL-2 coded with 00.15 currently assigned to MS-DRG 839 are closer to MS-DRG 838. Therefore, for FY 2008, we are assigning procedure code 00.15 (High-dose infusion of Interleukin-2 (IL-2)) to MS-DRG 837 (Chemotherapy with Acute Leukemia as Secondary Diagnosis

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or with High Dose Chemotherapeutic Agent with MCC) and MS-DRG 838 (Chemotherapy with Acute Leukemia as Secondary Diagnosis with CC or High Dose Chemotherapeutic Agent). s. Computer Assisted Surgery

Comment: We received one comment from a manufacturer requesting that CMS recognize improved clinical outcomes resulting from computer assisted surgery and develop new MS-DRGs to group patients together who receive this technology. The commenter noted that effective October 1, 2004, CMS created codes to describe specific forms of computer assisted surgery. The commenter further noted that clinical outcomes are superior when computer assisted surgery is utilized; however, assigning the computer assisted surgery codes does not affect the DRG assignment. The commenter encouraged CMS to consider this issue as it continues to refine the DRG system.

Response: We appreciate the commenter's recommendation that CMS evaluate how to better recognize the clinical outcomes associated with computer-assisted surgical procedures. It is unclear which procedures the commenter is proposing we specifically examine at this time. Currently, the procedure codes that identify the use of computer assisted surgery are as follows:

00.31, Computer assisted surgery with CT/CTA.

00.32, Computer assisted surgery with MR/MRA.

00.33, Computer assisted surgery with fluoroscopy.

00.34, Imageless computer assisted.

00.35, Computer assisted surgery with multiple datasets.

00.39, Other computer assisted surgery.

We will continue to study this issue as we obtain additional data under the MS-DRGs and determine if it is appropriate to make further modifications. 13. Changes to MS-DRG Logic As a Result of Public Comments

To assist the readers in identifying all changes that were made to the MS-DRGs as a result of public comments received on the FY 2008 IPPS proposed rule, we have developed the following summary chart of those changes.

MS-DRG Summary Chart

MDC/MS-DRG

Proposed title

Final title

Procedure code reassignments

Pre-MDC Intestinal Transplant

MS-DRG 005.................. Liver transplant and/or Liver transplant w MCC Cases with procedure code intestinal transplant w or intestinal

46.97 (Transplant of MCC.

transplant.

intestine) are reassigned from MS-DRG 006 to MS-DRG 005. MS-DRG 006.................. Liver transplant and/or Liver transplant w/o Intestinal Transplant w/ MCC. o MCC.

MDC 1 (Diseases and Disorders of the Nervous System) Implantation of Chemotherapeutic Agent Intracranial Stents

MS-DRG 023.................. Craniotomy with major Cranio w major dev iImpl/ Cases with procedure code device implant or acute acute complex CNS PDX 00.10 (Implantation of complex central nervous with MCC or chemo

chemotherapeutic agent) are system principal

implant.

reassigned from MS-DRG 024 diagnosis with MCC.

to MS-DRG 023. MS-DRG 024.................. Craniotomy with major Cranio w major dev impl/ Cases with procedure code device implant or acute acute complex CNS PDX w/ 00.62 (Percutaneous complex central nervous o MCC.

angioplasty or atherectomy system principal

of intracranial vessel(s)) diagnosis without MCC.

are reassigned from MS-DRGs 037-039 to MS-DRGs 023-024.

Intracranial Stents

MS-DRG 025.................. Craniotomy & endovascular Craniotomy &

Cases with procedure code intracranial procedures endovascular

00.62 (Percutaneous w MCC.

intracranial procedures angioplasty or atherectomy w MCC.

of intracranial vessel(s)) are reassigned from MS-DRGs 037 039 to MS-DRGS 025-027. MS-DRG 026.................. Craniotomy & endovascular Craniotomy &endovascular intracranial procedures intracranial procedures w CC.

w CC. MS-DRG 027.................. Craniotomy & endovascular Craniotomy & intracranial procedures endovascular w/o CC/MCC.

intracranial procedures w/o CC/MCC.

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Spinal Neurostimulators

MS-DRG 028.................. Spinal procedures w MCC.. Spinal procedures w MCC. Full system spinal cord non- MS-DRG 029.................. Spinal procedures w CC... Spinal procedures w CC rechargeable and ......................... or spinal

rechargeable neurostimulator MS-DRG 030.................. Spinal procedures w/o CC/ neurostimulators..

cases in MS-DRG 030 are MCC.

Spinal procedures w/o CC/ reassigned to MS-DRG 029 in MCC..

MDC 1. ICD-9-CM procedure codes 03.93 (Implantation or replacement of spinal neurostimulator lead(s)), and 86.94 (Insertion or replacement of single array neurostimulator pulse generator, not specified as rechargeable), or 86.95 (Insertion or replacement of dual array neurostimulator pulse generator, not specified as rechargeable), or 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator), or 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) must be reported in order for the spinal neurostimulator cases to be assigned to MS-DRG 029.

Intracranial Stents

MS-DRG 037.................. Extracranial procedures w Extracranial procedures Cases with procedure code MCC.

w MCC.

00.62 (Percutaneous MS-DRG 038.................. Extracranial procedures w Extracranial procedures angioplasty or atherectomy MS-DRG 039.................. CC.

w CC..

of intracranial vessel(s)) Extracranial procedures w/ Extracranial procedures are reassigned from MS-DRGs o CC/MCC.

w/o CC/MCC..

037 to MS-DRGs 023-027.

Peripheral Neurostimulators

MS-DRG 040.................. Periph & cranial nerve & Periph & cranial nerve & Full system peripheral non- other nerv syst proc w other nerv syst proc rechargeable and MS-DRG 041.................. MCC.

with MCC.

rechargeable neurostimulator Peripheral/Cranial nerve Periph/cranial nerve & cases in MS-DRG 042 are & other nerv syst proc other nerv syst proc w reassigned to MS-DRG 041. MS-DRG 042.................. with CC..

CC or periph neurostim.. ICD 9 CM procedure codes Peripheral/cranial nerve Periph/cranial nerve & 04.92 (Implantation or & other nerv syst proc w/ other nerv syst proc w/ replacement of peripheral o CC/MCC..

o CC/MCC..

neurostimulator lead(s)), and 86.94 (Insertion or replacement of single array neurostimulator pulse generator, not specified as rechargeable), or 86.95 (Insertion or replacement of dual array neurostimlator pulse generator, not specified as rechargeable), or 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator), or 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) must be reported in order for the peripheral neurostimulator cases to be assigned to MS-DRG 041.

Pain Codes

MS-DRG 091.................. Other disorders of

Other disorders of

Cases with a principal nervous system w MCC. nervous system w MCC. diagnosis of code 338.0 MS-DRG 092.................. Other disorders of

Other disorders of

(Central pain syndrome) or nervous system w CC.. nervous system w CC.. code 338.21 (Chronic pain MS-DRG 093.................. Other disorders of

Other disorders of

due to trauma) or code nervous system w/o CC/ nervous system w/o CC/ 338.22 (Chronic post- MCC..

MCC..

thoracotomy pain) or code 338.28 (Other chronic postoperative pain) or code 338.29 (Other chronic pain) or code 338.4 (Chronic pain syndrome) are reassigned from MDC 23, MS-DRGs 947-948 to MS-DRGs 091-093.

MDC 3 (Disease and Disorders of the Ear, Nose, Mouth, and Throat) Cochlear Implants

MS-DRG 129.................. Major head & neck

Major head & neck

Cochlear implant cases are procedures w CC/MCC. procedures w CC/MCC or reassigned from MS-DRG 130 MS-DRG 130.................. Major head & neck

Major Device.

to MS-DRG 129. The ICD 9 CM procedures w/o CC/MCC.. Major head & neck

procedure codes for cochlear procedures w/o CC/MCC.. implants are: 20.96 (Implantation or replacement of cochlear prosthetic device, not otherwise specified), or 20.97 (Implantation or replacement of cochlear prosthetic device, single channel), or 20.98 (Implantation or replacement of cochlear prosthetic device, multiple channel).

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MDC 5 (Disease and Disorders of the Circulatory System) Endovascular Implantation of Graft in Thoracic Aorta

MS-DRG 237.................. Major cardiovascular Major cardiovasc

Cases with procedure code procedures w MCC.

procedures w MCC or 39.73 (Endovascular ......................... thoracic aortic

implantation of graft in MS-DRG 238.................. Major cardiovascular

aneurysm repair.

thoracic aorta) are procedures w/o MCC.. Major cardiovascular reassigned from MS-DRG 238 procedures w/o MCC.. to MS-DRG 237.

Multiple Vessels, Multiple Coronary Stents

MS-DRG 246.................. Percutaneous

Perc cardiovasc proc w Cases in MS-DRG 247 with cardiovascular pro w drug-eluting stent w procedure code 00.66 drug-eluting stent w MCC or 4+ Vessels/

(Percutaneous transluminal MS-DRG 247.................. Major CC.

Stents.

coronary angioplasty [PTCA] Percutaneous

Perc cardiovasc proc w or coronary atherectomy), cardiovascular proc w drug-eluting stent w/o and code 36.07 (Insertion of drug-eluting stent w/o MCC..

drug-eluting coronary artery Major CC..

stent(s)), and code 00.43 (Procedure on four or more vessels), or code 00.48 (Insertion of four or more vascular stents) are reassigned to MS-DRG 246. MS-DRG 248.................. Percutaneous

Perc cardiovasc proc w Cases in MS-DRG 249 with cardiovascular proc w non-drug-eluting stent procedure codes 00.66 non-drug-eluting stent w w MCC or 4+ Ves/stents. (Percutaneous transluminal MS-DRG 249.................. Major CC.

Perc cardiovasc proc w coronary angioplasty [PTCA] Percutaneous

non-drug-eluting stent or coronary atherectomy), cardiovascular proc w w/o MCC..

and code 36.06 (Insertion of non-drug-eluting stent w/

non-drug-eluting coronary o Major CC..

artery stent(s)), and code 00.43 (Procedure on four or more vessels), or code 00.48 (Insertion of four or more vascular stents) are reassigned to MS-DRG 248. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) Spinal Fusion

MS-DRG 456.................. Spinal fusion exc cerv w Spinal fusion exc cerv w The following diagnoses are spinal curv, malig or 9+ spinal curv/malig/infec added to the principal fusions w MCC.

or 9+ fusions w MCC. diagnosis list for MS-DRGs MS-DRG 457.................. Spinal fusion exc w

Spinal fusion exc cerv w 456-458: 015.02 spinal curv, malig or 9+ spinal curv/malig/infec (Tuberculosis of bones and fusions w CC..

or 9+ fusions w CC.. joints, vertebral column, MS-DRG 458.................. Spinal fusion exc w

Spinal fusion exc cerv w bacteriological or spinal curv, malig or 9+ spinal curv/malig/infec histological examination fusions w/o CC/MCC.. or 9+ fusions w/o CC/ unknown (at present)); MCC..

015.04 (Tuberculosis of bones and joints, vertebral column, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture); 015.05 (Tuberculosis of bones and joints, vertebral column, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically); 730.08 (Acute osteomyelitis of other specified sites); 730.18 (Chronic osteomyelitis of other specified sites); and 730.28 (Unspecified oteomyelitis of other specified sites). Procedure code 81.64 (Fusion or refusion of 9 or more vertebrae) is added to the list of procedures for MS- DRGs 456-458.

Hip and Knee Replacements

MS-DRG 466.................. Revision of hip or knee Revision of hip or knee Cases with procedure code replacement w MCC.

replacement w MCC.

00.83 (Revision of knee MS-DRG 467.................. Revision of hip or knee Revision of hip or knee replacement, patellar replacement w CC..

replacement w CC..

component), or code 00.84 MS-DRG 468.................. Revision of hip or knee Revision of hip or knee (Revision of total knee replacement w/o CC/MCC.. replacement w/o CC/MCC.. replacement, tibial insert (liner)) are reassigned from MS-DRGs 466-468 to MS-DRGs 485-489. MS-DRG 485.................. Knee procedures w pdx of Knee procedures w pdx of infection w MCC.

infection w MCC. MS-DRG 486.................. Knee procedures w pdx of Knee procedures w pdx of infection w CC.

infection w CC. MS-DRG 487.................. Knee procedures w pdx of Knee procedures w pdx of ............................. infection w/o CC/MCC. infection w/o CC/MCC. MS-DRG 488.................. Knee procedures w/o pdx Knee Procedures without of infection w CC/MCC. Principal Diagnosis of Infection with CC/MCC. MS-DRG 489.................. Knee procedures w/o pdx Knee Procedures without of infection w/o CC/MCC. Principal Diagnosis of Infection without CC/ MCC.

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Spinal Procedures Spinal Neurostimulators

MS-DRG 490.................. Back & neck procedures Back & neck proc exc Cases with procedure codes except spinal fusion w spinal fusion with CC/ 84.59 (Insertion of other CC/MCC or disc devices. MCC or disc device/ spinal devices), or 84.62 MS-DRG 491.................. Back & neck procedures neurostim.

(Insertion of total spinal except spinal fusion w/o Back & neck proc exc disc prosthesis, cervical), CC/MCC..

spinal fusion w/o CC/ or 84.65 (Insertion of total MCC..

spinal disc prosthesis, lumbosacral), or 84.80 (Insertion or replacement of interspinous process device(s)), or 84.82 (Insertion or replacement of pedicle-based dynamic stabilization device(s)), or 84.84 (Insertion or replacement of facet replacement devices) are reassigned from MS-DRG 491 to MS-DRG 490. Reassign full system spinal cord non-rechargeable and rechargeable neurostimulator cases in MS-DRG 491 to MS- DRG 490 in MDC 8. ICD-9-CM procedure codes 03.93 (Implantation or replacement of spinal neurostimulator lead(s)), and 86.94 (Insertion or replacement of single array neurostimulator pulse generator, not specified as rechargeable), or 86.95 (Insertion or replacement of dual array neurostimulator pulse generator, not specified as rechargeable), or 86.97 (Insertion or replacement of single array rechargeable neurostimulator pulse generator), or 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator) must be reported in order for the spinal neurostimulator cases to be assigned to MS-DRG 490.

MDC 17 (MYELOPROLIFERATIVE DISEASES AND DISORDERS, POORLY DIFFERENTIATED NEOPLASM High-dose infusion interleukin-2 [IL-2])

MS-DRG 837.................. Chemo w acute leukemia as Chemo w acute leukemia Cases with procedure code sdx or w high dose chemo as sdx or w high dose 00.15 (High-Dose Infusion agent w MCC.

chemo agent w MCC.

Interleukin-2 [IL-2]) are reassigned from MS-DRG 839 to MS-DRG 838. MS-DRG 838.................. Chemo w acute leukemia as Chemo w acute leukemia sdx or w high dose chemo as sdx w CC or high agent w CC.

dose chemo agent. MS-DRG 839.................. Chemo w acute leukemia as Chemo w acute leukemia sdx or w high dose chemo as sdx w/o CC/MCC. agent w/o CC/MCC.

MDC 23 (Factors Influencing Health Status and Other Contacts with Health Status)

MS-DRG 947.................. Signs & symptoms w MCC... Signs & symptoms w MCC.. Cases with a principal MS-DRG 948.................. Signs & symptoms w/o MCC. Signs & symptoms w/o diagnosis of code 338.0 MCC..

(Central pain syndrome), 338.21 (Chronic pain due to trauma), or 338.22 (Chronic post-thoracotomy pain), or 338.28 (Other chronic postoperative pain), or 338.29 (Other chronic pain), or 338.4 (Chronic pain syndrome) are reassigned from MDC 23, MS-DRGs 947-948 to MS-DRGs 091-093 in MDC 1.

H. Recalibration of DRG Weights

In section II.E. of the preamble of this final rule with comment period, we stated that we are continuing to implement the cost-based DRG relative weights under a 3-year transition period such that, in FY 2008 (year two of the transition), the relative weights will be recalibrated using a blend of 67 percent of the cost-based relative weight and 33 percent of the charge-based relative weight. For FY 2009, the relative weights will be 100 percent cost-based. We are making a few minor changes to the cost-based relative weighting methodology that we adopted in the FY 2007 IPPS final rule (71 FR 47962 through 47971). However, in section II.E.2. of the preamble of the FY 2008 IPPS proposed rule, we requested public comments about whether to adopt any of the short-term recommendations to the cost-based relative weighting methodology for FY 2008 made by RTI. In response to those comments, we state in section II.E.2. of the preamble of this final rule with comment period that we are not adopting RTI's recommended regression- based CCRs for medical supplies and devices, IV drugs, and CT Scans and MRIs for FY 2008. However, as recommended by RTI, for FY 2008, we are adding two new CCRs for a total of 15 CCRs: One for ``Emergency Room'' and one for ``Blood and Blood Products,'' both of which can be derived directly from the Medicare cost report.

As we proposed, in developing the FY 2008 system of weights, we used two data sources: Claims data and cost report data. As in previous years, the claims data source is the MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2006 MedPAR data used in this final rule with comment period include discharges occurring on October 1, 2005, through September 30, 2006, based on bills received by CMS through March 2007, from all hospitals subject to the IPPS and short-term, acute care hospitals in Maryland (which are under

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a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2006 MedPAR file used in calculating the relative weights includes data for approximately 11,782,098 Medicare discharges from IPPS providers. Discharges for Medicare beneficiaries enrolled in a Medicare Advantage managed care plan are excluded from this analysis. The data exclude CAHs, including hospitals that subsequently became CAHs after the period from which the data were taken. The second data source used in the cost-based relative weighting methodology is the FY 2005 Medicare cost report data files from HCRIS, which represents the most recent full set of cost report data available. We used the March 31, 2007 update of the HCRIS cost report files for FY 2005 in setting the relative cost-based weights.

Because we are implementing the relative weights on a transitional basis, it is necessary to calculate both charge-based and cost-based relative weights. The charge-based methodology used to calculate the DRG relative weights from the MedPAR data is the same methodology that was in place for FY 2006 and FY 2007 and was applied as follows:

To the extent possible, all the claims were regrouped using the MS-DRGs being adopted for FY 2008, as discussed in section II.D. of the preamble of this final rule with comment period.

The transplant cases that were used to establish the relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively; previously CMS DRGs 103, 480, and 495) were limited to those Medicare- approved transplant centers that have cases in the FY 2006 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or intestinal, 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 IPPS rates, it was 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.

Total charges were standardized to remove the effects of differences in area wage levels, IME and DSH payments, and, for hospitals in Alaska and Hawaii, the cost-of-living adjustment was applied. Beginning with FY 2008, because hospital charges include charges for both operating and capital costs, we are standardizing total charges to remove the effects of differences in geographic adjustment factors, large urban add-on payments, cost-of-living adjustments, DSH payments, and IME adjustments under the capital IPPS as well.

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

The average charge for each DRG was then recomputed (excluding the statistical outliers). To compute the average DRG charge, we sum the standardized charges by DRG and divide by the transfer adjusted case count. 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. The average charge per DRG is then divided by the national average standardized charge per case to determine the relative weight.

The new charge-based weights were then normalized by an adjustment factor of 1.50850 so that the average case weight after recalibration was equal to the average case weight before recalibration. This normalization adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS as required by section 1886(d)(4)(C)(iii) of the Act.

The methodology we used to calculate the DRG cost-based relative weights from the FY 2006 MedPAR claims data and FY 2005 Medicare cost report data is as follows:

To the extent possible, all the claims were regrouped using the FY 2008 MS-DRG classifications discussed in section II.D. of the preamble of this final rule with comment period.

The transplant cases that were used to establish the relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively; previously CMS DRGs 103, 480, and 495) were limited to those Medicare- approved transplant centers that have cases in the FY 2006 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or intestinal, 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 cost for each DRG and before eliminating statistical outliers.

Claims with total charges or total length of stay less than or equal to zero were deleted. Claims that had an amount in the total charge field that differed by more than $10.00 from the sum of the routine day charges, intensive care charges, pharmacy charges, special equipment charges, therapy services charges, operating room charges, cardiology charges, laboratory charges, radiology charges, other service charges, labor and delivery charges, inhalation therapy charges, and anesthesia charges were also deleted.

At least 96.1 percent of the providers in the MedPAR file had charges for 10 of the 15 cost centers. Claims for providers that did not have charges greater than zero for at least 10 of the 15 cost centers were deleted.

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

Once the MedPAR data were trimmed and the statistical outliers were removed, the charges for each of the 15 cost groups for each claim were standardized to remove the effects of differences in area wage levels, IME and DSH payments, and for hospitals in Alaska and Hawaii, the applicable cost of living adjustment. Beginning with FY 2008, because hospital charges include charges for both operating and capital costs, we are standardizing total charges to remove the effects of differences in geographic adjustment factors, large urban add-on payments, cost-of- living adjustments, DSH payments, and IME adjustments under the capital IPPS as well. Charges were then summed by DRG for each of the 15 cost groups so that each DRG had 15 standardized charge totals. These charges were then adjusted to cost by applying the national average CCRs developed from the FY 2005 cost report data.

The 15 cost centers that we used in the relative weight calculation are shown in the following table. Included

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in the 15 CCRs are two distinct CCRs for FY 2008 for ``Emergency Room'' and ``Blood and Blood Products.'' The costs and charges for these two additional CCRs are removed from the ``Other Services'' CCR. The table shows the lines on the cost report that we used to create the 15 national cost center CCRs that we used to adjust the DRG charges to cost. For FY 2008, we are making minor revisions to the Cardiology, Laboratory, Radiology, and Other Services CCRs we are using to calculate the DRG relative weights, as follows:

The costs for cases involving Electroencephalography (EEG), cost report line 54, are currently in the Cardiology cost center group. However, MedPAR categorizes the claims data for EEG under Laboratory Charges (revenue codes 0740 and 0749). In order to maintain consistency with matching costs on the cost report to charges on MedPAR claims, we are moving cost report line 54 for EEG out of the Cardiology cost center group into the Laboratory cost center group.

In the FY 2007 IPPS proposed rule, we originally included the costs for Radioisotopes, cost report line 43, in the Radiology cost center group. However, in response to comments, we moved Radioisotopes to the Other Services cost center group. After researching this issue further over the past year, we believe that Radioisotopes is a radiology-related service that more appropriately belongs in the Radiology cost center group. Accordingly, for FY 2008, as we proposed, we are moving the cost report line item for line 43, Radioisotopes, out of the Other Services cost center group and into the Radiology cost center group. The version of the 15 cost center groupings are in the table below: BILLING CODE 4120-01-P

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We developed the national average CCRs as follows:

Taking the FY 2005 cost report data, we removed CAHs, Indian Health Service hospitals, all inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We included hospitals located in Maryland as we are including their charges in our claims database. We then created CCRs for each provider for each cost center (see prior table for line items used in the calculations) and removed any CCRs that were greater than 10 or less than 0.01. We normalized the departmental CCRs by dividing the CCR for each department by the total CCR for the hospital for the purpose of trimming the data. We then took the logs of the normalized cost center CCRs and removed any cost center CCRs where the log of the cost center CCR was greater or less than the mean log plus/minus 3 times the standard deviation for the log of that cost center CCR. Once the cost report data were trimmed, we calculated a Medicare specific CCR. The Medicare specific CCR was determined by taking the Medicare charges for each line item from Worksheet D, Part 4 and deriving the Medicare specific costs by applying the hospital specific departmental CCRs to the Medicare specific charges for each line item from Worksheet D, Part 4. Once each hospital's Medicare specific costs were established, we summed the total Medicare specific costs and divided by the sum of the total Medicare specific charges to produce national average, charge weighted CCRs.

After we multiplied the total charges for each DRG in each of the 15 cost centers by the corresponding national average CCR, we summed the 15 ``costs'' across each DRG to produce a total standardized cost for the DRG. The average standardized cost for each DRG was then computed as the total standardized cost for the DRG divided by the transfer adjusted case count for the DRG. The average cost for each DRG was then divided by the national average standardized cost per case to determine the relative weight.

The new cost-based relative weights were then normalized by an adjustment factor of 1.50957 so that the average case weight after recalibration was equal to the average case weight before recalibration. Since more trims were applied to the data under the cost-based weighting methodology than under the charge-based methodology, a smaller universe of claims was used in the cost-based weighting methodology. In this instance, the different universe of claims also resulted in a slightly higher cost-based normalization factor than the normalization factor derived for charge-based weights. The normalization adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.

The 15 national average CCRs for FY 2008 are as follows:

Group

CCR

Routine Days................................................. 0.553 Intensive Days............................................... 0.490 Drugs........................................................ 0.209 Supplies & Equipment......................................... 0.345 Therapy Services............................................. 0.428 Laboratory................................................... 0.177 Operating Room............................................... 0.303 Cardiology................................................... 0.196 Radiology.................................................... 0.181 Emergency Room............................................... 0.309 Blood and Blood Products..................................... 0.455 Other Services............................................... 0.451 Labor & Delivery............................................. 0.501 Inhalation Therapy........................................... 0.198 Anesthesia................................................... 0.146

As we explained in section II.D. of the preamble of this final rule with comment period, in response to comments, we are implementing the MS-DRGs with a 2-year transition period beginning in FY 2008. For FY 2008, the first year of the transition, 50 percent of the relative weight for a DRG is based on the two-thirds cost-based weight/one-third charge-based weight calculated using FY 2006 MedPAR data grouped to the Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 2008 relative weight for a DRG is based on the two-thirds cost-based weight/ one-third charge based weight calculated using FY 2006 MedPAR grouped to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the relative weights will be based on 100 percent cost weights computed using the Version 26.0 (FY 2009) MS-DRGs. Specifically, the blended relative weights for FY 2008 are computed as follows:

First, using the Version 24.0 GROUPER, relative weights are calculated based on 100 percent cost-based and 100 percent charge- based, respectively. These weights are then blended using two-thirds of the cost-based weights and one-third of the charge-based weights to establish the CMS DRG portion of the transition weights.

Second, using the Version 25.0 FY 2008 (MS-DRG) GROUPER, relative weights are calculated based on 100 percent cost-based weights and 100 percent charge-based weights, respectively. These weights are then blended using two-thirds of the cost-based weights and one-third of the charge-based weights to establish the MS-DRG portion of the transition weights.

Under the transition blend we are adopting in this final rule with comment period, we will group cases to MS-DRGs (using the Version 25.0 GROUPER), but the payment weight for each DRG will be a 50/50 blend of the MS-DRG weight and CMS DRG weight. Thus, we had to determine a blended weight for each DRG. Using the claims in the FY 2006 MedPAR database that we used to compute cost based weights under the Version 24.0 GROUPER, we grouped each case to a CMS-DRG (using the Version 24.0 GROUPER) and an MS-DRG (using the Version 25.0 GROUPER). Commonly, a set of cases that grouped to a single MS-DRG grouped to two or more CMS DRGs. Therefore, we determined an average CMS DRG weight for all cases that grouped to each MS-DRG. Specifically, we summed the CMS DRG weights of all the cases that grouped to each MS-DRG and then divided that number by the transfer-adjusted case count. To establish the final blended weight for each DRG, we added 50 percent of the MS-DRG weight to 50 percent of the average CMS DRG weight for that MS-DRG. These final blended relative weights are listed in Table 5 of this final rule with comment period.

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 used that same case threshold in recalibrating the DRG weights for FY 2008. Using the FY 2006 MedPAR data set, there are 7 MS-DRGs that contain fewer than 10 cases. Under the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we no longer have separate DRGs for patients age 0 to 17 years. With the exception of newborns, we previously separated some DRGs based on whether the patient was age 0 to 17 years or age 17 years and older. Other than the age split, cases grouping to these DRGs are identical. The DRGs for patients age 0 to 17 years generally have very low volumes because children are typically ineligible for Medicare. In the past, we have found that the low volume of cases for the pediatric DRGs could lead to significant year-to-year instability in their relative weights. Although we have always encouraged non-Medicare payers to develop weights applicable to their own patient populations, we have heard frequent complaints from providers about the use of the Medicare relative weights in the pediatric population. We believe that

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eliminating this age split in the MS-DRGs will provide more stable payment for pediatric cases by determining their payment using adult cases that are much higher in total volume. All of the low volume DRGs listed below are for newborns. Newborns are unique and require separate DRGs that are not mirrored in the adult population. Therefore, it remains necessary to retain separate DRGs for newborns. In FY 2008, because we do not have sufficient MedPAR data to set accurate and stable cost weights for these low-volume DRGs, we are computing weights for the low-volume DRGs by adjusting their FY 2007 weights by the percentage change in the average weight of the cases in other DRGs. The crosswalk table is shown below:

Low Volume DRG

DRG title

Crosswalk to DRG

789................. Neonates, Died or FY 2007 FR weight Transferred to

(adjusted by percent Another Acute Care change in average weight Facility.

of the cases in other DRGs). 790................. Extreme Immaturity or FY 2007 FR weight Respiratory Distress (adjusted by percent Syndrome, Neonate. change in average weight of the cases in other DRGs). 791................. Prematurity With Major FY 2007 FR weight Problems.

(adjusted by percent change in average weight of the cases in other DRGs). 792................. Prematurity Without FY 2007 FR weight Major Problems.

(adjusted by percent change in average weight of the cases in other DRGs). 793................. Full-Term Neonate With FY 2007 FR weight Major Problems.

(adjusted by percent change in average weight of the cases in other DRGs). 794................. Neonate With Other FY 2007 FR weight Significant Problems. (adjusted by percent change in average weight of the cases in other DRGs). 795................. Normal Newborn........ FY 2007 FR weight (adjusted by percent change in average weight of the cases in other DRGs).

I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2008

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, because the patient classification system utilized under the LTCH PPS uses the same CMS DRGs as those currently 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 used under the IPPS. Therefore, 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. We further stated that we will publish the annual proposed and final update of the LTC-DRGs in same notice as the proposed and final update for the IPPS (69 FR 34125).

Comment: Several commenters strongly recommended that we establish one rulemaking cycle that would encompass the update of the LTCH PPS payment rates (July 1) as well as the development of the LTC-DRG weights (October 1). One commenter also suggests that this change should begin for RY 2009 and, for that year, CMS should implement a 3- month update to the standardized amount (July 1, 2008 through September 30, 2008 with no other policy changes. The commenters also have stated that there should only be one rulemaking cycle because of interactive effects of adjustments made at two different times.

Response: In the RY 2008 LTCH PPS final rule (72 FR 26874), we responded to a similar comment by stating that we would ``evaluate whether such a consolidation is a workable alternative to the present schedule.'' While we appreciate the continued interest of commenters on this issue, we note that we did not propose a change to the LTCH PPS update cycle in the FY 2008 IPPS proposed rule. Therefore, we do not believe that the IPPS final rule is the appropriate vehicle for addressing these concerns. Rather, we believe that exploring the possibility of the consolidation of the LTCH PPS rulemaking cycles would be better addressed in the LTCH PPS rate year regulations since those rules are the primary vehicle for proposing and finalizing policy changes to the LTCH PPS. Therefore, we will continue our evaluation of this suggestion for the time being.

In the FY 2008 IPPS proposed rule, we did not address the issue concerning changing the present update cycle for the LTCH PPS, and therefore, we are not making any changes to the LTCH PPS update cycle in this final rule with comment period. However, we will take all comments and suggestions concerning the RY 2009 update into consideration when preparing the RY 2009 LTCH PPS proposed rule. Commenters' concerns regarding any changes to the present rulemaking cycle will be considered when we evaluate the possibility of making changes to the present update cycle as well as any options that may be available. To this end, any proposed changes to the present update cycle would be included in the RY 2009 LTCH PPS proposed rule for public comment.

In the past, the annual update to the IPPS CMS DRGs has been based on the annual revisions to the ICD-9-CM codes and was effective each October 1. As discussed in the FY 2008 IPPS proposed rule (72 FR 24755 through 24757), with the implementation of section 503(a) of Pub. L. 108-173, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year (October 1 and April 1) as required by the statute for the IPPS. Section 503(a) of Pub. L. 108-173 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

[sic] 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.'' This requirement improves the recognition of new technologies under the IPPS by accounting for those ICD-9-CM codes in the MedPAR claims data earlier than the agency had accounted for new technology in the past. In implementing the statutory change, the agency has provided that ICD-9-CM diagnosis and procedure codes for new medical technology may be created and assigned to existing DRGs in the middle of the Federal fiscal year, on April 1. However,

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this policy change will not impact the DRG relative weights in effect for that year, which will continue to be updated only once a year (October 1), nor will it have any impact on Medicare payments in that year. The use of the ICD-9-CM code set is also compliant with the current requirements of the Transactions and Code Sets Standards regulations at 45 CFR Parts 160 and 162, promulgated in accordance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. 104-191.

As noted above, the patient classification system used under the LTCH PPS is the same patient classification system that is used under the IPPS. Therefore, the ICD-9-CM codes currently used under both the IPPS and LTCH PPS may be updated as often as twice a year. This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS.

Because we do not publish a midyear IPPS rule, any April 1 ICD-9-CM coding update will not be published midyear. Rather, we will assign any new diagnosis or procedure codes to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignments (as also discussed in section II.G.10. of the preamble of this final rule with comment period). Any coding updates will be available through the Web sites provided in section II.G.10. of the preamble of this final rule with comment period and through the Coding Clinic for ICD 9-CM, a product of the American Hospital Association. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software system. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because we must use current ICD-9-CM codes. Therefore, for purposes of the LTCH PPS, because each ICD 9-CM code must be included in the GROUPER algorithm to classify each case under the LTCH PPS, the GROUPER software program used under the LTCH PPS would need to be revised to accommodate any new codes.

In implementing section 503(a) of Pub. L. 108-173, there will only be an April 1 update if new technology codes are requested and approved. We note that any new codes created for April 1 implementation will be limited to those diagnosis and procedure code revisions primarily needed to describe new technologies and medical services. However, we reiterate that the process of discussing updates to the ICD-9-CM is an open process through the ICD-9-CM Coordination and Maintenance Committee. Requestors will be given the opportunity to present the merits for a new code and to make a clear and convincing case for the need to update ICD-9-CM codes for purposes of the IPPS new technology add-on payment process through an April 1 update (as also discussed in section II.G.10. of the preamble of this final rule with comment period).

As we discussed in the FY 2008 IPPS proposed rule (72 FR 24755), at the September 28, 2006 ICD-9-CM Coordination and Maintenance Committee meeting, there were no requests for an April 1, 2007 implementation of ICD 9-CM codes. Therefore, the next update to the ICD-9-CM coding system will not occur until October 1, 2007 (FY 2008). Because there were no coding changes suggested for an April 1, 2007 update, the ICD- 9-CM coding set implemented on October 1, 2006, will continue through September 30, 2007 (FY 2008). The update to the ICD-9-CM coding system for FY 2008 is discussed above in section II.G.10. of the preamble of this final rule with comment period. Accordingly, in this final rule with comment period, as discussed in greater detail below, we are modifying and revising the LTC-DRG classifications and relative weights, to be effective October 1, 2007 through September 30, 2008 (FY 2008). In addition, we will notify LTCHs of any revisions to the GROUPER software used under the IPPS and the LTCH PPS that may be implemented on April 1, 2008. As discussed in greater detail below, the MS-LTC-DRGs for FY 2008 in this final rule with comment period are the same as the MS-DRGs adopted under the IPPS for FY 2008 (GROUPER Version 25.0) discussed in section II.B. of the preamble to this final rule with comment period. 2. Changes in the LTC DRG Classifications a. Background

Section 123 of Pub. L. 106 113 specifically requires that the agency implement a PPS for LTCHs that is a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs. Section 307(b)(1) of Pub. L. 106- 554 modified the requirements of section 123 of Pub. L. 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 123 of Pub. L. 106-113 as amended by section 307(b)(1) of Pub. L. 106-554 and Sec. 412.515 of our existing regulations, the LTCH PPS uses information from LTCH patient records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. As described in section II.D. of the preamble of this final rule with comment period, we are adopting MS-DRGs under the IPPS because we believe that adopting this system will result in a significant improvement in the DRG system's recognition of severity of illness and resource usage. We believe these improvements in the DRG system will be equally applicable to the LTCH PPS. The changes we are currently making for the IPPS are reflected in the FY 2008 GROUPER, Version 25.0, to be effective for discharges occurring on or after October 1, 2007 through September 30, 2008. Currently, the LTC-DRGs used as the patient classification system under the LTCH PPS correspond to the current CMS DRGs applicable under the IPPS for acute care hospitals.

Consistent with our historical practice of having LTC-DRGs correspond to the DRGs applicable under the IPPS, under the broad authority of section 123(a) of Pub. L. 106-113, as modified by section 307(b) of Pub. L. 106-554, as proposed, under the LTCH PPS we are adopting the use of MS-LTC-DRGs, which correspond to the MS-DRGs we are adopting under the IPPS. In addition, as stated above, we will be using the FY 2008 GROUPER Version 25.0 to classify cases effective for LTCH discharges occurring on or after October 1, 2007 through September 30, 2008. The changes to the current CMS DRG classification system used under the IPPS for FY 2008 (GROUPER Version 25.0) are discussed in section II.D. of the preamble to this final rule with comment period.

Comment: Four commenters indicated support for the adoption of the MS-LTC-DRGs for the LTCH PPS but noted specific concerns and included policy suggestions that they believed could address these concerns.

Response: We appreciate the commenters' support. We have seriously considered the areas of concern as well as the policy suggestions. As stated above, we are adopting the use of MS-LTC-DRGs beginning in FY 2008.

[[Continued on page 47279]]

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

[[pp. 47279-47328]] Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates

[[Continued from page 47278]]

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Below, we explain our responses to these stated concerns.

Comment: Several commenters expressed concern about the adoption of the MS-LTC-DRGs for FY 2008 in advance of RAND's final report. These commenters envisioned that a report recommending a DRG system other than the MS-DRGs, (upon which the MS-LTC-DRGs are based) could result in a CMS decision to implement ``yet another'' patient classification system in FY 2009.

Response: As noted above in our response to similar comments focusing on the use of the MS-DRGs by the IPPS, as RAND has completed its evaluation of the alternative DRG systems, including the MS-DRGs, consistent with RAND's findings, we believe it is appropriate at this time to adopt the MS-DRG system for Medicare in FY 2008 for the IPPS and at the same time, we are also adopting the MS-LTC-DRGs for the LTCH PPS. While there will be an opportunity for the public to comment on RAND's findings, we do not think it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems being evaluated by RAND is clearly superior. We plan to use RAND's report to continue to examine ways to improve and refine Medicare inpatient payment systems and expect that any future refinements will be based on MS-DRGs. Therefore, as final policy for FY 2008, we are adopting the MS-LTC-DRGs as the new classification system for the LTCH PPS. However, since we are interested in public input on this issue, we will make RAND's final report available on the CMS Web Site at: http://www.cms.hhs.gov/Reports/downloads/

Interested members of the public can write to the following

address:

Division of Acute Care, Center for Medicare Management, 7500 Security Boulevard, C4-08-06, Baltimore, MD 21244, Attn: Mady Hue.

Comment: Two commenters requested that CMS delay adoption of the MS-LTC-DRGs until FY 2009 in order to provide LTCHs additional time to analyze the impact of the new classification system and to provide meaningful comments. The commenters suggested that, during this time, CMS examine the interaction of MS-LTC-DRG relative weights and new policies established for RY 2008 (for example, revisions to the short- stay outlier policy resulting in the ``IPPS comparable threshold'') before implementing MS-LTC-DRGs. The commenters further stated that such a delay would allow LTCHs the opportunity to adjust to the other recent LTCH PPS changes.

Response: We do not believe that it is either appropriate or necessary to delay the adoption of the MS-LTC-DRGs until FY 2009 as the commenters suggest. We believe that we provided a comprehensive analysis of the MS-DRG classification system, upon which the MS-LTC- DRGs are based, in the proposed rule and, as discussed elsewhere in these responses, clear and specific direction, which are evidenced by the number of comments that were received, which allowed hospital stakeholders to simulate the impacts of the proposed policy change. We do not believe a full year delay in implementation of the MS-DRGs and the MS-LTC-DRGs is necessary or appropriate. We believe that implementing the severity-based DRGs will result in more appropriate Medicare payments, a goal that should not be postponed. However, although we are not delaying the adoption of the severity-based DRGs for either the IPPS or the LTCH PPS, we are providing a 2-year transition to the full adoption of both the MS-DRGs and the MS-LTC- DRGs, described elsewhere in these responses. We believe the transition will mitigate the payment impact of the new DRG system for both acute care hospitals and LTCHs as they adapt to the system. Furthermore, as we note in our discussion of a similar comment regarding the adoption of the MS-DRGs for the IPPS (see section II.E. of the preamble of this final rule with comment period), many commenters supported immediate adoption of the MS-DRGs, particularly because they are so structurally similar to the current DRGs. Therefore, we continue to maintain that a full year's delay in the adoption of the MS-LTC-DRGs under the LTCH PPS is unwarranted. While the MS-DRGs do include some consolidations of base DRGs, the major changes from the current DRGs involve adding severity levels to the base DRGs. Therefore, the move to MS-LTC-DRGs will not necessitate additional data elements. Because we do not believe that extensive preparation for implementation of the MS-DRGs is necessary, we do not believe that it is appropriate or necessary to delay adoption of the MS-DRGs until FY 2009. We continue to believe that payment adjustments that were finalized in the RY 2008 LTCH PPS final rule, among which was the revision to the short-stay outlier policy noted by the commenters, will result in more appropriate Medicare payments to LTCHs. The revised SSO policy addresses the issue of LTCH discharges that are comparable to an acute care IPPS hospital discharge based on the length of stay for that discharge. That policy is not tied to or affected by the adoption of the MS-LTC-DRGs. Nor do we believe that the extension of the 25 percent threshold adjustment that we finalized for RY 2008 at revised Sec. 412.534 and new Sec. 412.536, which governs Medicare payments for patients discharged from LTCHs who were admitted from specific referring hospitals, is tied to or affected by the adoption of the MS-LTC-DRGs. Furthermore, as noted above, because the MS-LTC-DRGs are so structurally similar to the LTC- DRGs, we do not believe that postponing the adoption of the severity- weighted DRGs in order to evaluate the interaction of the policy changes implemented for the LTCH PPS for RY 2008 would confer any significant advantage to stakeholders.

Comment: Four commenters urged CMS to establish a 3-year transition to the full adoption of the MS-LTC-DRGs in order to minimize the ``impact of behavioral changes in coding'' resulting from the new system. Referring to the proposed 2.4 percent downward adjustment, the commenters also maintained that a 3-year transition would allow CMS to analyze LTCH data which would indicate whether there were coding changes that could warrant the application of a prospective adjustment to LTCH PPS payment rates.

Response: We have carefully considered each comment in determining whether there should be a transition period for the relative weights computed using the MS-LTC-DRGs, the length of the transition, and how to compute the relative weights during the transition. Although we received strong general support for adopting the MS-LTC-DRGs, we agree that some transition is warranted to mitigate the magnitude of potential changes in payment to LTCHs that could occur in one year. As discussed in section II.D. of the preamble to this final rule with comment period, although MedPAC recommended that CMS fully implement MS-DRGs immediately, MedPAC suggested that, if the agency chose not to fully implement severity-adjusted DRGs in FY 2008, CMS should implement MS-DRGs over a 2-year transition. Accordingly, as we discussed earlier regarding implementation of the MS-DRGs under the IPPS, we are also implementing a 2 year transition to MS-LTC-DRGs. For FY 2008, the first year of the transition, 50 percent of the relative weight for a MS-LTC- DRG will be based on average relative weight under Version 24.0 of the LTC-DRG GROUPER. The remaining 50 percent of the FY 2008 relative weight for a MS-

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LTC-DRG will be based on the MS-LTC-DRG relative weight. For a more detailed description of the calculation of the MS-LTC-DRG relative weights for FY 2008 under this transition methodology, we refer readers to section II.I.4. (step 7 of Steps for Determining the FY 2008 MS-LTC- DRG Relative Weights) of the preamble of this final rule with comment period.) In FY 2009, the MS-LTC-DRG relative weights will be based on 100 percent of MS-LTC-DRG relative weights.

As discussed in detail elsewhere in these responses, we are not finalizing the proposed 2.4 percent downward adjustment to the MS-LTC- DRG relative weights.

Comment: Some commenters maintained that they are unable to fully evaluate the impact of the proposed MS-DRG system on their member hospitals due to the lack of access to the necessary tools. The commenters note that neither an MS-LTC-DRG GROUPER nor an MS-LTC-DRG Definitions Manual has been made available to help them completely understand the proposed system. Therefore, the commenters believed they have been prevented from thoroughly and completely evaluating the proposed system and providing meaningful comments. The commenter recommended delaying implementation of the MS-LTC-DRGs until such information has been made available and providers have had the opportunity to review it and provide meaningful comments.

Response: We disagree that LTCHs have not had adequate access to information concerning the changes to the MS-DRGs and the MS-LTC-DRGs. Ample and thorough information was published in the FY 2008 IPPS proposed rule. We refer the commenters to Section II.D.2., ``Development of Proposed Medicare Severity DRGs (MS-DRGs)'' beginning on page 24697 of the May 3, 2007 Federal Register (72 FR 24697 through 24707), where CMS' entire process for the creation of the MS-DRGs was explained. We discussed the creation of base MS-DRGs, upon which the MS-LTC-DRGs are based, and the consolidation from the existing DRGs is summarized in Table F of the Addendum to the proposed rule (72 FR 24702). We also discussed the process for applying the severity criteria to each of the 335 base DRGs, resulting in 745 proposed MS- DRGs.

We discussed the proposed changes to the LTC-DRG classifications (72 FR 24755 through 24771), and indicated that we proposed to conform the LTC-DRG system to the IPPS DRG system by using MS-LTC-DRGs which correspond to the proposed MS-DRGs. Further specific conforming language was spelled out on pages 24756 through 24757 of the FY 2008 IPPS proposed rule.

In addition, we made other information available to the public that would allow for a detailed analysis of the MS-LTC-DRG proposal. We made available two MedPAR files (FY 2005 and FY 2006) that included the CMS DRG and MS-DRG assignment for each case. As discussed in the preamble to the proposed rule, the MS-LTC-DRGs and MS-DRGs share identical titles. Furthermore, Table 11 of the Addendum to the proposed rule listed the relative weight for each MS-LTC-DRG. With this information, the public could determine the MS-LTC-DRG assignment and relative weight for all cases in the FY 2005 and FY 2006 MedPAR files. Therefore, we believe the public had detailed information with which to perform a comprehensive analysis of our proposal to adopt MS-LTC-DRGs.

Because we believe that adequate access to proposed changes to MS- LTC-DRGs has been provided, as discussed above, we are not delaying their implementation. As stated above, we are adopting the use of MS- LTC-DRGs under the LTCH PPS, which correspond to the MS-DRGs adopted under the IPPS. Accordingly, we will be using the FY 2008 GROUPER Version 25.0 effective for LTCH discharges occurring on or after October 1, 2007 through September 30, 2008.

In conjunction with the changes to the existing CMS DRGs for the IPPS by adoption of the MS-DRGs, as discussed above, we are adopting the MS-LTC-DRGs for the LTCH PPS, as both sets of DRGs are determined from the same DRG structure. Although the structure of the DRGs used under the IPPS and the LTCH PPS are identical, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs. This conforming change, that is, to replicate the MS-LTC-DRG structure after the MS-DRG structure, is appropriate in order to maintain consistency and uniformity among a number of stakeholders, such as acute care hospitals, LTCHs, epidemiologists, rate setting organizations, and payors, among others. Notwithstanding the value of consistency, however, we also emphasize, that the adoption of the MS-LTC-DRGs as the patient classification system for the LTCH PPS will improve identification of severity of illness and hospital resource use which will result in more appropriate Medicare payments for LTCHs. As noted above, the patient classification system used under the LTCH PPS is the same patient classification system used under the IPPS, which historically has been updated annually as required by section 1886(d)(4)(C) of the Act and is effective for discharges occurring on or after October 1 through September 30 of each year. As such, the updates to the MS-DRG classification system used under the IPPS for FY 2008 (GROUPER Version 25.0), discussed in section II.D. of the preamble of this final rule with comment period, will be applicable to updates under the LTCH PPS (that is, the MS-LTC-DRGs).

As discussed above, we proposed to adopt the MS-LTC-DRGs as the patient classification system under the LTCH PPS, beginning with discharges occurring on or after October 1, 2007. However, in the proposed rule, we omitted proposed changes to the regulation text reflecting the proposed change from LTC-DRGs to MS-LTC-DRGs. As discussed previously in this preamble, in this final rule with comment period, we are adopting MS-LTC-DRGs for use in the LTCH PPS beginning with discharges on or after October 1, 2007. In this final rule with comment period, we are revising the regulation text to conform to our proposed and final policy. Consequently, we are revising the regulation text at Sec. 412.503 where we define terms associated with the LTCH PPS in order to indicate the adoption of the MS-LTC-DRGs as the patient classification system under the LTCH PPS beginning with FY 2008 for discharges occurring on or after October 1, 2007. First, we are adding language to the definition of ``LTC-DRG'' indicating that effective, October 1, 2007, the MS-LTC-DRGs are used to classify patient discharges occurring on or after October 1, 2007, from a long-term care hospital and that for patient discharges occurring on or after October 1, 2007 and that references to LTC-DRGs in 42 CFR Part 412, Subpart O for policy descriptions and/or payment calculations shall be considered to be references to the MS-LTC-DRGs. Secondly, we are adding a definition of ``MS-LTC-DRGs'' as ``* * * the severity-adjusted diagnosis-related group used to classify patient discharges from a long-term care hospital based on clinical characteristics and average resource use, for prospective payment purposes for discharges from a long-term care hospital occurring on or after October 1, 2007.''

Under the LTCH PPS, as described in greater detail below, we determine relative weights for each of the MS-LTC-DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple

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medical problems characteristic of LTCH patients. (Unless otherwise noted in this final rule with comment period, our MS-LTC-DRG analysis is based on LTCH data from the March 2007 update of the FY 2006 MedPAR file, which contains hospital bills received through March 31, 2007, for discharges occurring in FY 2006.)

LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. Therefore, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55985), which implemented the LTCH PPS, and the FY 2006 IPPS final rule (70 FR 47324), we use low-volume quintiles in determining the DRG relative weights for DRGs with less than 25 LTCH cases (low-volume LTC-DRGs). Specifically, we group those low-volume DRGs into 5 quintiles based on average charges per discharge. (A listing of the composition of low-volume quintiles for the FY 2007 LTC- DRGs (based on FY 2005 MedPAR data) appears in section II.I.2. of the FY 2007 IPPS final rule (71 FR 47975 through 47978).) 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, as discussed below in section II.I.4. of the preamble of this final rule with comment period. 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 DRG to which a beneficiary's stay is assigned. Just as cases have been classified into the MS-DRGs for acute care hospitals under the IPPS (section II.B. of the preamble of this final rule with comment period), cases have been classified into MS-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 demographic information about the patient. The diagnosis and procedure information is reported by the hospital using the ICD-9-CM coding system. Under the MS-DRGs for the IPPS and the MS-LTC-DRGs for the LTCH-PPS, these factors will not change.

Section II.B. of the preamble of this final rule with comment period discusses the organization of the existing CMS DRGs, which we are maintaining under the MS-DRG and MS-LTC-DRG systems. As noted above, the patient classification system for the LTCH-PPS is derived from the IPPS DRGs and is similarly organized into 25 major diagnostic categories (MDCs). Most of these MDCs are based on a particular organ system of the body and the remainder involves 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. Under the present CMS DRGs, some surgical and medical DRGs are further differentiated based on the presence or absence of CCs. The existing LTC-DRGs are similarly categorized. (See section II.B. of the preamble of this final rule with comment period for further discussion of surgical DRGs and medical DRGs.)

The MS-DRGs and the MS-LTC-DRGs contain base DRGs that have been subdivided into one, two, or three severity levels. The most severe level has cases with at least one code that is a major CC, referred to as ``with MCC''. The next lower severity level contains cases with at least one CC, referred to as ``with CC''. Those DRGs without an MCC or a CC are referred to as ``without CC/MCC''. When data did not support the creation of three severity levels, the base DRG was divided into either two levels or the base was not subdivided. The two-level subdivisions consist of one of the following subdivisions:

With CC/MCC.

Without CC/MCC.

In this type of subdivision, cases with at least one code that is on the CC or MCC list are assigned to the ``with CC/MCC'' DRG. Cases without a CC or an MCC are assigned to the ``without CC/MCC'' DRG.

The other type of two-level subdivision is as follows:

With MCC.

Without MCC.

In this type of subdivision, cases with at least one code that is on the MCC list are assigned to the ``with MCC'' DRG. Cases that do not have an MCC are assigned to the ``without MCC'' DRG. This type of subdivision could include cases with a CC code, but no MCC. 3. Development of the FY 2008 MS-LTC-DRG Relative Weights a. General Overview of Development of the MS-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 medical care to Medicare patients. The system must be able to account adequately for each 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 have annually adjusted the LTCH-PPS standard Federal prospective payment system rate by the applicable relative weight in determining payment to LTCHs for each case. (As we have noted above, as proposed, we are adopting the MS-LTC-DRGs for the LTCH-PPS for FY 2008. However, this change in the patient classification system does not affect the basic principles of the development of relative weights under a DRG- based prospective payment system. For purposes of clarity, in the general discussion below in which we describe the basic methodology of the patient classification system, in use since the start of the LTCH- PPS (that is, LTC-DRGs), we use ``MS-LTC-DRG'' to specify the DRG system that will be used by the LTCH prospective payment system beginning in FY 2008.)

Although the adoption of the MS-LTC-DRGs will result in some modifications of existing procedures for assigning weights in cases of zero volume and/or nonmonotonicity, discussed in detail in the following sections, as we proposed, the basic methodology for developing the FY 2008 MS-LTC-DRG relative weights in this final rule with comment period continue to be determined in accordance with the general methodology established in the August 30, 2002 LTCH-PPS final rule (67 FR 55989 through 55991). (As noted above, in this preamble, ``LTC-DRGs'' will be used in descriptions of the basic methodology established at the beginning of the LTCH-PPS that will remain unchanged with the adoption of the MS-LTC-DRGs. Use of ``MS-LTC-DRGs'' will indicate a discussion of specifics aspects of our adoption of the severity-weighted patient classification system beginning in FY 2008.)

Under the LTCH-PPS, relative weights for each MS-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 MS-LTC- DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each MS-LTC-DRG that represents the resources needed by an average inpatient LTCH case in that MS-LTC-DRG. For example, cases in an MS-LTC-DRG with a relative weight of 2 will, on average, cost twice as much to treat as cases in an MS-LTC-DRG with a weight of 1.

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b. Data

In the FY 2008 IPPS proposed rule (72 FR 24757), to calculate the proposed MS-LTC-DRG relative weights for FY 2008, we obtained total Medicare allowable charges from FY 2006 Medicare LTCH bill data from the December 2006 update of the MedPAR file, which were the best available data at that time, and we used the proposed Version 25.0 of the CMS GROUPER proposed for use under the IPPS to classify cases. We also proposed that if more recent data were available, we would use those data and the finalized Version 25.0 of the CMS GROUPER. Consistent with that proposal, to calculate the MS-LTC-DRG relative weights for FY 2008 in this final rule with comment period, we obtained total Medicare allowable charges from FY 2006 Medicare LTCH bill data from the March 2007 update of the MedPAR file, which are the best available data at this time, and we used the Version 25.0 of the CMS GROUPER used under the IPPS (as discussed in section II.B. of the preamble of this final rule with comment period) to classify cases.

As we discussed in the FY 2007 IPPS final rule (71 FR 47974), 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 Pub. L. 90-248. Data from demonstration projects authorized under section 222(a) of Pub. L. 92- 603 are also excluded. Therefore, in the development of the FY 2008 MS- LTC-DRG relative weights in this final rule with comment period, we have excluded the data of the 17 all inclusive rate providers and the 2 LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2006 MedPAR file. 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. This nonarbitrary distribution of cases with relatively high (or low) charges in specific MS-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, as we proposed, in this final rule with comment period, we use a hospital specific relative value (HSRV) method to calculate the MS-LTC-DRG relative weights instead of the methodology used to determine the MS-DRG relative weights under the IPPS described in section II.H. of the preamble of this final rule with comment period. 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 MS-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 HSRV 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, average 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, as implemented in the August 30, 2002 LTCH-PPS final rule (67 FR 55989 through 55991), we continue to 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.I.4. (step 3) of the preamble of this final rule with comment period) by the average adjusted charge for all cases at the LTCH in which the case was treated. Short stay outliers are cases with a length of stay that is less than or equal to five sixths the average length of stay of the MS- LTC (see Sec. 412.529 and Sec. 412.503). (As discussed above, we are revising the regulations at Sec. 412.503 to specify that regulatory references to LTC-DRGs for policy descriptions and/or payment calculations shall be considered as references to the MS-LTCs for LTCH discharges occurring on or after October 1, 2007). 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 at 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 be at a LTCH with low average charges. For example, a $10,000 charge for a case at 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 at 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. Treatment of Severity Levels in Developing Relative Weights

With the implementation of the LTCH-PPS for FY 2003, we established a procedure to address setting relative weights for LTC-DRG ``pairs'' that were differentiated on the presence or absence of CCs (71 FR 47979). Beginning with FY 2008, as we proposed, we are adopting a severity-based patient classification system for the LTCH-PPS, the MS- LTC-DRGs described above, which requires us to adapt our existing procedures for dealing with setting relative weights for the severity levels within a specific base MS-LTC-DRG. As proposed, we are also modifying our existing methodology for maintaining monotonicity when setting relative weights for the MS-LTC-DRGs.

As under the existing procedure, under the MS-LTC-DRGs, for purposes of the annual setting of the relative weights, there continue to be three different categories of DRGs based on volume of cases within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 25 cases are each assigned a unique relative weight; low-volume MS LTC-DRGs (that is, MS-LTCs that contain between one and 24 cases annually) are grouped into quintiles (described below) and assigned the weight of the quintile. No-volume MS-LTC-DRGs (that is, no cases in the databases were assigned to those MS LTC-DRGs) are crosswalked to other MS-LTC- DRGs based on the clinical similarities and assigned the weight of the quintile that is closest to the relative weight of the crosswalked MS- LTC-DRG. (We provide in-depth discussions of our policy regarding

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weight setting for low volume MS-LTCs in section II.I.3.e. of the preamble of this final rule with comment period and for no-volume MS- LTC-DRGs, under Step 5 in section II.I.4. of the preamble of this final rule with comment period.)

As described above, in response to the need to account for severity and pay appropriately for cases, we have developed a severity-adjusted patient classification system which we are adopting for both the IPPS and the LTCH PPS. As described in greater detail above, the MS-LTC-DRG system can accommodate three severity levels: ``with MCC'' (most severe); ``with CC,'' and ``without CC/MCC'' (the least severe) with each level assigned an individual MS-LTC-DRG number. In cases with two subdivisions, the levels are either ``with CC/MCC'' and ``without CC/ MCC'' or ``with MCC'' and ``without MCC''. Two parallel numbering systems have been developed to describe MS-LTC-DRGs, which are identical to the MS DRGs numbers under the IPPS. That is, while each severity level in each DRG category gets a unique MS-LTC-DRG number, in conjunction, each of the severity levels in a single DRG category are also assigned the same ``base-DRG'' number. Therefore, under the system, multiple sclerosis and cerebellar ataxia with MCC is MS-LTC-DRG 58; multiple sclerosis and cerebellar ataxia with CC is MS-LTC-DRG 59; and multiple sclerosis and cerebellar ataxia without CC/MCC is MS-LTC- DRG 60.

As noted above, beginning with FY 2008, while the LTCH PPS and the IPPS will use the same patient classification system, the methodology that is used to set the DRG weights for use in each payment system differs because the overall volume of cases in the LTCH PPS is much less than in the IPPS. As a general rule, as proposed, we are determining the relative weights for the MS-LTC-DRGs using the following steps: (1) If an MS-LTC-DRG has at least 25 cases, it is assigned its own relative weight; (2) if an MS-LTC-DRG has between 1 and 24 cases, it is assigned to a quintile to which we will assign a relative weight; and (3) if an MS-LTC-DRG has no cases, it is crosswalked to another MS-LTC-DRG based upon clinical similarities to assign an appropriate relative weight (as described in detail in Step 5 of the Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights, below). Furthermore, in determining the MS-LTC-DRG relative weights, as proposed, when necessary, adjustments were made to account for nonmonotonicity, as explained below.

Theoretically, as with the existing LTC-DRG system, cases under the MS-LTC-DRG system that are more severe require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels, weights should increase with severity, from lowest to highest. If the weights do not increase (that is, if based on the relative weight calculation outlined above, an MS- LTC-DRG with MCC would have a lower relative weight than one with CC, or the MS-LTC-DRG without CC/MCC would have a higher relative weight than either of the others), there is a problem with monotonicity. Since the start of the LTCH PPS for FY 2003 (67 FR 55990), we have adjusted the setting of the LTC-DRG relative weights in order to maintain monotonicity by grouping both sets of cases together and establishing a new relative weight that is assigned to both LTC-DRGs. We continue to believe that utilizing nonmonotonic relative weights to adjust Medicare payments would result in inappropriate payments. This is because when nonmonotonicity exists, cases that are more severe and require greater expenditure of medical care resources would be paid based on a lower relative weight than cases that are less severe and require lower resource use. Similarly, as proposed, we are establishing a procedure for dealing with nonmonotonicity under the MS-LTC-DRG classification system, which is discussed in greater detail below in section II.I.4. (Step 6) of the preamble of this final rule with comment period. e. Low-Volume MS-LTC-DRGs

In order to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), under current policy, in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984--55995), we group those ``low-volume LTC-DRGs'' (that is, DRGs that contained between 1 and 24 cases annually) into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. For this FY 2008 IPPS final rule, as we proposed, we are continuing to employ this treatment of low-volume MS- LTC-DRGs with a modification to combine MS-LTC-DRGs for the purpose of computing a relative weight in cases where necessary to maintain monotonicity in determining the FY 2008 MS-LTC-DRG relative weights using the best available LTCH data. In this final rule with comment period, using LTCH cases from the March 2007 update of the FY 2006 MedPAR file, we identified 303 MS-LTC-DRGs that contained between 1 and 24 cases. This list of MS-LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing a maximum of 61 MS-LTC-DRGs (303/ 5 = 60, with a remainder of 3 MS-LTC-DRGs). Consistent with our current methodology, as proposed, we are making an assignment to a specific low-volume quintile by sorting the low-volume MS-LTC DRGs in ascending order by average charge. For this final rule with comment period, this results in an assignment to a specific low-volume quintile of the sorted 303 low-volume MS-LTC-DRGs by ascending order by average charge. Because the number of low-volume MS-LTC-DRGs for FY 2008 is not evenly divisible by five, to determine the composition of the low-volume quintiles in accordance with our established methodology, the average charge of the low-volume MS-LTC-DRG was used to determine which low- volume quintile received the additional MS-LTC-DRGs. After sorting the 303 low-volume MS-LTC-DRGs in ascending order, we grouped the first fifth (1st through 60th) of low volume MS-LTC-DRGs (with the lowest average charge) into Quintile 1. Because the average charge of the 61st MS-LTC-DRG in the sorted list is closer to the 60th MS-LTC-DRGs average charge (assigned to Quintile 1) than to the average charge of the 62nd MS-LTC-DRG in the sorted list (to be assigned to Quintile 2), we placed the 61st MS-LTC-DRG into Quintile 1. This process was repeated through the remaining low-volume MS-LTC-DRGs so that 3 low volume quintiles contain 61 MS-LTC-DRGs and 2 low-volume quintiles contain 60 MS-LTC- DRGs. The highest average charge cases were grouped into Quintile 5.

In order to determine the relative weights for the MS-LTC-DRGs with low-volume for FY 2008, based on the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), as proposed, we are using the five low-volume quintiles described above. In addition, as proposed, in cases where the initial assignment of the low-volume MS- LTC-DRGs to quintiles results in nonmonotonicity within a base DRG, in order to ensure appropriate Medicare payments, we make adjustments to the treatment of low-volume MS-LTC-DRGs to preserve monotonicity, as discussed in detail in section II.I.4 (Step 6 of the methodology for determining the FY 2008 MS-LTC-DRG relative weights). The composition of each of the five low-volume quintiles shown in the chart below was used in determining the MS-LTC-DRG relative weights for FY 2008. We determine a

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relative weight and (geometric) average length of stay for each of the five low-volume quintiles using the methodology that we apply to the regular MS-LTC-DRGs (25 or more cases), as described below in section II.I.4. of the preamble of this final rule with comment period. We are assigning the same relative weight and average length of stay to each of the MS-LTC-DRGs that make up an individual low-volume quintile. We note that, as this system is dynamic, it is possible that the number and specific type of MS-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 MS-LTC-DRGs and to calculate the relative weights based on our methodology.

Composition of Low-Volume Quintiles for FY 2008

MS-LTC-DRG

MS-LTC-DRG (version 25) description

QUINTILE 1 (Version 25 relative weight = 0.4739)

30.................... Spinal procedures w/o CC/MCC. 32.................... Ventricular shunt procedures w CC. 33.................... Ventricular shunt procedures w/o CC/MCC. 60.................... Multiple sclerosis & cerebellar ataxia w/o CC/ MCC. 66.................... Intracranial hemorrhage or cerebral infarction w/ o CC/MCC. 67.................... Nonspecific cva & precerebral occlusion w/o infarct w MCC. 68.................... Nonspecific cva & precerebral occlusion w/o infarct w/o MCC. 69.................... Transient ischemia. 72.................... Nonspecific cerebrovascular disorders w/o CC/ MCC. 76.................... Viral meningitis w/o CC/MCC. 79.................... Hypertensive encephalopathy w/o CC/MCC. 88.................... Concussion w MCC***. 122................... Acute major eye infections w/o CC/MCC. 123................... Neurological eye disorders. 133................... Other ear, nose, mouth & throat O.R. procedures w CC/MCC***. 149................... Dysequilibrium. 159................... Dental & Oral Diseases w/o CC/MCC. 182................... Respiratory neoplasms w/o CC/MCC. 183................... Major chest trauma w MCC. 184................... Major chest trauma w CC**. 201................... Pneumothorax w/o CC/MCC. 261................... Cardiac pacemaker revision except device replacement w CC. 313................... Chest pain. 328................... Stomach, esophageal & duodenal proc w/o CC/MCC. 331................... Major small & large bowel procedures w/o CC/MCC. 349................... Anal & stomal procedures w/o CC/MCC. 376................... Digestive malignancy w/o CC/MCC. 379................... G.I. hemorrhage w/o CC/MCC. 434................... Cirrhosis & alcoholic hepatitis w/o CC/MCC. 446................... Disorders of the biliary tract w/o CC/MCC. 505................... Foot procedures w/o CC/MCC. 512................... Shoulder,elbow or forearm proc,exc major joint proc w/o CC/MCC. 544................... Pathological fractures & musculoskelet & conn tiss malig w/o CC/MCC. 547................... Connective tissue disorders w/o CC/MCC. 563................... Fx, sprn, strn & disl except femur, hip, pelvis & thigh w/o MCC. 645................... Endocrine disorders w/o CC/MCC. 661................... Kidney & ureter procedures for non-neoplasm w/o CC/MCC. 688................... Kidney & urinary tract neoplasms w/o CC/MCC. 696................... Kidney & urinary tract signs & symptoms w/o MCC. 714................... Transurethral prostatectomy w/o CC/MCC. 718................... Other male reproductive system O.R. proc exc malignancy w/o CC/MCC. 724................... Malignancy, male reproductive system w/o CC/MCC. 726................... Benign prostatic hypertrophy w/o MCC. 756................... Malignancy, female reproductive system w/o CC/ MCC. 759................... Infections, female reproductive system w/o CC/ MCC. 761................... Menstrual & other female reproductive system disorders w/o CC/MCC. 825................... Lymphoma & non-acute leukemia w other O.R. proc w/o CC/MCC. 836................... Acute leukemia w/o major O.R. procedure w/o CC/ MCC. 869................... Other infectious & parasitic diseases diagnoses w/o CC/MCC. 880................... Acute adjustment reaction & psychosocial dysfunction. 881................... Depressive neuroses. 882................... Neuroses except depressive. 883................... Disorders of personality & impulse control. 886................... Behavioral & developmental disorders. 894................... Alcohol/drug abuse or dependence, left ama. 95.................... Alcohol/drug abuse or dependence w rehabilitation therapy. 897................... Alcohol/drug abuse or dependence w/o rehabilitation therapy w/o MCC. 906................... Hand procedures for injuries. 916................... Allergic reactions w/o MCC. 922................... Other injury, poisoning & toxic effect diag w MCC. 923................... Other injury, poisoning & toxic effect diag w/o MCC.

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965................... Other multiple significant trauma w/o CC/MCC.

QUINTILE 2 (Version 25 relative weight = 0.6478)

42.................... Periph & cranial nerve & other nerv syst proc w/ o CC/MCC. 58.................... Multiple sclerosis & cerebellar ataxia w MCC. 75.................... Viral meningitis w CC/MCC. 77.................... Hypertensive encephalopathy w MCC. 78.................... Hypertensive encephalopathy w CC**. 83.................... Traumatic stupor & coma, coma >1 hr w MCC. 84.................... Traumatic stupor & coma, coma >1 hr w/o CC/MCC. 99.................... Non-bacterial infect of nervous sys exc viral meningitis w/o CC/MCC. 102................... Headaches w MCC***. 113................... Orbital procedures w CC/MCC. 121................... Acute major eye infections w CC/MCC. 133................... Other ear, nose, mouth & throat O.R. procedures w CC/MCC**. 134................... Other ear, nose, mouth & throat O.R. procedures w/o CC/MCC**. 148................... Ear, nose, mouth & throat malignancy w/o CC/MCC. 152................... Otitis media & URI w MCC. 153................... Otitis media & URI w/o MCC. 156................... Nasal trauma & deformity w/o CC/MCC. 157................... Dental & Oral Diseases w MCC***. 184................... Major chest trauma w CC***. 188................... Pleural effusion w/o CC/MCC*. 200................... Pneumothorax w MCC. 245................... AICD lead & generator procedures. 282................... Circulatory disorders w AMI, discharged alive w/ o CC/MCC. 284................... Circulatory disorders w AMI, expired w CC*. 311................... Angina pectoris. 336................... Peritoneal adhesiolysis w MCC. 382................... Complicated peptic ulcer w/o CC/MMCC. 384................... Uncomplicated peptic ulcer w/o MCC. 433................... Cirrhosis & alcoholic hepatitis w CC*. 437................... Malignancy of hepatobiliary system or pancreas w/ o CC/MCC. 443................... Disorders of liver except malig,cirr,alc hepa w/ o CC/MCC. 499................... Local excision & removal int fix devices of hip & femur w/o CC/MCC. 514................... Hand or wrist proc, except major thumb or joint proc w/o CC/MCC. 534................... Fractures of femur w/o MCC. 535................... Fractures of hip & pelvis w MCC. 555................... Signs & symptoms of musculoskeletal system & conn tissue w MCC. 556................... Signs & symptoms of musculoskeletal system & conn tissue w/o MCC. 578................... Skin graft &/or debrid exc for skin ulcer or cellulitis w/o CC/MCC. 598................... Malignant breast disorders w MCC. 599................... Malignant breast disorders w/o CC/MCC**. 600................... Non-malignant breast disorders w CC/MCC. 601................... Non-malignant breast disorders w/o CC/MCC. 630................... Other endocrine, nutrit & metab O.R. proc w/o CC/ MCC. 642................... Inborn errors of metabolism. 660................... Kidney & ureter procedures for non-neoplasm w MCC. 687................... Kidney & urinary tract neoplasms w CC. 693................... Urinary stones w/o esw lithotripsy w MCC. 694................... Urinary stones w/ot esw lithotripsy w/o MCC**. 723................... Malignancy, male reproductive system w CC. 730................... Other male reproductive system diagnoses w/o CC/ MCC. 769................... Postpartum & post abortion diagnoses w O.R. procedure. 803................... Other O.R. proc of the blood & blood forming organs w CC. 815................... Reticuloendothelial & immunity disorders w CC. 816................... Reticuloendothelial & immunity disorders w/o CC/ MCC**. 842................... Lymphoma & non-acute leukemia w/o CC/MCC. 848................... Chemotherapy w/o acute leukemia as secondary diagnosis w/o CC/MCC. 855................... Infectious & parasitic diseases w O.R. procedure w/o CC/MCC. 864................... Fever of unknown origin. 876................... O.R. procedure w principal diagnoses of mental illness. 903................... Wound debridements for injuries w/o CC/MCC. 905................... Skin grafts for injuries w/o CC/MCC. 917................... Poisoning & toxic effects of drugs w MCC. 918................... Poisoning & toxic effects of drugs w/o MCC. 929................... Full thickness burn w skin graft or inhal inj w/ o CC/MCC. 956................... Limb reattachment, hip & femur proc for multiple significant trauma. 964................... Other multiple significant trauma w CC. 977................... HIV w or w/o other related condition.

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QUINTILE 3 (Version 25 relative weight = 0.7790)

78.................... Hypertensive encephalopathy w CC***. 102................... Headaches w MCC**. 103................... Headaches w/o MCC**. 125................... Other disorders of the eye w/o MCC. 157................... Dental & Oral Diseases w MCC**. 158................... Dental & Oral Diseases w CC. 199................... Pneumothorax w MCC. 238................... Major cardiovascular procedures w/o MCC. 246................... Percutaneous cardiovascular proc w drug-eluting stent w MCC. 250................... Perc cardiovasc proc w/o coronary artery stent or AMI w MCC. 254................... Other vascular procedures w/o CC/MCC. 263................... Vein ligation & stripping 285 Circulatory disorders w AMI, expired w/o CC/MCC*. 287................... Circulatory disorders except AMI, w card cath w/ o MCC. 294................... Deep vein thrombophlebitis w CC/MCC. 304................... Hypertension w MCC. 348................... Anal & stomal procedures w CC. 352................... Inguinal & femoral hernia procedures w/o CC/MCC. 354................... Hernia procedures except inguinal & femoral w CC. 358................... Other digestive system O.R. procedures w/o CC/ MCC. 380................... Complicated peptic ulcer w MCC. 381................... Complicated peptic ulcer w CC. 383................... Uncomplicated peptic ulcer w MCC. 387................... Inflammatory bowel disease w/o CC/MCC*. 390................... G.I. obstruction w/o CC/MCC*. 421................... Hepatobiliary diagnostic procedures w CC. 424................... Other hepatobiliary or pancreas O.R. procedures w CC. 494................... Lower extrem & humer proc except hip,foot,femur w/o CC/MCC. 502................... Soft tissue procedures w/o CC/MCC. 504................... Foot procedures w CC. 507................... Major shoulder or elbow joint procedures w CC/ MCC. 517................... Other musculoskelet sys & conn tiss O.R. proc w/ o CC/MCC. 533................... Fractures of femur w MCC. 553................... Bone diseases & arthropathies w MCC. 597................... Malignant breast disorders w MCC. 599................... Malignant breast disorders w/o CC/MCC***. 604................... Trauma to the skin, subcut tiss & breast w MCC. 618................... Amputat of lower limb for endocrine,nutrit,& metabol dis w/o CC/MCC. 619................... O.R. procedures for obesity w MCC. 620................... O.R. procedures for obesity w CC**. 624................... Skin grafts & wound debrid for endoc, nutrit & metab dis w/o CC/MCC. 644................... Endocrine disorders w CC. 657................... Kidney & ureter procedures forneoplasm w CC. 662................... Minor bladder procedures w MCC. 665................... Prostatectomy w MCC. 694................... Urinary stones w/ot esw lithotripsy w/o MCC***. 695................... Kidney & urinary tract signs & symptoms w MCC. 722................... Malignancy, male reproductive system w MCC. 744................... D&C, conization, laparascopy & tubal interruption w CC/MCC. 746................... Vagina, cervix & vulva procedures w CC/MCC. 749................... Other female reproductive system O.R. procedures w CC/MCC. 755................... Malignancy, female reproductive system w CC. 809................... Major hematol/immun diag exc sickle cell crisis & coagul w CC. 810................... Major hematol/immun diag exc sickle cell crisis & coagul w/o CC/MCC. 816................... Reticuloendothelial & immunity disorders w/o CC/ MCC***. 821................... Lymphoma & leukemia w major O.R. procedure w CC. 826................... Myeloprolif disord or poorly diff neopl w maj O.R. proc w MCC. 835................... Acute leukemia w/o major O.R. procedure w CC. 838................... Chemo w acute leukemia as sdx or w high dose chemo agent w CC. 843................... Other myeloprolif dis or poorly diff neopl diag w MCC***. 844................... Other myeloprolif dis or poorly diff neopl diag w CC***. 896................... Alcohol/drug abuse or dependence w/o rehabilitation therapy w MCC. 909................... Other O.R. procedures for injuries w/o CC/MCC. 989................... Non-extensive O.R. proc unrelated to principal diagnosis w/o CC/MCC.

QUINTILE 4 (Version 25 relative weight = 1.0810)

28.................... Spinal procedures w MCC. 29.................... Spinal procedures w CC. 38.................... Extracranial procedures w CC.

[[Page 47287]]

53.................... Spinal disorders & injuries w/o CC/MCC*. 88.................... Concussion w MCC**. 89.................... Concussion w CC. 103................... Headaches w/o MCC***. 124................... Other disorders of the eye w MCC. 168................... Other resp system O.R. procedures w/o CC/MCC. 241................... Amputation for circ sys disorders exc upper limb & toe w/o CC/MCC. 242................... Permanent cardiac pacemaker implant w MCC***. 244................... Permanent cardiac pacemaker implant w/o CC/MCC. 257................... Upper limb & toe amputation for circ system disorders w/o CC/MCC*. 286................... Circulatory disorders except AMI, w card cath w MCC. 347................... Anal & stomal procedures w MCC. 351................... Inguinal & femoral hernia procedures w CC. 368................... Major esophageal disorders w MCC. 369................... Major esophageal disorders w CC. 370................... Major esophageal disorders w/o CC/MCC**. 407................... Pancreas, liver & shunt procedures w/o CC/MCC. 408................... Biliary tract proc except only cholecyst w or w/ o c.d.e. w MCC***. 412................... Cholecystectomy w c.d.e. w CC. 414................... Cholecystectomy except by laparoscope w/o c.d.e. w MCC. 415................... Cholecystectomy except by laparoscope w/o c.d.e. w CC. 418................... Laparoscopic cholecystectomy w/o c.d.e. w CC. 420................... Hepatobiliary diagnostic procedures w MCC. 423................... Other hepatobiliary or pancreas O.R. procedures w MCC. 476................... Amputation for musculoskeletal sys & conn tissue dis w/o CC/MCC*. 478................... Biopsies of musculoskeletal system & connective tissue w CC. 479................... Biopsies of musculoskeletal system & connective tissue w/o CC/MCC. 482................... Hip & femur procedures except major joint w/o CC/ MCC. 486................... Knee procedures w pdx of infection w CC. 487................... Knee procedures w pdx of infection w/o CC/MCC. 490................... Back & neck procedures except spinal fusion w CC/ MCC or disc devices 493................... Lower extrem & humer proc except hip, foot, femur w CC. 497................... Local excision & removal int fix devices exc hip & femur w/o CC/MCC. 503................... Foot procedures w MCC. 511................... Shoulder,elbow or forearm proc,exc major joint proc w CC. 516................... Other musculoskelet sys & conn tiss O.R. proc w CC. 562................... Fx, sprn, strn & disl except femur, hip, pelvis & thigh w MCC. 577................... Skin graft &/or debrid exc for skin ulcer or cellulitis w CC. 584................... Breast biopsy, local excision & other breast procedures w CC/MCC. 620................... O.R. procedures for obesity w CC***. 659................... Kidney & ureter procedures for non-neoplasm w MCC. 667................... Prostatectomy w/o CC/MCC. 675................... Other kidney & urinary tract procedures w/o CC/ MCC. 709................... Penis procedures w CC/MCC. 711................... Testes procedures w CC/MCC. 717................... Other male reproductive system O.R. proc exc malignancy w CC/MCC. 725................... Benign prostatic hypertrophy w MCC. 754................... Malignancy, female reproductive system w MCC. 760................... Menstrual & other female reproductive system disorders w CC/MCC. 776................... Postpartum & post abortion diagnoses w/o O.R. procedure. 781................... Other antepartum diagnoses w medical complications. 823................... Lymphoma & non-acute leukemia w other O.R. proc w MCC. 824................... Lymphoma & non-acute leukemia w other O.R. proc w CC. 834................... Acute leukemia w/o major O.R. procedure w MCC. 843................... Other myeloprolif dis or poorly diff neopl diag w MCC**. 844................... Other myeloprolif dis or poorly diff neopl diag w CC**. 845................... Other myeloprolif dis or poorly diff neopl diag w/o CC/MCC**. 928................... Full thickness burn w skin graft or inhal inj w CC/MCC. 958................... Other O.R. procedures for multiple significant trauma w CC. 983................... Extensive O.R. procedure unrelated to principal diagnosis w/o CC/MCC. 985................... Prostatic O.R. procedure unrelated to principal diagnosis w CC. 986................... Prostatic O.R. procedure unrelated to principal diagnosis w/o CC/MCC.

QUINTILE 5 (Version 25 relative weight = 1.5863)

12.................... Tracheostomy for face,mouth & neck diagnoses w CC. 26.................... Craniotomy & endovascular intracranial procedures w CC. 31.................... Ventricular shunt procedures w MCC. 37.................... Extracranial procedures w MCC. 131................... Cranial/facial procedures w CC/MCC. 134................... Other ear, nose, mouth & throat O.R. procedures w/o CC/MCC***.

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137................... Mouth procedures w CC/MCC. 139................... Salivary gland procedures 164 Major chest procedures w CC. 226................... Cardiac defibrillator implant w/o cardiac cath w MCC. 227................... Cardiac defibrillator implant w/o cardiac cath w/ o MCC. 237................... Major cardiovascular procedures w MCC. 242................... Permanent cardiac pacemaker implant w MCC**. 243................... Permanent cardiac pacemaker implant w CC. 248................... Percutaneous cardiovasc proc w non-drug-eluting stent w MCC. 258................... Cardiac pacemaker device replacement w MCC. 260................... Cardiac pacemaker revision except device replacement w MCC. 327................... Stomach, esophageal & duodenal proc w CC. 329................... Major small & large bowel procedures w MCC. 330................... Major small & large bowel procedures w CC. 335................... Peritoneal adhesiolysis w MCC. 350................... Inguinal & femoral hernia procedures w MCC. 370................... Major esophageal disorders w/o CC/MCC***. 405................... Pancreas, liver & shunt procedures w MCC. 406................... Pancreas, liver & shunt procedures w CC. 408................... Biliary tract proc except only cholecyst w or w/ o c.d.e. w MCC**. 409................... Biliary tract proc except only cholecyst w or w/ o c.d.e. w CC. 417................... Laparoscopic cholecystectomy w/o c.d.e. w MCC. 454................... Combined anterior/posterior spinal fusion w CC. 456................... Spinal fusion exc cerv w spinal curv, malig or 9+ fusions w MCC. 459................... Spinal fusion except cervical w MCC. 460................... Spinal fusion except cervical w/o MCC. 466................... Revision of hip or knee replacement w MCC. 467................... Revision of hip or knee replacement w CC. 469................... Major joint replacement or reattachment of lower extremity w MCC. 470................... Major joint replacement or reattachment of lower extremity w/o MCC. 471................... Cervical spinal fusion w MCC. 472................... Cervical spinal fusion w CC. 477................... Biopsies of musculoskeletal system & connective tissue w MCC. 480................... Hip & femur procedures except major joint w MCC. 481................... Hip & femur procedures except major joint w CC. 485................... Knee procedures w pdx of infection w MCC. 488................... Knee procedures w/o pdx of infection w CC/MCC. 492................... Lower extrem & humer proc except hip, foot, femur w MCC. 498................... Local excision & removal int fix devices of hip & femur w CC/MCC. 513................... Hand or wrist proc, except major thumb or joint proc w CC/MCC. 576................... Skin graft &/or debrid exc for skin ulcer or cellulitis w MCC. 582................... Mastectomy for malignancy w CC/MCC. 664................... Minor bladder procedures w/o CC/MCC. 668................... Transurethral procedures w MCC. 669................... Transurethral procedures w CC. 691................... Urinary stones w esw lithotripsy w CC/MCC. 713................... Transurethral prostatectomy w CC/MCC. 715................... Other male reproductive system O.R. proc for malignancy w CC/MCC. 802................... Other O.R. proc of the blood & blood forming organs w MCC. 829................... Myeloprolif disord or poorly diff neopl w other O.R. proc w CC/MCC. 837................... Chemo w acute leukemia as sdx or w high dose chemo agent w MCC. 845................... Other myeloprolif dis or poorly diff neopl diag w/o CC/MCC***. 933................... Extensive burns or full thickness burns w MV 96+ hrs w/o skin graft. 957................... Other O.R. procedures for multiple significant trauma w MCC. 963................... Other multiple significant trauma w MCC. 969................... HIV w extensive O.R. procedure w MCC. 984................... Prostatic O.R. procedure unrelated to principal diagnosis w MCC.

*One of the original 303 low-volume MS LTC-DRGs initially assigned to this low-volume quintile; removed from this low-volume quintile in addressing nonmonotonicity (see step 6 in section II.I.4.below). **One of the original 303 low-volume MS LTC-DRGs initially assigned to a different low-volume quintile but moved to this low-volume quintile in addressing nonmonotonicity (see step 6 in section II.I.4 below). ***One of the original 303 low-volume MS LTC-DRGs initially assigned to this low-volume quintile but moved to a different low-volume quintile in addressing nonmonotonicity (see step 6 in section II.I.4 below).

We note that we will continue to monitor the volume (that is, the number of LTCH cases) in these low-volume quintiles to ensure that our quintile assignment results in appropriate payment for such cases and does not result in an unintended financial incentive for LTCHs to inappropriately admit these types of cases. 4. Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights

As we noted previously, although the adoption of the MS-LTC-DRGs with three severity levels results in some

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slight modifications of existing procedures for assigning weights in cases of zero volume and/or nonmonotonicity, described in detail elsewhere in this section, as proposed, the FY 2008 MS-LTC-DRG relative weights in this final rule with comment period are based on the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). In summary, for FY 2008, LTCH cases are grouped to the appropriate MS-LTC-DRG, while taking into account the low volume MS-LTC-DRGs as described above, before the FY 2008 MS-LTC- DRG relative weights can be determined. After grouping the cases to the appropriate MS-LTC-DRG, we calculate the relative weights for FY 2008 by first removing statistical outliers and cases with a length of stay of 7 days or less, as discussed in greater detail below. Next, we adjust the number of cases in each MS-LTC-DRG for the effect of short- stay outlier cases, as also discussed in greater detail below. The short-stay adjusted discharges and corresponding charges are used to calculate ``relative adjusted weights'' in each MS-LTC-DRG using the HSRV method described above.

Below we discuss in detail the steps for calculating the FY 2008 MS-LTC-DRG relative weights. We note that, as we stated above in section II.I.3.b. of the preamble of this final rule with comment period, we have excluded the data of all-inclusive rate LTCHs and LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2006 MedPAR file.

Step 1--Remove statistical outliers.

The first step in the calculation of the FY 2008 MS-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 MS-LTC-DRG. These statistical outliers are removed prior to calculating the relative weights. As noted above, 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 relative weights could result in an inaccurate relative weight that does not truly reflect relative resource use among the MS-LTC-DRGs.

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

The FY 2008 MS-LTC-DRG relative weights reflect the average of resources used on representative cases of a specific type. Generally, cases with a length of stay of 7 days or less do not belong in a LTCH because these 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. As explained above, if we were to include stays of 7 days or less in the computation of the FY 2008 MS-LTC-DRG relative weights, the value of many 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, by including data from these very short-stays. Thus, as explained above, in determining the FY 2008 MS-LTC-DRG relative weights, as we proposed, 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.

After removing cases with a length of stay of 7 days or less, we are left with cases that have a length of stay of greater than or equal to 8 days. The next step in the calculation of the FY 2008 MS-LTC-DRG relative weights is to adjust each LTCH's charges per discharge for those remaining cases for the effects of short-stay outliers (as defined in Sec. 412.529(a) in conjunction with Sec. 412.503 for LTCH discharges occurring on or after October 1, 2007). (We note that even if a case was removed in Step 2 (that is, cases with a length of stay of 7 days or less), it was paid as a short-stay outlier if its length of stay was less than or equal to five-sixths of the average length of stay of the MS-LTC-DRG, in accordance with Sec. 412.529. As discussed above, we are revising the regulations at Sec. 412.503 to specify that regulatory references to LTC-DRGs for policy descriptions and/or payment calculations shall be considered as references to the MS-LTC- DRGs for LTCH discharges occurring on or after October 1, 2007.)

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 MS-LTC-DRG for non-short- 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 MS-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 MS-LTC-DRG.

As we explained in the FY 2008 IPPS proposed rule (72 FR 24765), counting short-stay outlier cases as full discharges with no adjustment in determining the MS-LTC-DRG relative weights would lower the MS-LTC- DRG relative weight for affected MS-LTC-DRGs because the relatively lower charges of the short-stay outlier cases would bring down the average charge for all cases within an MS-LTC-DRG. This would result in an ``underpayment'' for non-short-stay outlier cases and an ``overpayment'' for short-stay outlier cases. Therefore, as we proposed, we adjust for short-stay outlier cases under Sec. 412.529 in this manner because it results in more appropriate payments for all LTCH cases.

Step 4--Calculate the FY 2008 MS-LTC-DRG relative weights on an iterative basis.

The process of calculating the MS-LTC-DRG relative weights using the HSRV 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 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 MS-LTC-DRG, as we proposed, the FY 2008 relative weight is calculated by dividing the average of the adjusted hospital-specific relative charge values (from above) for the MS-LTC-DRG by the overall average hospital-specific relative charge value across all cases for all LTCHs. Using these recalculated MS-LTC-DRG relative weights, each LTCH's average relative weight for all of its cases (case-mix) is calculated by dividing the sum of all the LTCH's MS-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 MS-LTC-DRG relative weights across all LTCHs. 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--Determine an FY 2008 relative weight for MS-LTC-DRGs with no LTCH cases.

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As we stated above, we determine the relative weight for each MS- LTC-DRG using total Medicare allowable charges reported in the best available LTCH claims data (that is, the March 2007 update of the FY 2006 MedPAR file for this final rule with comment period). Of the FY 2008 MS-LTC-DRGs, we identified a number of MS-LTC-DRGs for which there were no LTCH cases in the database. That is, based on data from the FY 2006 MedPAR file used in this final rule with comment period, no patients who would have been classified to those MS-LTC-DRGs were treated in LTCHs during FY 2006 and, therefore, no charge data were reported for those MS-LTC-DRGs. Thus, in the process of determining the MS-LTC-DRG relative weights, we are unable to determine weights for these MS-LTC-DRGs with no LTCH cases using the methodology described in Steps 1 through 4 above. However, because patients with a number of the diagnoses under these MS-LTC-DRGs may be treated at LTCHs beginning in FY 2008, for this final rule with comment period, as we proposed, we are assigning relative weights to each of the no-volume MS-LTC-DRGs based on clinical similarity and relative costliness with the exception of ``transplant'' MS-LTC-DRGs and ``error'' MS-LTC-DRGs (as discussed below). In general, as we proposed, we determined relative weights for the MS-LTC-DRGs with no LTCH cases in the FY 2006 MedPAR file used in this final rule with comment period by crosswalking these MS-LTC-DRGs to other MS-LTC-DRGs and then assigning them the relative weight of the appropriate low-volume quintile (as described in greater detail below).

Specifically, as we stated above, we determine the relative weight for each MS-LTC-DRG using total Medicare allowable charges reported in the March 2007 update of the FY 2006 MedPAR file. Of the 745 MS-LTC- DRGs for FY 2008, we identified 185 MS-LTC-DRGs for which there were no LTCH cases in the database. For this final rule with comment period, as noted above, we are assigning relative weights to each of the 185 no volume MS-LTC-DRGs (with the exception of 8 ``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs, as discussed below) based on clinical similarity and relative costliness to one of the remaining 560 (745 - 185 = 560) MS-LTC-DRGs for which we are able to determine relative weights, based on FY 2006 LTCH claims data. Then we assigned them the relative weight of the appropriate low-volume quintile, as discussed below. (As explained below in Step 7, when necessary, we made adjustments to account for nonmonotonicity.)

As we proposed, our methodology for determining the relative weights for the no-volume MS-LTC-DRGs is as follows: We crosswalk the no-volume MS-LTC-DRG to an MS-LTC-DRG for which there are LTCH cases in the FY 2006 MedPAR file and to which it is similar clinically and in intensity of use of resources as determined by criteria such as care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, postoperative care, and length of stay. If the MS-LTC-DRG to which it is crosswalked is grouped to one of the low-volume quintiles, we assign the relative weight for the applicable low-volume quintile to the no- volume MS-LTC-DRG. However, if the MS-LTC-DRG to which the no-volume MS-LTC-DRG is crosswalked is not one of the MS-LTC-DRGs in a low-volume quintile, we do the following: (1) Compare the relative weight of the MS-LTC-DRG to which the no-volume MS-LTC-DRG is crosswalked to the relative weights of each of the five quintiles; (2) assign the no- volume MS-LTC-DRG the relative weight of the low-volume quintile with the relative weight that is closest to the MS-LTC-DRG to which the no- volume MS-LTC-DRG is crosswalked. As stated above, assigning the relative weight of a quintile to a no-volume MS-LTC-DRG that is cross- walked to a MS-LTC-DRGs that has 25 or more cases and, therefore, is not in a low-volume quintile is consistent with our methodology used in determining relative weights for MS-LTC-DRGs that have a low-volume of LTCH cases (that is, 24 or fewer cases), which is discussed above in section II.I.e. of this preamble. (As we noted above, in the infrequent case where nonmonotonicity involving a no-volume MS-LTC-DRG results, additional measures as described in Step 6 are required in order to maintain monotonically increasing relative weights.) For this final rule with comment period, a list of the no-volume FY 2008 MS-LTC-DRGs and the FY 2008 MS-LTC-DRG to which it is crosswalked is shown in the chart below.

No-Volume MS-LTC-DRG Crosswalk for FY 2008

Cross-walked MS-LTC-DRG

MS-LTC-DRG description

MS-LTC-DRG

9............. Bone marrow transplant..................

823 11............ Tracheostomy for face, mouth & neck

12 diagnoses w MCC. 13............ Tracheostomy for face, mouth & neck

12 diagnoses w/o CC/MCC. 20............ Intracranial vascular procedures w PDX

31 hemorrhage w MCC. 21............ Intracranial vascular procedures w PDX

32 hemorrhage w CC. 22............ Intracranial vascular procedures w PDX

33 hemorrhage w/o CC/MCC. 23............ Craniotomy w major device implant or

31 acute complex CNS PDX w MCC. 24............ Craniotomy w major device implant or

33 acute complex CNS PDX w/o MCC. 25............ Craniotomy & endovascular intracranial

26 procedures w MCC. 27............ Craniotomy & endovascular intracranial

26 procedures w/o CC/MCC. 34............ Carotid artery stent procedure w MCC....

37 35............ Carotid artery stent procedure w CC.....

38 36............ Carotid artery stent procedure w/o CC/

38 MCC. 39............ Extracranial procedures w/o CC/MCC......

38 61............ Acute ischemic stroke w use of

70 thrombolytic agent w MCC. 62............ Acute ischemic stroke w use of

71 thrombolytic agent w CC. 63............ Acute ischemic stroke w use of

72 thrombolytic agent w/o CC/MCC. 90............ Concussion w/o CC/MCC...................

89 114........... Orbital procedures w/o CC/MCC...........

113 115........... Extraocular procedures except orbit.....

125 116........... Intraocular procedures w CC/MCC.........

125 117........... Intraocular procedures w/o CC/MCC.......

125 129........... Major head & neck procedures w CC/MCC or

146 major device.

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130........... Major head & neck procedures w/o CC/MCC.

148 132........... Cranial/facial procedures w/o CC/MCC....

131 135........... Sinus & mastoid procedures w CC/MCC.....

133 136........... Sinus & mastoid procedures w/o CC/MCC...

133 138........... Mouth procedures w/o CC/MCC.............

137 150........... Epistaxis w MCC.........................

152 151........... Epistaxis w/o MCC.......................

153 165........... Major chest procedures w/o CC/MCC.......

164 185........... Major chest trauma w/o CC/MCC...........

184 215........... Other heart assist system implant.......

238 216........... Cardiac valve & oth maj cardiothoracic

237 proc w card cath w MCC. 217........... Cardiac valve & oth maj cardiothoracic

238 proc w card cath w CC. 218........... Cardiac valve & oth maj cardiothoracic

250 proc w card cath w/o CC/MCC. 219........... Cardiac valve & oth maj cardiothoracic

237 proc w/o card cath w MCC. 220........... Cardiac valve & oth maj cardiothoracic

238 proc w/o card cath w CC. 221........... Cardiac valve & oth maj cardiothoracic

250 proc w/o card cath w/o CC/MCC. 222........... Cardiac defib implant w cardiac cath w

242 AMI/HF/shock w MCC. 223........... Cardiac defib implant w cardiac cath w

243 AMI/HF/shock w/o MCC. 224........... Cardiac defib implant w cardiac cath w/o

242 AMI/HF/shock w MCC. 225........... Cardiac defib implant w cardiac cath w/o

243 AMI/HF/shock w/o MCC. 228........... Other cardiothoracic procedures w MCC...

252 229........... Other cardiothoracic procedures w CC....

253 230........... Other cardiothoracic procedures w/o CC/

254 MCC. 231........... Coronary bypass w PTCA w MCC............

237 232........... Coronary bypass w PTCA w/o MCC..........

238 233........... Coronary bypass w cardiac cath w MCC....

237 234........... Coronary bypass w cardiac cath w/o MCC..

238 235........... Coronary bypass w/o cardiac cath w MCC..

237 236........... Coronary bypass w/o cardiac cath w/o MCC

238 247........... Percutaneous cardiovascular proc w drug-

246 eluting stent w/o MCC. 249........... Percutaneous cardiovasc proc w non-drug-

248 eluting stent w/o MCC. 251........... Perc cardiovasc proc w/o coronary artery

250 stent or AMI w/o MCC. 259........... Cardiac pacemaker device replacement w/o

258 MCC. 262........... Cardiac pacemaker revision except device

261 replacement w/o CC/MCC. 295........... Deep vein thrombophlebitis w/o CC/MCC...

294 296........... Cardiac arrest, unexplained w MCC.......

283 297........... Cardiac arrest, unexplained w CC........

284 298........... Cardiac arrest, unexplained w/o CC/MCC..

285 332........... Rectal resection w MCC..................

356 333........... Rectal resection w CC...................

357 334........... Rectal resection w/o CC/MCC.............

358 337........... Peritoneal adhesiolysis w/o CC/MCC......

336 338........... Appendectomy w complicated principal

371 diag w MCC. 339........... Appendectomy w complicated principal

372 diag w CC. 340........... Appendectomy w complicated principal

373 diag w/o CC/MCC. 341........... Appendectomy w/o complicated principal

371 diag w MCC. 342........... Appendectomy w/o complicated principal

372 diag w CC. 343........... Appendectomy w/o complicated principal

373 diag w/o CC/MCC. 344........... Minor small & large bowel procedures w

371 MCC. 345........... Minor small & large bowel procedures w

372 CC. 346........... Minor small & large bowel procedures w/o

373 CC/MCC. 353........... Hernia procedures except inguinal &

354 femoral w MCC. 355........... Hernia procedures except inguinal &

354 femoral w/o CC/MCC. 410........... Biliary tract proc except only cholecyst

409 w or w/o c.d.e. w/o CC/MCC. 411........... Cholecystectomy w c.d.e. w MCC..........

412 413........... Cholecystectomy w c.d.e. w/o CC/MCC.....

412 416........... Cholecystectomy except by laparoscope w/

415 o c.d.e. w/o CC/MCC. 419........... Laparoscopic cholecystectomy w/o c.d.e.

418 w/o CC/MCC. 422........... Hepatobiliary diagnostic procedures w/o

421 CC/MCC. 425........... Other hepatobiliary or pancreas O.R.

424 procedures w/o CC/MCC. 453........... Combined anterior/posterior spinal

454 fusion w MCC. 455........... Combined anterior/posterior spinal

454 fusion w/o CC/MCC. 457........... Spinal fusion exc cerv w spinal curv,

456 malig or 9+ fusions w CC. 458........... Spinal fusion exc cerv w spinal curv,

456 malig or 9+ fusions w/o CC/MCC. 461........... Bilateral or multiple major joint procs

480 of lower extremity w MCC. 462........... Bilateral or multiple major joint procs

482 of lower extremity w/o MCC. 468........... Revision of hip or knee replacement w/o

467 CC/MCC. 473........... Cervical spinal fusion w/o CC/MCC.......

472 483........... Major joint & limb reattachment proc of

480 upper extremity w CC/MCC. 484........... Major joint & limb reattachment proc of

482 upper extremity w/o CC/MCC. 489........... Knee procedures w/o pdx of infection w/o

488 CC/MCC.

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491........... Back & neck procedures except spinal

490 fusion w/o CC/MCC. 506........... Major thumb or joint procedures.........

514 508........... Major shoulder or elbow joint procedures

507 w/o CC/MCC. 509........... Arthroscopy.............................

505 510........... Shoulder, elbow or forearm proc, exc

511 major joint proc w MCC. 537........... Sprains, strains, & dislocations of hip,

505 pelvis & thigh w CC/MCC. 538........... Sprains, strains, & dislocations of hip,

505 pelvis & thigh w/o CC/MCC. 583........... Mastectomy for malignancy w/o CC/MCC....

582 585........... Breast biopsy, local excision & other

584 breast procedures w/o CC/MCC. 614........... Adrenal & pituitary procedures w CC/MCC.

629 615........... Adrenal & pituitary procedures w/o CC/

630 MCC. 621........... O.R. procedures for obesity w/o CC/MCC..

620 625........... Thyroid, parathyroid & thyroglossal

628 procedures w MCC. 626........... Thyroid, parathyroid & thyroglossal

629 procedures w CC. 627........... Thyroid, parathyroid & thyroglossal

630 procedures w/o CC/MCC. 653........... Major bladder procedures w MCC..........

659 654........... Major bladder procedures w CC...........

660 655........... Major bladder procedures w/o CC/MCC.....

661 656........... Kidney & ureter procedures for neoplasm

657 w MCC. 658........... Kidney & ureter procedures for neoplasm

657 w/o CC/MCC. 663........... Minor bladder procedures w CC...........

662 666........... Prostatectomy w CC......................

665 670........... Transurethral procedures w/o CC/MCC.....

665 671........... Urethral procedures w CC/MCC............

687 672........... Urethral procedures w/o CC/MCC..........

688 692........... Urinary stones w esw lithotripsy w/o CC/

691 MCC. 697........... Urethral stricture......................

688 707........... Major male pelvic procedures w CC/MCC...

660 708........... Major male pelvic procedures w/o CC/MCC.

661 710........... Penis procedures w/o CC/MCC.............

709 712........... Testes procedures w/o CC/MCC............

711 716........... Other male reproductive system O.R. proc

715 for malignancy w/o CC/MCC. 734........... Pelvic evisceration, rad hysterectomy &

717 rad vulvectomy w CC/MCC. 735........... Pelvic evisceration, rad hysterectomy &

718 rad vulvectomy w/o CC/MCC. 736........... Uterine & adnexa proc for ovarian or

754 adnexal malignancy w MCC. 737........... Uterine & adnexa proc for ovarian or

755 adnexal malignancy w CC. 738........... Uterine & adnexa proc for ovarian or

756 adnexal malignancy w/o CC/MCC. 739........... Uterine, adnexa proc for non-ovarian/

754 adnexal malig w MCC. 740........... Uterine, adnexa proc for non-ovarian/

755 adnexal malig w CC. 741........... Uterine, adnexa proc for non-ovarian/

756 adnexal malig w/o CC/MCC. 742........... Uterine & adnexa proc for non-malignancy

755 w CC/MCC. 743........... Uterine & adnexa proc for non-malignancy

756 w/o CC/MCC. 745........... D&C, conization, laparascopy & tubal

744 interruption w/o CC/MCC. 747........... Vagina, cervix & vulva procedures w/o CC/

746 MCC. 748........... Female reproductive system

749 reconstructive procedures. 750........... Other female reproductive system O.R.

749 procedures w/o CC/MCC. 765........... Cesarean section w CC/MCC...............

744 766........... Cesarean section w/o CC/MCC.............

769 767........... Vaginal delivery w sterilization &/or

769 D&C. 768........... Vaginal delivery w O.R. proc except

769 steril &/or D&C. 770........... Abortion w D&C, aspiration curettage or

769 hysterotomy. 774........... Vaginal delivery w complicating

769 diagnoses. 775........... Vaginal delivery w/o complicating

769 diagnoses. 777........... Ectopic pregnancy.......................

769 778........... Threatened abortion.....................

759 779........... Abortion w/o D&C........................

759 780........... False labor.............................

759 782........... Other antepartum diagnoses w/o medical

759 complications. 789........... Neonates, died or transferred to another

761 acute care facility. 790........... Extreme immaturity or respiratory

761 distress syndrome, neonate. 791........... Prematurity w major problems............

760 792........... Prematurity w/o major problems..........

761 793........... Full term neonate w major problems......

760 794........... Neonate w other significant problems....

760 795........... Normal newborn..........................

761 799........... Splenectomy w MCC.......................

423 800........... Splenectomy w CC........................

424 801........... Splenectomy w/o CC/MCC..................

424 804........... Other O.R. proc of the blood & blood

803 forming organs w/o CC/MCC. 820........... Lymphoma & leukemia w major O.R.

821 procedure w MCC. 822........... Lymphoma & leukemia w major O.R.

821 procedure w/o CC/MCC.

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827........... Myeloprolif disord or poorly diff neopl

826 w maj O.R. proc w CC. 828........... Myeloprolif disord or poorly diff neopl

826 w maj O.R. proc w/o CC/MCC. 830........... Myeloprolif disord or poorly diff neopl

829 w other O.R. proc w/o CC/MCC. 839........... Chemo w acute leukemia as sdx or w high

837 dose chemo agent w/o CC/MCC. 887........... Other mental disorder diagnoses.........

881 915........... Allergic reactions w MCC................

916 927........... Extensive burns or full thickness burns

933 w MV 96+ hrs w skin graft. 955........... Craniotomy for multiple significant

26 trauma. 959........... Other O.R. procedures for multiple

958 significant trauma w/o CC/MCC. 970........... HIV w extensive O.R. procedure w/o MCC..

969

To illustrate this methodology for determining the relative weights for the 185 MS-LTC-DRGs with no LTCH cases, we are providing the following example, which refers to the no volume MS-LTC-DRGs crosswalk information for FY 2008 provided in the chart above.

Example:

There were no cases in the FY 2006 MedPAR file used for this final rule with comment period for MS-LTC-DRG 22 (Intracranial vascular procedures w PDX hemorrhage w/o CC/MCC). We determined that MS-LTC-DRG 33 (Ventricular shunt procedures w/o CC/MCC), which is assigned to low- volume Quintile 1 for the purpose of determining the FY 2008 MS-LTC-DRG relative weights, is similar clinically and based on resource use to MS-LTC-DRG 22. Therefore, we are assigning the same relative weight of MS-LTC-DRG 33 of 0.4739 (Quintile 1) for FY 2008 (see the Composition of Low-Volume Quintiles for FY 2008 chart above in section II.I.3.e. of this preamble) to MS-LTC-DRG 22.

Furthermore, for FY 2008 as proposed, we are establishing MS-LTC- DRG relative weights of 0.0000 for the following transplant MS-LTC- DRGs: Heart transplant or implant of heart assist system w MCC (MS-LTC- DRG 1); Heart transplant or implant of heart assist system w/o MCC (MS- LTC-DRG 2); Liver transplant w MCC or intestinal transplant (LTC-DRG 5); Liver transplant w/o MCC (MS-LTC-DRG 6); Lung transplant (MS-LTC- DRG 7); Simultaneous pancreas/kidney transplant (MS-LTC-DRG 8); Pancreas transplant (MS-LTC-DRG-10) and Kidney transplant (MS-LTC-DRG 652). (We note that in the FY 2008 IPPS proposed rule (72 FR 24768), we inadvertently neglected to include proposed MS-LTC-DRG 652 (Kidney transplant) in the list of transplant MS-LTC-DRGs for which we proposed to assign a relative weight of 0.0000 for FY 2008. However, the proposed relative weight of 0.0000 for MS-LTC-DRG 652 was correctly shown in Table 11 of the FY 2008 IPPS proposed rule and was also correctly footnoted as being one of the proposed MS-LTC-DRGs that was assigned a proposed relative weight of 0.0000 (see 72 FR 25109). We also note that this is consistent with our treatment of the current LTC-DRG for a kidney transplant (LTC-DRG 302 (see 71 FR 47984)). This is 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 will 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.

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 MS-LTC-DRGs affected. At the present time, we would only include these eight transplant MS-LTC-DRGs in the GROUPER program for administrative purposes only. Because we use the same GROUPER program for LTCHs as is used under the IPPS, removing these MS- LTC-DRGs would be administratively burdensome.

In this final rule with comment period, as we proposed in Table 11 of the FY 2008 IPPS proposed rule (72 FR 25114), we are assigning a relative weight of 0.0000 for the 2 ``error'' MS-LTC-DRGs: MS-LTC-DRG- 998 (Principal diagnosis invalid as discharge diagnosis) and MS-LTC-DRG 999 (Ungroupable), (We note that in the discussion of proposed MS-LTC- DRGs with no LTCH cases in the FY 2008 IPPS proposed rule) (72 FR 24766 247769), we inadvertently neglected to include the 2 proposed ``error'' MS-LTC-DRGs (i.e., MS-LTC-DRGs 998 and 999) in the list of MS-LTC-DRGs for which we proposed to assign a relative weight of 0.0000 for FY 2008. However, as stated above, the proposed relative weight of 0.0000 for MS-LTC-DRGs 998 and 999 were correctly shown in Table 11 of the FY 2008 IPPS proposed rule and were also correctly footnoted as being one of the proposed MS-LTC-DRGs that was assigned a proposed relative weight of 0.0000 (see 72 FR 25114). We also note that this is consistent with our treatment of the current ``error'' LTC-DRGs (that is, LTC-DRG 469 (Principal Diagnosis Invalid as Discharge Diagnosis) and LTC-DRG 470 (Ungroupable)) (see 71 FR 48328)).

Again, we note that, as this system is dynamic, it is entirely possible that the number of MS-LTC-DRGs with no volume of LTCH cases based on the system will vary in the future. We used the most recent available claims data in the MedPAR file to identify no volume MS-LTC- DRGs and to determine the relative weights in this final rule with comment period.

Step 6--Adjust the FY 2008 MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As explained in section II.B. of the preamble of this final rule with comment period, the IPPS FY 2008 MS-DRGs, on which the FY 2008 MS- LTC-DRGs are based, provide a significant improvement in the DRG system's recognition of severity of illness and resource usage. The MS- DRGs contain base DRGs that have been subdivided into one, two, or three severity levels. Where there are three severity levels, the most severe level has at least one code that is referred to as an MCC. The next lower severity level contains cases with at least one code that is a CC.

[[Page 47294]]

Those cases without a MCC or a CC are referred to as without CC/MCC. When data did not support the creation of three severity levels, the base was divided into either two levels or the base was not subdivided. The two-level subdivisions could consist of the CC/MCC and without the CC/MCC. Alternatively, the other type of two level subdivision could consist of the MCC and without MCC. In base MS-LTC-DRGs with two levels, cases classified into a ``without CC/MCC'' MS-LTC-DRG are expected to have lower resource use (and lower costs) than the ``with CC/MCC'' and ``with MCC.''

That is, theoretically, cases that are more severe typically require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels, relative weights should increase by severity, from lowest to highest. If the weights do not increase (that is, if within a base MS-LTC-DRG, an MS-LTC-DRG with MCC has a lower relative weight than one with CC, or the MS-LTC-DRG without CC/MCC has a higher relative weight than either of the others, they are nonmonotonic. We continue to believe that utilizing nonmonotonic relative weights to adjust Medicare payments would result in inappropriate payments. Consequently, as proposed, in general, we combine MS-LTC-DRG severity levels within a base MS-LTC-DRG for the purpose of computing a relative weight when necessary to ensure that monotonicity is maintained. Specifically, under each of the example scenarios provided below, we would combine severity levels within a base MS-LTC-DRG as follows:

The first example of nonmonotonically increasing relative weights for MS-LTC-DRG pertains to base MS-LTC-DRGs with a three-level split and each of the three levels has 25 or more LTCH cases and, therefore, did not fall into one of the five low volume quintiles. If nonmonotonicity is detected in the relative weights of MS-LTC-DRGs in adjacent severity levels (for example, the relative weight of the ``with MCC'' (the highest severity level) is less than the ``with CC'' (the middle level), or the ``with CC'' is less than the ``without CC/ MCC''), we combine the adjacent MS-LTC-DRGs and determine one relative weight based on the case weighted average of the combined LTCH cases of the nonmonotonic MS-LTC-DRG. The case-weighted average charge is determined by dividing the total charges for all LTCH cases in both severity levels by the total number of LTCH cases for the combined MS- LTC-DRGs. We apply this relative weight to both affected levels of the base MS-LTC-DRG. If nonmonotonicity remains an issue because the above process results in a relative weight that is still nonmonotonic to the remaining MS-LTC-DRG within the base MS-LTC-DRG, we combine all three of the severity levels to determine one relative weight based on the case-weighted average charge of the combined severity levels which is assigned to each of the MS-LTC-DRGs in that base MS-LTC-DRG.

A second example of nonmonotonically increasing relative weights for an MS-LTC-DRG pertains to the situation where there are three severity levels and one or more of the severity levels within a base MS-LTC-DRG has less than 25 LTCH cases (that is, low volume). If nonmonotonicity occurs in the case where either the highest or lowest severity level (``with MCC'' or ``without CC/MCC'') has 25 LTCH cases or more and the other two severity levels are low volume (and therefore the other two severity levels would otherwise be assigned the relative weight of the applicable quintile(s)), we combine the data for the cases in the two adjacent low volume MS-LTC-DRGs for the purpose of determining a relative weight. If the combination results in at least 25 cases, we calculate one relative weight based on the case-weighted average charge of the combined severity levels and assign it to both of the severity levels. If the combination results in less than 25 cases, based on the case weighted average charge of the combined low-volume MS-LTC-DRGs, both MS-LTC-DRGs are assigned the relative weight of the quintile that has the closest relative weight to the case-weighted average charge of the combined low volume MS-LTC-DRGs. If nonmonotonicity persists, we combine all three severity levels and one relative weight would be assigned to all three levels based on the case-weighted average charge of the combined severity levels. Similarly, in nonmonotonic cases where the middle level has 25 cases or more but either or both the lowest or highest severity level has less than 25 cases (that is, low volume), we combine the nonmonotonic low- volume MS-LTC-DRG with the middle level MS-LTC-DRG of the base DRG. We calculate one relative weight based on the case-weighted average charge of the combined severity levels and apply it to both of the affected MS-LTC-DRGs. If the nonmonotonicity persists, we combine all three levels for the purpose of determining a relative weight based on the case-weighted average charge of the combined severity levels, and apply that relative weight to all three levels.

A third example of nonmonotonicity involves a base MS-LTC-DRG with three severity levels where at least one of the severity levels has no cases. As discussed in greater detail in Step 5, based on clinical similarity, we initially cross-walk the no-volume MS-LTC-DRG to an MS- LTC-DRG to which it is similar clinically and in intensity of resource use and then assign the no-volume MS-LTC-DRG the relative weight of the quintile with the relative weight closest to that of the MS-LTC-DRG to which the no-volume MS-LTC-DRG had been cross-walked. If this results in nonmonotonicity, in the case where the no-volume MS-LTC-DRG is either the lowest or highest severity level, we assign to the no-volume MS-LTC-DRG the same relative weight that is assigned to the middle level of the MS-LTC-DRG in that base DRG. If nonmonotonicity persists, all three severity levels are combined for the purpose of calculating one relative weight based on the case-weighted average charge of the combined severity levels which is applied to each of the three levels. In the proposed rule, we noted that this is a departure from our current treatment of no-volume LTC-DRGs which results in an ultimate assignment to a quintile. However, this was not accurate. In fact, this policy is consistent with our existing policy. We believe this treatment achieves monotonically increasing relative weights while providing appropriate payment for the no-volume MS-LTC-DRG because the relative weight assigned to the no-volume MS-LTC-DRG is based on the average charges of services rendered within the same base MS-LTC-DRG.

We apply the same process where the base MS-LTC-DRG contains a two- level split. For example, if nonmonotonicity occurs in a base MS-LTC- DRG with two severity levels (that is, the higher severity level relative weight is less than the lower severity level), where both of the MS-LTC-DRGs have at least 25 cases or where one or both of the MS- LTC-DRGs is low volume, we combine the two MS-LTC-DRGs of that base MS- LTC-DRG for the purpose of determining a case-weighted relative weight. If the combination results in at least 25 cases, we calculate one relative weight and assign it to both of the MS-LTC-DRGs. If the combination results in less than 25 cases, we calculate the case- weighted average charge for the combined MS-LTC-DRG. After we calculate the case-weighted average charge for the combined MS LTC DRGs, we compare that weight to the weights

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of the quintiles and apply the quintile weight closest to that case- weighted average weight to both of these MS-LTC-DRGs.

Step 7--Calculate MS-LTC-DRG transition blended relative weights for FY 2008.

As discussed above in section II.I.2.a. of this preamble, we are implementing the MS-LTC-DRGs with a 2-year transition beginning in FY 2008. For FY 2008, the first year of the transition, 50 percent of the relative weight for a MS-LTC-DRG will be based on the average LTC-DRG relative weight under Version 24.0 of the LTC-DRG GROUPER. The remaining 50 percent of the relative weight will be based on the MS- LTC-DRG relative weight under Version 25.0 of the MS-LTC-DRG GROUPER. In FY 2009, the MS-LTC-DRG relative weights will be based on 100 percent of the MS-LTC-DRG relative weights.

We used the following methodology to calculate the transition blended MS-LTC-DRG relative weights for FY 2008. To determine the payment for a particular case under the MS-LTC-DRGs in FY 2008, we will group cases to MS-LTC-DRGs (using the Version 25.0 GROUPER), but the relative weight for each case will be determined based on a 50/50 blend of the MS-LTC-DRG relative weight applying steps 1-6 above and the LTC- DRG relative weight applying steps 1-6 above. Thus, we determined a blended weight for each MS-LTC-DRG in the Version 25.0 GROUPER. Using LTCH claims in the FY 2006 MedPAR file, we grouped each case to an LTC- DRG (using the Version 24.0 GROUPER) and an MS-LTC-DRG (using the Version 25.0 GROUPER) and applied steps 1-6 above to each set of grouped claims to determine a set of LTC-DRG relative weights and a set of MS-LTC-DRG relative weights. Commonly, a set of cases that grouped to a single MS-LTC-DRG grouped to two or more LTC-DRGs. Therefore, we determined an average LTC-DRG relative weight using the Version 24.0 GROUPER for all cases that grouped to each MS-LTC-DRG. Specifically, we summed the LTC-DRG relative weights of all the cases that grouped to each MS-LTC-DRG and then divided that number by the number of LTCH cases. To establish the final transition blended weight for each MS- LTC-DRG in the Version 25.0 GROUPER, we added 50 percent of the MS-LTC- DRG relative weight to 50 percent of the average LTC-DRG relative weight for that MS-LTC-DRG.

We also note that after calculating the transition blended relative weights, we adjusted the FY 2008 MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights using the method described above in Step 6. As noted above, we continue to believe that utilizing nonmonotonic relative weights to adjust Medicare payments would result in inappropriate payments. Therefore, in general, we combine MS-LTC-DRG severity levels within a base MS-LTC-DRG for the purpose of determining the transition blended relative weight when necessary to ensure that monotonicity is maintained. (For specific details on how severity levels within a base MS-LTC-DRG are combined when nonmonotonicity occurs, refer to Step 6 above.)

Step 8--Calculate the FY 2008 budget neutrality factor.

As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), under the broad authority conferred upon the Secretary under section 123 of Pub. L. 106-113 as amended by section 307(b) of Pub. L. 106-554 to develop the LTCH PPS, beginning with the MS-LTC-DRG update for FY 2008, the annual update to the MS-LTC-DRG classifications and relative weights will be done in a budget neutral manner such that estimated aggregate LTCH PPS payments would be unaffected, that is, would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the MS-LTC-DRG classification and relative weight changes. Historically, we have not updated the LTC-DRGs in a budget neutral manner because we believed that past fluctuations in the LTC-DRG relative weights were primarily due to changes in LTCH coding practices. We believe that changes in the LTCH PPS payment rates, including the LTC-DRG relative weights, should accurately reflect changes in LTCHs' true cost of treating patients (real CMI increase), and should not be influenced by changes in coding practices (apparent CMI increase). As we explained in the RY 2008 LTCH PPS final rule (72 FR 26882), because LTCH 2006 claims data does not appear to significantly reflect changes in LTCH coding practices in response to the implementation of the LTCH PPS, we believe that, beginning with FY 2008, it is appropriate to update the MS-LTC-DRGs so that estimated aggregate LTCH PPS payments will neither increase nor decrease. Thus, in that same final rule, we established under Sec. 412.517(b) that the annual update to the MS-LTC-DRG classifications and relative weights be done in a budget neutral manner. (As discussed above, we are revising the regulations at Sec. 412.503 to specify that ``MS-LTC-DRG'' is used in place of ``LTC-DRG'' for discharges occurring on or after October 1, 2007. For a detailed discussion on the establishment of the requirement to update the MS-LTC-DRG classifications and relative weights in a budget neutral manner, refer to the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884). Updating the MS-LTC-DRGs in a budget neutral manner will result in an annual update to the individual MS-LTC-DRG classifications and relative weights based on the most recent available data to reflect changes in relative LTCH resource use, and the MS-LTC-DRG relative weights will be uniformly adjusted to ensure that estimated aggregate payments under the LTCH PPS would not be affected (that is, decreased or increased). Consistent with that provision, we are updating the MS-LTC-DRG classifications and relative weights for FY 2008 based on the most recent available data and include a budget neutrality adjustment.

To ensure budget neutrality in updating the MS-LTC-DRG classifications and relative weights under new Sec. 412.517(b), as we proposed, we are using a method that is similar to the methodology used under the IPPS. (A discussion of the IPPS DRG budget neutrality adjustment can be found in the FY 2007 IPPS final rule (71 FR 47970).) We note that, in this final rule with comment period, we have modified our proposed methodology for ensuring budget neutrality in updating the MS-LTC-DRG classifications and relative weights for FY 2008 to accommodate the use of blended transition relative weights (discussed in Step 7 above). Specifically, after recalibrating the MS-LTC-DRG relative weights, as we do under the methodology as described in detail in Steps 1 through 7 above, we calculate and apply a normalization factor to the MS-LTC-DRG relative weights to ensure that estimated payments are not influenced by changes in the composition of case types or changes made to the classification system. That is, the normalization adjustment is intended to ensure that the recalibration of the MS-LTC-DRG relative weights (that is, the process itself) neither increases nor decreases total estimated payments. To calculate the normalization factor for FY 2008, as proposed (with modifications to accommodate the use of blended transition relative weights) we use the following steps: (1) We use the most recent available claims data (FY 2006) and the MS-LTC-DRG transition blended relative weights (determined above in Step 7 of the Steps for Determining the FY 2008 MS-LTC-DRG

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Relative Weights) to calculate the average CMI; (2) we group the same claims data (FY 2006) using the FY 2007 GROUPER (Version 24.0) and FY 2007 relative weights (established in the FY 2007 IPPS final rule (71 FR 47971-47984 and 48321-48331) and calculate the average CMI; and (3), we compute the ratio of these average CMIs by dividing the average CMI determined in step (2) by the average CMI determined in step (1). In determining the MS-LTC-DRG relative weights for FY 2008, based on the latest available data, the normalization factor is estimated as 1.020905, which is applied to each MS-LTC-DRG transition blended relative weight. That is, each MS-LTC-DRG transition blended relative weight is multiplied by 1.020905 in the first step of the budget neutrality process. Accordingly, the relative weights in Table 11 in the Addendum of this final rule with comment period reflect this normalization factor. We also ensure that estimated aggregate LTCH PPS payments (based on the most recent available LTCH claims data) after reclassification and recalibration (the new (i.e., FY 2008) relative weights) are equal to estimated aggregate LTCH PPS payments (for the same most recent available LTCH claims data) before reclassification and recalibration (the existing (i.e., FY 2007) relative weights). Therefore, in general, we calculate the budget neutrality adjustment factor by simulating estimated total payments under both sets of GROUPERs and relative weights using current LTCH PPS payment policies (RY 2008) and the most recent available claims data (from the FY 2006 MedPAR file). (We note, in the FY 2008 IPPS proposed rule (72 FR 24770), we proposed to simulate estimated total payments for purposes of determining the proposed FY 2008 budget neutrality adjustment using current LTCH PPS payment policies, which at that time, were RY 2007 LTCH PPS rates and policies. Since the publication of the proposed rule, we have established RY 2008 LTCH PPS rates and policies in the RY 2008 LTCH PPS final rule (72 FR 26870-27029). Accordingly, we are using RY 2008 LTCH PPS rates and policies in determining the FY 2008 budget neutrality adjustment in this final rule with comment period.) In this final rule with comment period, the budget neutrality adjustment was determined using the following steps: (1) We simulate estimated total payments using the normalized transition-blended relative weights under GROUPER Version 25.0 (as described above in Step 7); (2) we simulate estimated total payments using the FY 2007 GROUPER (Version 24.0) and FY 2007 LTC-DRG relative weights (as established in the FY 2007 IPPS final rule (71 FR 47971-47984 and 48321-48331); and (3) we calculate the ratio of these estimated total payments by dividing the estimated total payments determined in step (2) by the estimated total payments determined in step (1). Then, for FY 2008, each of the normalized transition-blended relative weights is multiplied by the budget neutrality factor to determine the budget neutral relative weight for each MS-LTC-DRG. Accordingly, in determining the MS-LTC-DRG relative weights for FY 2008, based on the most recent available data, we are establishing a budget neutrality factor of 0.996467, which is applied to the transition blended relative weights after normalizing. The FY 2008 MS-LTC-DRG relative weights in Table 11 in the Addendum of this final rule with comment period reflect this budget neutrality factor.

Table 11 in the Addendum to this final rule with comment period lists the MS-LTC-DRGs and their respective transition-blended budget neutral relative weights, geometric mean length of stay, and five- sixths of the geometric mean length of stay (used in the determination of short stay outlier payments under Sec. 412.529) for FY 2008. The ``IPPS Comparable Threshold'' (that is, the IPPS geometric average length of stay plus one standard deviation) for each MS-LTC-DRG (used in the determination of short stay outlier payments under Sec. 412.529(c)(3) as established in the RY 2008 LTCH PPS final rule (72 FR 26904-26918)) for FY 2008 is also included in Table 11 in the Addendum to this final rule with comment period.

In determining the proposed MS-LTC-DRG relative weights for FY 2008, in the FY 2008 IPPS proposed rule (72 FR 24771), we proposed to apply a case mix budget neutrality factor to the MS-LTC-DRG relative weight to eliminate the effect of changes in coding or classification of discharges that do not reflect real change in case mix. The budget neutrality factor was proposed because we believed that adoption of the MS-LTC-DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. We believed this adjustment would be necessary for FY 2008 and FY 2009 to ensure that estimated aggregate LTCH PPS payments would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the adoption of the MS-LTC-DRG patient classification system. Accordingly, in the proposed rule each proposed MS-LTC-RG relative weights presented in Table 11 was multiplied by a factor of 0.976 to account for improvements in coding and documentation resulting from the adoption of the new patient classification system.

In this final rule with comment period, as discussed in the responses below, we are not implementing the proposed case-mix budget neutrality factor to the MS-LTC-DRG relative weights. Accordingly, the MS-LTC-DRG relative weights in Table 11 of the Addendum to this final rule with comment period do not reflect any adjustment to account for changes in coding and documentation that do not reflect real change in case mix.

Comment: While several commenters supported the adoption of a patient classification system that recognizes differences in patient acuity in LTCHs, a number of commenters opposed CMS' proposal to apply a budget neutrality adjustment factor to the MS-LTC-DRG relative weights in anticipation of changes in coding or classification of discharges resulting from the adoption of the MS-LTC-DRGs. Commenters expressed doubt that the adoption of the proposed MS-LTC-DRGs would lead to the coding changes CMS expects. Specifically, these commenters believed that in certain situations, such as where there are corresponding and equivalent subclassifications under both the proposed and existing systems, there may not be any real opportunity for coding improvements for those groups. For instance, one commenter cited MS- LTC-DRG 207 and 208 (LTC-DRGs 565 and 566) as an example of a DRG group that would not experience upcoding. Consequently, several commenters opposed the application of the adjustment for improved coding practices across all MS-LTC-DRGs and requested that CMS refrain from applying an adjustment to any MS-LTC-DRG for which they believed coding changes are inapplicable. A commenter asserted specifically that for the DRGs in which upcoding is impossible, CMS would be ``imposing a payment penalty for these cases.'' One commenter, a LTCH trade association group, commissioned a report to evaluate the proposed ``coding adjustment'' to the MS-LTC-DRG relative weights to account for changes in coding or classification of discharges resulting from the adoption of the new patient classification system. CMS had stated in the proposed rule that the ``coding adjustment'' is necessary in order to maintain budget neutrality. Based on the commissioned report, the

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commenter concluded that the magnitude of the proposed ``coding adjustment'' is inappropriate for LTCHs because it would not result in budget neutrality, rather, it would result in an overall reduction in aggregate LTCH payments. The commenter noted that since approximately 34 percent of LTCH cases are paid under the short-stay outlier policy where cases are paid at or below costs, there is no opportunity for upcoding in those cases. Furthermore, according to the commissioned report, approximately 61 percent of current LTCH discharges already are coded at what would be the highest severity level under the new MS-LTC- DRG system. That is, the commenter asserted that there is no opportunity to up-code these cases because they are either in a base MS-DRG with only one severity level or these cases are already coded in the highest severity level of a base MS-DRG with multiple severity levels. The report noted that according to their own analysis, this number of LTCH cases is almost triple the number of IPPS discharges that appear in the highest severity level MS-DRGs. The commissioned report further attempted to analyze LTCH discharges and for the potential for upcoding within a base MS-DRG (``MS-DRG family'') by calculating what the report terms as ``upcode ratios.'' The report defines an ``upcode ratio'' as the ratio of the relative weight of the MS-DRG with the highest severity level within the MS-DRG family to the relative weight of the base MS-DRG with the lowest severity level. Presumably, the higher the ``upcode ratio,'' the greater the incentive for upcoding into the highest severity level since the upcoding would result in a higher payment. Based on the ``upcode ratios,'' the report contrasted the potential for upcoding by LTCHs and IPPS hospitals. The report concluded that since 97 percent of LTCH discharges are distributed in the lowest ``upcode ratio'' quartile versus 25 percent of IPPS discharges, LTCHs therefore have less incentive to upcode within the same base MS-DRG than IPPS hospitals. The report also estimated that if every LTCH upcoded every discharge to the highest possible severity level, LTCHs' maximum potential for upcoding would result in a 3.61 percent increase in the case mix index. The report translated this finding to mean that 66 percent of all LTCH cases would have to be upcoded to the highest severity level in order to make the proposed adjustment to the LTCH relative weights budget neutral. The commenter believed it was unreasonable for CMS to assume that LTCHs could improve coding to that extent. Finally, the report also predicted that a significant number of LTCH discharges would be subjected to the 25 percent rule and thus paid at rates that are similar to IPPS rates and not based on MS-LTC-DRGs. The report noted that IPPS hospitals are not subject to the 25 percent rule, implying that the magnitude of the

[l] dquo;coding adjustment'' which was based on primarily IPPS data, is inappropriate for LTCHs. The commenter concludes that ``the vast majority of LTCH discharges present no opportunity to upcode and most of the remaining LTCH discharges provide little potential to do so.'' Another commenter stated that the significant year-to-year changes in LTCH payments due to both policy changes and routine rate and weighting adjustments which results in large payment fluctuations for some DRGS, creates a challenge to LTCHs to effectively operate, plan for the future, and maintain quality care for Medicare patients. In particular, one commenter using MedPAR 2005 claims data compared estimated payments under the proposed MS-DRG system (with the ``coding adjustment'' included) to estimated payment under the current system and asserted that according to their analysis, large payment changes would result in the ten most common LTC-DRGs. The commenter cited specifically that the change in payment for the top ten DRGs ranges from over a 25 percent reduction in some cases to over a 30 percent increase in others. In light of the volatility apparent in adopting the new MS-LTC-DRG system, the commenter recommended that CMS delay making an adjustment for improved coding practices until after a transition to the MS-LTC-DRG system has occurred. The commenter suggested that once the transition has fully occurred, CMS could apply an appropriate adjustment based on actual, rather than anticipated, coding change.

Response: In the proposed rule, we indicated that we believe that adoption of the proposed MS-LTC-DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. MedPAC noted that ``refinements in DRG definitions have sometimes led to substantial unwarranted increase in payments to hospitals, reflecting more complete reporting of patients' diagnoses and procedures.'' MedPAC further noted that ``refinements to the DRG definitions and weights would substantially strengthen providers' incentives to accurately report patients' comorbidities and complications.'' To address this issue, MedPAC recommended that the Secretary ``project the likely effect of reporting improvements on total payments and make an offsetting adjustment to the national average base payment amounts'' [Report to Congress on Physician-Owned Specialty Hospitals, March 2005, p. 42]. While we modeled the changes to the DRG system and relative weights to ensure budget neutrality, we are concerned that the large increase in the number of DRGs and refinements of severity levels will provide opportunities for hospitals to do more accurate documentation and coding of information contained in the medical record. Coding that has no effect on payment under the current LTC-DRGs may result in a case being assigned to a higher paid DRG under the proposed MS-LTC-DRGs. We note that while the commenters have attempted to analyze the potential for improvements in documentation and coding to affect the MS-LTC-DRG assignment within a base MS-LTC-DRG, improved documentation may also result in a case being assigned from a lower paid MS-LTC-DRG into a higher paid MS-LTC-DRG of a completely different base MS-LTC-DRG. In particular, the commissioned report submitted by the LTCH trade association demonstrated to us that commenters are pre-occupied with focusing on the potential for improving documentation and coding where the MS-LTC-DRG assignment would change from a lower severity level to a higher severity level within the same base MS-LTC-DRG. We are emphasizing here that in addition to the potential for improvements in documentation and coding to change the severity level within a base DRG (``intra-DRG change''), the potential for improvements in documentation and coding to result in the assignment of a case into a higher paid MS-LTC-DRG outside of the base MS-LTC-DRG (``inter-DRG documentation and coding changes'') is also a likely consequence of more accurate and complete documentation and possible for LTCH discharges because patients are admitted with multiple CCs. In general, the commenters expressed the belief that ``the vast majority of LTCH discharges present no opportunity to upcode'' (emphasis added). We disagree with this belief since generally, the commenters have provided arguments based on examples which focus entirely on ``intra-DRG change'' without accounting for the ``inter-DRG change'' potential which may be possible for LTCH discharges because patients are

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admitted with multiple complications and comorbidities. One commenter cited two MS-LTC-DRGs for patients on ventilators, MS-LTC-DRG 207 and 208 (previously LTC-DRG 565 and 566), as MS-LTC-DRGs that would not experience ``intra-DRG change'' because the classification groups under the old and new classification systems for these ventilator patients remains unchanged. We acknowledge that for MS-LTC-DRG 207, which is a high paying MS-LTC-DRG, there appears to be no incentive for improvements in documentation and coding that result in ``intra-DRG change'' from the lower paid MS-LTC-DRG 208 to the higher paid MS-LTC- DRG 207 or for documentation and coding improvements that affect ``inter-DRG change'' because this DRG is already such a high paying DRG. However, for patients that were classified in MS-LTC-DRG 208, there may be some opportunity for documentation and coding improvements that affect ``inter-DRG change,'' depending on the existence of specific CCs. While we take issue with some of the commenters' generalizations, we agree that there are significant differences in the distribution of patients among the severity DRGs between those in IPPS hospitals and those in LTCHs. Accordingly, we agree with the comments that it would be appropriate to further adjust the proposed budget neutrality adjustment that we are utilizing for IPPS hospitals to reflect the experiences of the LTCHs. However, due to the complexity of the interactions, at this time we are unable to determine the extent to which MS-LTCndash;DRGs are susceptible to increased case-mix improvements in documentation and coding in order to estimate an appropriate adjustment for such improvements that would be applicable to LTCHs. Accordingly, we are not finalizing the proposed case-mix budget neutrality factor to the MS-LTC-DRG relative weights at this time.

While some commenters have noted that not all MS-LTC-DRGs are equally susceptible to improvements in documentation and coding and suggested that we apply the adjustment for such improvements to only those MS-LTC-DRGs for which improvements in documentation and coding are possible, we note that in general, we apply adjustments to the LTCH PPS on a system-wide basis since the LTCH PPS is a system devised upon averages. We also note that some commenters attempted to analyze the impact of the short-stay outlier policy and the 25 percent rule on improvements in documentation and coding. As we stated previously in this final rule, we continue to believe that payment adjustments that were finalized in the RY 2008 LTCH PPS final rule, among which was the revision to the short-stay outlier policy (Sec. 412.529(c)) noted by the commenters, will result in more appropriate Medicare payments to LTCHs. The revised short-stay outlier policy addresses the issue of LTCH discharges that are comparable to an acute care IPPS hospital discharge based on the length of stay for that discharge. That policy is not tied to or affected by the adoption of the MS-LTC-DRGs. Nor do we believe that the extension of the 25 percent threshold adjustment that we finalized for RY 2008 at revised 412.534 and new 412.536, which governs Medicare payments for patients discharged from LTCHs who were admitted from specific referring hospitals, is tied to or affected by the adoption of the MS-LTC-DRGs. Furthermore, as noted above, since the MS-LTC-DRGs are so structurally similar to the LTC-DRGs, we do not believe that postponing the adoption of the severity-weighted DRGs in order to evaluate the interaction of the policy changes implemented for the LTCH PPS for RY 2008 would confer any significant advantage to stakeholders. However, we agree with the commenters that the fact that a large number of LTCH discharges are paid as short-stay outliers based on cost could have an effect on the budget neutrality adjustment applicable to LTCHs as compared to the adjustment we are finalizing for the IPPS and the LTCH budget neutrality would need to be adjusted accordingly.

In response to the commenter's concern that our policy changes and routine rate and weighting adjustments result in large payment fluctuations for some DRGs, we note that fluctuations are seen year to year resulting from refinements to the LTC PPS that are necessary in order to pay appropriately for LTCH cases. Each year, we recalibrate the relative weights based on the most recent available LTCH claims data, which reflect current LTCH patient mix and coding practices. The annual recalibration of the relative weights to which LTCH cases are assigned will appropriately reflect more or less resource use than the previous year's LTC-DRG relative weights. We understand the concerns expressed by the commenters regarding the fluctuations in payments for certain MS-LTC-DRGs based on the proposed FY 2008 reweighting of the MS-LTC-DRGs. However, we remind the commenters that the existing budget neutrality requirement for changes in DRGs and recalibrating the relative weights mitigates any effect of the change to MS-LTC-DRGs on estimated aggregate LTCH PPS payments. Additionally, as we have discussed earlier, transitioning the relative weights for FY 2008 should further mitigate the effects from adoption of the MS-LTC-DRG system. For the reasons discussed in the comments and responses section of this final rule with comment period, we will not be implementing the proposed case-mix budget neutrality factor to the MS-LTC-DRG relative weights at this time.

While we agree that the IPPS adjustment would need to be adjusted to be applicable to LTCHs, we continue to believe more accurate and complete documentation and coding will occur because it will result in higher aggregate payments under the MS-LTC-DRG system. We have every reason to expect that hospitals will respond to the adoption of MS-LTC- DRGs in much the same way as they have responded to similar events in the past. They will improve their documentation and coding of diagnoses and procedures, and this change will lead to increases in reported case mix. The reason to make offsetting adjustments is also the same. Although hospitals' efforts to improve the specificity and accuracy of documentation and coding are perfectly legitimate, the increases in payments that result are not warranted because the increase in measured case-mix does not reflect any real change in illness severity or the cost of care for the patients being treated. Therefore, offsetting adjustments to the PPS payment rates are needed to protect the Medicare program from unwarranted increases in spending. We believe the question is not whether documentation and coding will improve, resulting in higher case mix and payments, rather, the question is only how much will coding change when the incentives to code particular secondary diagnoses change with the adoption of MS-LTC-DRGs, and how long will these changes continue.

Section 123 of the BBRA, as amended by section 307(b) of the BIPA, provides that the Secretary may specify appropriate adjustments to the long-term care hospital payment system, including updates. This broad discretionary authority includes our ability to make adjustments and updates for case mix changes due to improved coding and documentation changes that do not reflect real change in case mix regardless of whether such adjustment

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is for anticipated case-mix changes or case mix changes that occurred in a previous time period. We remain convinced that an adjustment is needed to eliminate the effect of changes in coding or classification of LTCH discharges that do not reflect real change in case mix resulting from the adoption of the proposed MS-LTC-DRGs. However, as discussed above, after revisiting this issue, we believe that the adjustment for anticipated improvements in coding and documentation adopted in this final rule with comment period for IPPS hospitals needs to be adjusted to apply to LTCHs. At this time, CMS has not been able to determine an appropriate adjustment to the factor used for IPPS hospitals in order to make it applicable to LTCHs; however, we will continue to monitor LTCHs' response to the MS-LTC-DRG transition. Beginning with RY 2009, if CMS is able to estimate an appropriate adjustment factor applicable to LTCHs, CMS would propose an adjustment factor to LTCHs to account prospectively for coding and documentation changes. We note that in previous years, we have adjusted the annual update to the LTCH PPS standardized rate for case-mix changes due to coding and documentation changes to recoup payments made in a prior period by making a prospective adjustment during the rate setting cycle. Specifically, the adjustments for coding and documentation changes implemented in the RY 2007 and RY 2008 regulations were based on actual LTCH case mix data from FY 2004 and FY 2005, respectively (71 FR 27820-2 and 72 FR 26887-90). Since we have an established mechanism to adjust LTCH payments to account for the effect of changes in coding and documentation